Only yesterday, Pretium Resources (PVG) released its Q3 2019 financial results. The results were good, the company generated a very nice cash flow, it was able to repay a portion of its debt and repurchase its off-take obligation. The problem is that the company promised and the investors expected more. Once again, things were not going as expected at the Brucejack mine. The gold production was lower than expected and also the 2019 production and cost guidance had to be modified. This is not good and a near-term share price weakness should be expected.
Pretium produced 88,227 toz gold in Q3, which is only slightly less than in Q2. However, a much better result was expected. The company intended to process higher-grade ore in H2 2019, which should have been able to push the overall 2019 average gold grade to the 10.4 g/t level. It means that the H2 2019 ore grades were expected close to the 12 g/t level. However, in Q3, the mill feed grade equaled only 9.1 g/t. It is a slight improvement to 8.9 g/t in Q2, however, it is approximately 25% below the original H2 target. The mill throughput was expected to approach the 3,800 tpd level, however, in Q3, it declined by 5.5% compared to Q2. Although the gold recoveries experienced a tiny improvement, to 97%, the Q3 gold production of 88,227 toz gold is much lower than the original expectation of approximately 120,000 toz gold.
Source: Own processing, using data of Pretium Resources
Pretium wanted to increase the H2 2019 mill throughput while increasing the mill feed grades. However, it looks like it turned out to be a more complex plan than originally expected. According to the news release:
Mining during the quarter focused on advancing development to open up the mine to provide sufficient stope access to operate at 3,800 tonnes per day on a steady state basis. The additional focus for mining during the quarter was to increase grade to the mill by limiting internal dilution through the optimization of stope design - which reduces the amount of lower-grade tonnes processed. However, the reduction in stope tonnage as the quarter closed reduced our overall tonnage available for processing. This also impacted our ability to maximize grade through limiting internal dilution.
In addition, as mining progressed through mid-September, operational issues with two stopes prevented expected higher grade ore from being mined as planned. There was a hang-up of a key production stope and complications with sequencing another stope. As a result, readily available lower grade tonnage from operating stopes was substituted for the expected higher grade tonnage.
Also Pretium's CEO Joseph Ovsennek admitted that pursuing both the goals at once was a mistake:
During the third quarter, we continued to focus on opening up the mine while increasing grade to the mill. Pursuing both objectives simultaneously while stope inventory was constrained proved to be more challenging than anticipated, and we ended the quarter with gold production below our own expectations. As a result of limited stope inventory, we now expect that the fourth quarter will be consistent with the third quarter and have adjusted our full-year 2019 production guidance to between 340,000 to 350,000 ounces of gold production, an approximate 15% decrease from the midpoint of our prior production guidance range of 390,000 to 420,000 ounces of gold sold. We have adjusted our all-in sustaining cost guidance range to $900 to $950 per ounce of gold sold, reflecting the lower anticipated gold production and our spending, which is lower than previously guided.
The relatively good news is that also some of Pretium's expenses are lower than originally expected and the volume of gold sold increased by 5.5%. As a result, the total cash cost declined to $640/toz (by 8.8% quarter-over-quarter), the AISC declined to $878/toz (by 6.6% quarter-over-quarter) and the total cost of sales declined to $950/toz (by 2% quarter-over-quarter).
Source: Pretium Resources
Not only the costs declined, but also the average realized gold price increased. It grew from $1,319/toz in Q2 to $1,486/toz in Q3, or by 12.7%. It resulted in revenues of $132.7 million, which is historically the second-best result. Pretium recorded higher revenues only in Q2 2018, however, back then, also the gold production was much higher, 111,340 toz gold. While the net income declined to $6.3 million and EPS to $0.03, the Q3 operating cash flow set a new record, at $77.8 million.
Source: Own processing, using data of Seeking Alpha and Pretium Resources
Despite the record-high operating cash flow, Pretium's cash position has worsened. As of the end of Q3, the company held cash and cash equivalents of only $16.58 million. This situation was caused by the repurchase of the off-take agreement for $80 million ($60 million was paid in Q3, $20 million will be paid in Q4) and a $16.7 million repayment of the credit facility. The total debt decreased to $570 million and the net debt decreased slightly too, reaching the $553.4 million level.
Source: Own processing, using data of Seeking Alpha and Pretium Resources
The outlook for Pretium's Q4 has worsened. According to the news release, a stable 3,800 tpd mill throughput should be reached only at the end of this year. The Q4 production should be in line with the Q3 production, which means that if the current gold price prevails, we will see another profitable quarter, however, not as profitable as it was originally expected. A positive catalyst will be needed to revert the newly-born bearish trend, however, it probably won't come before Q1, when the 2020 production guidance, as well as the updated resource and reserve estimates, are expected. But after the recent experiences, it is hard to guess whether we are talking about a positive catalyst or about another disappointment.
The market reaction on the Q3 2019 financial results was pretty negative. Shortly after the market open, Pretium's share price dived almost by 25% and touched the $9 level. Although it managed to bounce back up over the $10 level, it is possible to expect that the $9 level will be retested over the coming days, as the difference between the expected Q3 results and the actual Q3 results is really big and the negative sentiment should prevail. If the downwards movement continues past the $9 level, it is possible to expect the share price to retest the support levels in the $6.5-7.5 area.
What I like about Pretium's Q3
- The operating cash flow set a new record high.
- The net debt was reduced.
- Pretium repurchased its off-take obligations.
What I don't like about Pretium's Q3
- The gold production was much lower than expected, due to lower grades and lower throughput rates.
- The 2019 production guidance was revised from 390,000-420,000 toz gold to 340,000-350,000 toz gold.
- The AISC guidance was increased from $775-875/toz gold to $900-950/toz gold.
- The disappointments keep on repeating. Although the mine is profitable and generates a lot of cash, the management keeps on setting the expectations high, only to under-deliver.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.