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Pretium: Speculative Play in Gold

08/30/2018 5:00 am EST

Focus: COMMODITIES

Jack Adamo

Editor, Jack Adamo's Insiders Plus

The overriding factor in the price of gold is the strength of the U.S. dollar; there have been relatively brief periods where their inverse relationship has taken time off, but the vast majority of the time it has been consistent, explains Jack Adamo, editor of Insiders Plus.

With interest rates so low all over the developed world, the U.S.'s 2% rates on short-term T-bills seem like a great deal to foreigners, especially since our currency is getting stronger and seems relatively sturdy. The latter illusion will probably hold up until the debt crisis begins to manifest itself.

The result is that the U.S. Dollar is in high demand. You need our currency to buy our Government securities, and like everything else in the world of economics, the more demand for a thing, the higher the cost to the buyer.

My current thinking on this is that we won't see any significant weakening of the greenback until the Fed reverses its tightening policy. And I don't think that will happen until the house built on debt begins to teeter.

So, there's a good chance that tight money will be around for another year or so when the tax cuts lose their stimulating effect and the interest payments on government debt become too burdensome.

I want to strongly reiterate that I have not lost an ounce of faith in the future of gold. In fact, I bought more Krugerrands; but just as with the rest of our investment intentions, it pays to keep powder dry in preparation for better opportunities that are certain to come.

I had previously had decided not to buy Pretium Resources Inc. (PVG). The main reason was there were some unresolved lawsuits in the wings for which no reserves were taken and there was quite a bit of insider selling back in December. Although the lawsuits are still a valid concern, I changed my mind on the stock after seeing Q2 results, which were released August 9.

Pretium has only one mine, the Brucejack. It just went into production late in 2017, so it does not have year-over-year comparisons for Q2, I'll compare Q2 results with those of Q1 2018.

In Q1 ore grades were excellent at 11.9 grams/tonne. In Q2 the company mined less ore, but a huge increase in grade to an outstanding 14.9 g/t allowed the firm to increase gold ounces produced by more than 45% to 111,340 for Q2. All-in sustaining costs averaged just $648/oz., which is among the very best I've seen. Silver production increased slightly to 118,205 oz.

Second half results will probably be significantly better than the first half, since Q1 operations were still gearing up, and showed a loss of 4¢ per share.

As to the lawsuits, I think the company's production and financial results will convince the courts that there was no deceit or wrongdoing by the company. Mining is an inherently lumpy and unpredictable business and recent results clearly demonstrate that management's expectations were honest and reasonable.

However, since the suits are still in play and since the company is quite small and has only one working mine, I must assign a speculative rating to the stock. I also caution investors to buy the stock only with a limit order, never a market order. The shares are thinly traded.

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