Pershing Gold Corp (NASDAQ:PGLC) has had its fair share of skeptics. I hope that skeptics are falling silent. Why? Look no further than the demise of Allied Nevada and Midway Gold (MDWCQ). By no means did I forecast that either would fail. However, with 20/20 hindsight, each relied to heavily on debt or debt-like capital. As a reminder, Pershing Gold has no debt. Midway and Allied Nevada have larger resource endowments than Pershing, growing their ounces in lock step with their debt. Little good it did them in the end. I’ve said in the past that Pershing continues to take measured, prudent steps towards production. Naysayers took this to mean that the company was moving too slowly. I disagree. Critics conveniently ignore the fact that gold was near ~$1,800/oz in early 2013, fell to ~$1,225/oz within 6-7 months, rebounded briefly to ~$1,400/oz and dropped to the $1,200/oz range. Instead of moving too slow, Pershing stepped back its exploration and development pace, leaving under-valued ounces in the ground. An internal economic scoping study this year with details of proposed production, costs, life-of-mine metrics, NAV, etc., the recently completed uplifting to NASDAQ and production next year should revitalize investor interest. The pudding from which the proof will be found is in the oven.
To be clear, I don’t mean to pick on Allied Nevada or Midway. Others that have struggled mightily. For example, Nevada Sunrise Gold (NEV.V) is down 81% from its 52-week high. [I own a modest number of Nevada Sunrise shares due to an analyst I respect recommending it]. Canamex Resources (CAC.V) has an option to acquire up to a 75% interest in the Nevada Bruner Gold project located in Nye County, Nevada. That stock has lost 78% of its value. I could list more fallen angles, but why kick Nevada dogs when they are down?
Pershing Gold’s key assets, the past producing Relief Canyon Mine and its 100% owned processing facility, includes three open-pit mines, roads and power. The company’s state-of-the-art, fully permitted and operational heap leach facility would probably cost $30-$40 million to replace and several years to permit. The plant has the capacity to process gold bearing solutions from the leaching of 8 million tons of ore per year and is permitted to stack 21 million tons. The facility is ideally situated to process ore from Relief Canyon and potential discoveries of satellite deposits on Pershing’s 25,000+ acre property. Pershing’s processing facility and existing infrastructure suggests both low remaining cap-ex and a shorter timeline to production. Not to state the obvious, but as Pershing’s management says, the three easiest ways to achieve a higher valuation are near-term production, a growing resource and high leverage to the price of gold. Not only does Pershing have no debt, it has no streaming or royalties encumbering its flagship Relief Canyon Mine and no hedging of the gold price.
Importance of Pershing’s Growing Ounces to be Replaced With Key Operating Metrics as the Valuation Driver vs. Peer Producers
Speaking of growing resources, not only is the number of ounces increasing, but the weighted average grade is improving as well. For those not paying close attention to recent drill results, suffice it to say that the grades in each set of reported assays has been getting better and better. That’s no stroke of luck, but the work of one of the best development teams in Nevada. Notice that I haven’t mentioned the name Steve Alfers? Relief Canyon is taking on a greater importance, carrying its own weight. Don’t get me wrong, Alfers and two key financial backers got us this far, but Relief Canyon is poised to steal the limelight.
Long-term and prospective investors alike should review Pershing Gold’s new corporate presentation. It has been updated and enhanced significantly since I last wrote about the company. Pershing expects an upgraded resource report in a few weeks and another one within about six months. By then, the combined NI 43-101 compliant Measured, Indicted & Inferred resource should be in excess of 1 million ounces, most of which should be in the Measured & Indicated categories. A knock against Pershing has been a sub 1 million ounce resource. Once past 1 million ounces, detractors should move on to other gold companies. More important in my mind is that 1 million + ounces supports many years of production at an initial run-rate of 50k oz/year, growing over time to 80k oz/year. Cash flow from initial years could be used to self-fund additional drilling at Relief Canyon and searching for discoveries elsewhere on Pershing’s property. The number of delineated ounces is rapidly becoming less crucial as a valuation benchmark. Once in production, Pershing will be compared on operating metrics, all-in costs, margins and production volumes, coming out of low-risk Nevada, to peer small and mid-tier producers globally.
Finally, I point to the silver and gold colored Elephant in the room. Rarely is much ink spilled on the topic of Coeur Mining (NYSE:CDE) possibly acquiring Pershing Gold, but I continue to believe it makes sense. Now that the Paramount Gold & Silver acquisition is largely out of the way, Coeur should be (in my opinion) looking at its closest neighbor. Coeur can afford to outbid others because of the synergies the combined company would be able to achieve. Perhaps Coeur is waiting for production to start? If so, the acquisition price will only move higher. Coeur has done a commendable job at righting its ship. The stock price is up 71% from its low and debt is down modestly. If Coeur waits too long, it could face find itself in competition as the existing list of potential suitors is getting larger. Is Pershing Gold’s (PGLC) stock a triple from here? No. A double? Perhaps, depending on progress made and takeover interest over the next 6-12 months. Is the company going to fall off a cliff without a net, parachute or bungee cord? Not a chance. Unlike Midway and Allied Nevada, Pershing Gold retains considerable upside (with no debt) with minimal fundamental downside. I like the risk reward of that proposition.
Disclosure: I, Peter Epstein, CFA, MBA have no prior or existing relationship with Pershing Gold (PGLCD) or any company mentioned herein. Readers should be aware that an investment in Pershing Gold is a speculative one. Readers should consult with their own investment advisors before buying or selling any speculative stock. I, Peter Epstein, own no shares of Pershing Gold at this time. I have owned shares in the past and might buy shares in the future. In 2011 Peter Epstein, CFA, left a $3 billion hedge fund where he was a senior analyst to help increase awareness of a number of small cap companies in which he’s invested in. Follow him @peterepstein2
