Pretium: Another Landmine

Summary

Pretium Resources reported its Q3 results this week, and is taking a tumble after the report.

The company missed on both revenues and earnings per share estimates, and have revised cost guidance upwards.

For investors, it's one of the unfortunate side effects of investing in a producer with a complex and unpredictable deposit.

Pretium Resources (PVG) has had a strong year thus far and was coming into its Q3 results with a nearly 50% year-to-date gain. The stock was finally set up like it wanted to break out through yearly resistance near the $12.80 level, but it's been de-railed yet again after analysts got a look at its earnings report. The company's revenue for Q3 missed by a country mile, with Q3 revenue of $132.7 million vs. projections of $159.9 million, and quarterly earnings were also significantly below estimates. For investors, this shouldn't be a terrible surprise. The deposit has long been known for its lack of predictability, and complex deposits like this leave an investor open to landmines every now and then on quarterly reports. I expect earnings estimates for FY-2019 and FY-2020 to be revised lower in the coming week after the company revised all-in sustaining costs upward yet again. The bulls will need to defend the $8.90 level on a weekly close to prevent any lasting technical damage.

(Source: TC2000.com)

While Centerra Gold's (OTCPK:CAGDF)Mount Milligan issuestook center stage on Wednesday, Pretium Gold seems to have taken the cake for share price destruction this week. Centerra Gold saw its share price plunge nearly 16% yesterday on its Q3 results, but Pretium has outdone it, with a projected 22% drop based on current after-hours prices. This will shave $550 million off the market capitalization of Pretium Resources, and a good chunk of this drop is justified after the recentcost guidance revision. All-in sustaining costs came in at $878/oz for Q3, which wasn't terrible, but it's the guidance raise to $900-950/oz that is leaving a bad taste in the mouths of analysts.

(Source: TC2000.com, Businesswire.com)

For several quarters now, analysts have been hoping to see all-in sustaining cost guidance trend down for the company, at least within $200/oz of where its initial projections of $450/oz were before the mine was built. This was a nearly $800 million project that was justified mostly due to industry-leading all-in sustaining cash costs and production of 500,000 plus ounces per year. Thus far, the company has struggled to produce 90,000 ounces per quarter consistently (360,000 ounces per year), and all-in sustaining costs remain more than 80% higher than projections. The below chart shows the figures from the initial Feasibility Study done by Pretium in 2014, and $448/oz is a significant way off from the newest guidance raise to $925/oz at the midpoint.

(Source: Company News Release)

While most analysts and shareholders have accepted that $488/oz is not likely ever going to happen here, a drop-down to $650/oz-700/oz would be very welcome, and at least within 50% of the mine plan costs. However, each quarter for the company continues to bring with it a trend higher in all-in sustaining costs. The trough for all-in sustaining costs was set in Q2 2018 after a strong quarter, but this figure has trended higher by an average of 10% per quarter since. While Q3 2019 has seen a drop-off and the first quarterly drop in the past four quarters, this is expected to be an anomaly. Given the company's guidance for $925/oz at the midpoint for FY-2019, we have to assume that all-in sustaining cost guidance for Q4 should be coming in near $950/oz. This is because the current all-in sustaining costs in the first nine months is $895/oz. To get anywhere near the midpoint, we are likely to see the highest costs of 2019 in the fourth quarter.

(Source: Author's Chart)

The company's corporate presentation continues to state it is a low-cost and high-margin producer, but the high-margins are only thanks to the surge higher in the price of gold (GLD) this year. Industry average all-in sustaining costs are currently sitting just below $900/oz, and therefore Pretium is not a low-cost producer at all. Instead, it is an average producer, with the least predictable production and cost guidance of any of the majors. Once again, this is due to the complexity of the Brucejack Mine, and its inability to deliver as expected.

The company stated the following in the Q2 results:

AISC in the first half of the year was $905 per ounce of gold sold, above the annual guidance range of $775 to $875 per ounce of gold sold. However, as production increases through the remainder of 2019, we expect AISC to be within full-year guidance."

The prior midpoint for cost guidance was $825/oz, and it makes sense why analysts do not welcome this new raise to $925/oz at the midpoint at the closing of Q3 results. Analysts are looking for the company to instill confidence in its results, and they've lost more of that confidence after this report.

(Source: Company Website)

The other issue in the Q3 report was mined grades, which continue to come in well below the mine plan. Year 2 and Year 3 grades were expected to be some of the strongest of the mine plan, with grades backing off in years 11 through 18. Year 2 grades were supposed to come in at 15.2 grams per tonne gold, with Year 3 grades projected at 16.7 grams per tonne gold. If we average out these two years, we get 15.95 grams per tonne gold.Q2 mined gradescame in at 8.9 grams per tonne gold, and Q3 mined grades came in at 9.1 grams per tonne gold. This comes out to an average of 9.0 grams per tonne gold, about 60% below the expected grades during this period of the mine life.

