Pretium’s Ovsenek explains Brucejack ramp-up troubles

VANCOUVER — Shares of Pretium Resources (TSX: PVG; NYSE: PVG) dropped after a Jan. 23 production update for its flagship Brucejack underground gold mine in northwestern B.C.’s Golden Triangle district.

The company’s stock closed at a 52-week low of $9.18 after four days of trading on the Toronto Stock Exchange. It saw 13 million shares traded at press time.

Pretium’s release reviewed the initial six-month ramp up at Brucejack and provided guidance for the first six months of 2018.

The company reportedly produced 152,484 oz. gold at the operation since declaring commercial production in July. During the fourth quarter it milled 271,501 tonnes of ore and produced 70,281 oz. gold.

“The market didn’t give us any leeway, and they’re entitled to do that, but this is all part of the process,” Pretium president and CEO Joseph Ovsenek said during an interview on Jan. 29. “We certainly started out very well, but it’s still a ramp up. You don’t just start up a mine and turn on the factory. It’s much more complicated.”

Pretium said that grade reconciliation to the reserve model ran 75% to 80% from August to December. Ore from stopes developed on the project’s 1,200-metre level sill provided 25% of mill feed, and the area had a “lower drill density than stopes on other levels of the mine.”

Brucejack’s Valley of the Kings (VOK) deposit contains 8.1 million oz. gold in 15.6 million proven and probable tonnes of 16.1 grams gold per tonne. The West Zone deposit, which is north of VOK and part of the current mine plan, has 2.9 million proven and probable tonnes of 6.9 grams gold for 600,000 oz. gold.

“We’ve been pushing [grade reconciliation] from our first week of mining. We told everyone that it was very early days and we’d do the best we could at year-end,” Ovsenek said. “It is early days on grade reconciliation along with everything else. We believe as we get into other better-defined areas, and open up the deposit, we’ll be able to approach parity with our grade model. But right now we’re five months into mining on an operation that has a 20-year life.”

BMO Capital Markets analyst Andrew Kaip noted that Pretium’s fourth-quarter production numbers were “well below” his expectation of 91,800 oz. gold.

He attributed the shortfall to a lower-than-expected grade despite higher tonnes milled. BMO had projected Brucejack would produce at 12 grams gold, while the results show the latest mining averaged 8.4 grams gold.

Gold bars produced at Pretium Resources’ Brucejack gold mine in British Columbia. Credit: Pretium Resources.

“The feasibility study called for developing a sill on the 1,200 level, and we went ahead and did that to establish the long-term infrastructure for the mine. We should have had higher density before we were mining at the 1,200, in hindsight,” Ovsenek added. “We also need our grade-control system to allow us to actually define the dimensions of our stopes. Unfortunately, we thought it would be operational in the fourth quarter, and we needed to execute better on that.”

Pretium estimates production for the first half of 2018 in the range of 150,000 to 200,000 oz. gold at all-in sustaining costs (AISCs) of US$700 to US$900 per oz. gold. BMO analysts had modelled the operation to produce 205,000 oz. over the next six months at AISCs of US$400 per ounce.

“We would have thought that mining would have focused on better delineated stopes, with delineation drilling completed on the 1,200 level prior to mining,” Kaip wrote after Pretium’s press release.

“In our view, [Pretium] provided a [fourth-quarter] production update lacking in details, raising more questions than answers and increasing grade uncertainty at the Brucejack mine. It is too early to be impairing grades at Brucejack, but short of details — questions remain,” he added.

Pretium expected 504,000 oz. gold produced annually for the first eight years of the mine’s 18-year mine life, at an all-in sustaining cash cost of US$446 per oz. gold.

Pretium reports that a “grade-control program” will operate during the first quarter of 2018, which allows ore blending from the various stopes on a ring-by-ring basis to smooth out head grade. Brucejack is slated to hit steady-state gold production in mid to late 2018.

“It’s effectively a big tank with an agitator. So you’re looking at something resembling an industrial-sized washing machine that blends material,” Ovsenek said. “That part of the system works fine. You put drill cuttings from our long-hole drill in there and mix it up with a bunch of water for a nice, homogenous sample.”

In December, Pretium said it had applied to the provincial government to increase production rates at the mine by 41% to 3,800 tonnes per day. The boost in mill capacity would cost US$25 million and the approval process could take six to 12 months.

BMO analysts subsequently cut their price target on Pretium from $20 to $17.50 per share.

“We recognize [the company’s] hesitation on providing grade reconciliation data given that mining has exploited a small portion of the deposit, but grade is at the crux of an investment thesis for investors,” Kaip said. “The more visibility on reserve grade reconciliation, the more confidence investors will have.”

Pretium spent nearly US$811 million, including working capital, to get Brucejack up and running. The company estimated a 2.8-year payback period.

Pretium has 182 million shares outstanding and had US$38 million in cash at the end of 2017.

“It’s a highly variable deposit we’ve been estimating from surface. We’re now underground and opening it up, and it’s now all about the data,” Ovsenek said. “We need more of it and we need the grade-control system going so we can really define our stopes well. We need to continue with the infill drilling because it’s not a deposit where you can mine on 10- or 20-metre drill spacing. You have to be down in the 5- to 10-metre drill centres. So it’s more about refinement of the resource model than starting from scratch. We need to keep refining our knowledge, and our model, and we’ll get there.”