Once again, I believe that analysts have accepted that we probably won't be seeing 16.0 grams per tonne gold consistently at any point. Still, grades of 12-13 grams per tonne gold and at least within a reasonable deviation from the mine plan would be nice. The current report is showing that even with nine quarters of production under the company's belt, they aren't delivering anywhere near the mine plan, and things aren't heading in the right direction. While this sell-off may be overdone, I think it's beginning to become a reality that Pretium will likely never produce anywhere near what the Feasibility Study projected. So how has this affected the company's growth metrics? Let's take a look:

(Source: Company News Release)

If we look at the below chart of annual earnings per share (EPS) I've built, Pretium has an ambitious earnings trend forecasted by analysts. Analysts were looking for $0.64 in EPS in FY-2019, $1.11 in FY-2020, and $1.36 in FY-2021. These are exceptional growth rates and certainly deserved of a share price re-rating. However, share price re-ratings only come to those that deliver on analyst estimates or beat, not companies that see massive misses like the one that Pretium just gave us. The company has thus far reported $0.36 in earnings per share for the first nine months, with $0.18 reported in Q3. The $0.18 in EPS was $0.04 below projections for $0.22, and the company is now going to need $0.28 in EPS to meet estimates of $0.64. While this is possible, I would argue there's less than a 10% chance of this occurring. I believe it's more likely the company reports between $0.55 and $0.58 in EPS for FY-2019, roughly 15% below the conservative estimates analysts were hoping for here.

This is an issue as it puts a massive dent in the EPS growth analysts were expecting this year. While annual EPS of $0.64 would have translated to nearly 20% growth from the $0.54 in EPS for FY-2018, earnings of $0.55-0.58 will translate to only single-digit earnings growth. This is unacceptable in a year when gold prices are up over 20%. While FY-2020 estimates of $1.11 are forecasting impressive growth, I believe they are going to be revised lower over the next two to three weeks to below the $1.00 level.

(Source: YCharts.com, Author's Chart)

To summarize, Pretium's earnings trend and sales trend were set up beautifully heading into this report, but have been bulldozed after the release, and we're likely to see revisions lower. Analysts are looking for a company where there's stability in reports that they can have confidence in for the long term. Once again, Pretium has eroded the trust of both analysts and shareholders once again with this report. After reassurance that guidance would remain in the earlier provided guidance near $825/oz, we've got a $100/oz revision higher heading into year-end. This isn't a 1-2% miss on guidance; it's a 12% miss and material. Given the company's lack of consistency and inability to deliver near the mine plan, it has remained on my avoid list.

So let's see what the technicals look like after this after-hours drop:

(Source: YCharts.com, Author's Chart)

To summarize, Pretium's earnings trend and sales trend were set up beautifully heading into this report, but have been bulldozed after the report, and we're likely to see revisions lower. Analysts are looking for a company where there's stability in reports that they can have confidence in, and Pretium has eroded the confidence of both analysts and shareholders once again with this report. After reassurance that guidance would remain in the earlier provided guidance near $825/oz, we've got a $100/oz revision higher heading into year-end. This isn't a 1-2% miss on guidance, it's a 12% miss and material. Given the company's lack of consistency and inability to deliver anywhere near the mine plan, it has remained on my avoid list for over a year.

So let's see what the technicals look like after this after-hours drop:

(Source: TC2000.com)

If we look at the above weekly chart, Pretium has its upper support at $8.90 on a weekly close, with solid support at $6.60. We now have a new resistance level at the $11.55 level and two lower highs in place, which has pushed us into an intermediate downtrend. I would expect rallies to the $11.00-11.55 level over the next four months to get sold into based on this.As long as the bulls can hold the $8.90 level on a weekly closing basis, we can avert lasting technical damage here. However, a weekly close below $8.90 wipes out any semblance of an uptrend the stock had and places it back in the range it's hung out in for all of 2018 and most of 2019.

Pretium is a case of a great project, but a lousy delivery on the mine plan's expectations. This is one of the reasons that I am more careful with underground miners as there can be massive deviations from the mine plan. Kirkland Lake Gold (KL) has written the book on underground mining and is a name that investors have been able to trust. However, every project is different, and Pretium has been unable to deliver. When it comes to companies that can't deliver on plans and consistently miss guidance, I prefer to avoid them.

For this reason, I see Pretium as a trading vehicle, but not a suitable investment. Until the company can consistently get all-in sustaining costs below $775/oz for two to three quarters in a row, it will remain on my Avoid list. This does not mean the stock can't go higher long-term, it's just that I don't care for bumpy rides.

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.