Pershing Gold Corp (OTCMKTS:PGLC) Soon To Be Operational, Profitable

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Dec 01, 2014
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I cannot think of any other junior gold stock with as much institutional backing as Pershing Gold. Here is an incontestable list of real money investment from high net worth individuals and major mining companies.

  • Newmont Mining
  • Coeur Mining
  • Paramount Gold and Silver
  • Dundee Corporation
  • Ingalls & Snyder, LLC
  • Dr. Frost of Opko Health and Teva Pharmaceutical
  • Barry Honig of Yahoo's interCLICK
  • Alex Morrison of Franco-Nevada
  • Stephen Alfers of Franco-Nevada

Because of this support, Pershing Gold consistently ranks among the top 100 on the OTCQB exchange for liquidity. Moreover, private placements are consistently priced near parity with common shares.

Another thing that differentiates Pershing Gold from other junior gold stocks is insider buying. Look at its latest SEC filings, and you will see that, whenever the price starts to go down, insiders open up their checkbooks and buy a few hundred thousand more shares.

Consider the combined personal net worth of these insiders, and there is enough cash in the bank to acquire the entire company outright. In any case, it is certainly the opinion of multi-millionaires and NYSE-listed companies that Pershing Gold is a good value at the current market price; otherwise they would certainly negotiate better prices or pass on private placement offers.

By owning Pershing Gold, shareholders have outperformed physical gold and average junior gold miners over the past 12 months. They also enjoy the backing of the most enviable co-investors in the world for a junior gold company: Newmont Mining (NEM, Financial), Coeur Mining (CDE, Financial), Paramount Gold and Silver (PZG, Financial), Dundee Corporation (DDEJF.pk), Franco-Nevada (FNV, Financial) and Ingalls & Snyder, LLC.

History

To understand how Pershing Gold got to where it is today it is first important to consider the history of its headline property, Relief Canyon. Relief Canyon is located in northwestern Nevada, approximately 110 miles northeast of Reno. It lies within the Antelope Springs Mining District, an area well known within the mining industry for its mineral reserves.

In 1979, a regional precious metals prospecting program conducted by Duval Corporation generated anomalous results, and subsequent drilling in 1981 and 1982 confirmed for the first time the presence of gold in the area. In the latter of these two years, Duval Corporation sold the property to Lacana Mining. Lacana became the first company to produce gold from the mine in late 1984, reportedly producing 13,800 ounces of gold between August 1984 and December 1985. In late 1986, Pegasus Gold Corp took an option on Relief Canyon, reopened the mine and managed its operation until September 1990. The mine reportedly produced more than 117,000 ounces of gold during this period, after which mining halted until 1993. Between 1993 and 1995, J.D. Welsh and Associates owned the property. In January 1995, Firstgold Corporation acquired the property and proceeded to drill more than 180 holes between then and 2008. During this time, the company also rebuilt the property’s Adsorption-Desorption Recovery plant and installed a range of new processing equipment. The cost of drilling and rebuilding combined with very low levels of production meant that Firstgold amassed a large amount of debt, and eventually filed for bankruptcy in 2009.

Pershing Gold purchased the Relief Canyon property at auction. It converted more than $9 million of debts into shares of the company’s stock, which it sold to investors at $0.35 a share. As a result, Pershing Gold became the sole owner and operator of a 1,200-acre property with a brand new facility and a historic gold production rate of over 110,000 ounces. Over the next year and a half, Pershing Gold acquired the mineral rights to a further 23,000 acres of land surrounding the relief canyon property. Specifically 9,700 acres of land to the south of relief canyon in March 2012, and 13,300 acres surrounding and to the south of relief canyon in April the same year.

In short, Pershing Gold now commands the mineral rights to nearly 25,000 acres of land located within a proven mining district, the anchor property of which houses a state of the art production facility.

Location

The most common error about Pershing Gold is thinking that it is building a new mine. To be clear: companies have already mined hundreds of thousands of ounces from Pershing Gold's mine. Reference the above section to read about three companies that have already extracted gold from Pershing Gold's mine: Lacana, Pegasus and Firstgold.

Pershing Gold is simply recommissioning a mine. Modern technology like heap leaching allows Pershing Gold to capture specks of gold that were previously impractical to mine. This is all that will happen at Relief Canyon: mining the gold specks that were previously impractical to mine.

Moreover, anyone can drive to visit Persing Gold's Relief Canyon mine in northwestern Nevada. It is within the Humboldt mountain range at the southern end of the Black Ridge Fault, a gold and silver trend.

Pershing Gold's mine is very close to several operating mines owned by major mining companies. To the North is Coeur Mining's Nevada Packard mine. Since production began in 1986, the mine has produced 120 million ounces of silver and 1 million ounces of gold. Coeur Mining expects the mine will produce 4.5-4.9 million ounces of silver and 44,000-46,000 ounces of gold during 2013. Also to the North is Coeur Mining's Rochester mine, the most productive silver mine in North America. Measured and indicated reserves for the Rochester deposits total 120.7 million ounces of silver and 865,800 ounces of gold. Another mine to north is Midway Gold's (MDW, Financial) and Barrick Gold's (ABX, Financial) Spring Valley mine.

At the northernmost tip of the Humboldt range lies the Standard and Florida Canyon mines. Japanese mining company Jipangu Inc. owns and operates both mines. Combined, Jipangu reports the mines have a total gold reserve of 1.1 million ounces and a total resource of 761,000 ounces. To date the Florida Canyon mine alone has produced over 3.3 million ounces of gold.

Geology

Three main rock units dominate the Relief Canyon mine. The top layer, called the Grass Valley formation and the bottom layer, called the Cane Spring formation are of little use to Pershing Gold. The middle layer, a stratabound horizon of breccia, is the primary focus of Pershing Gold’s operations. Simply put, breccia is a rock composed of fragments of other rock and minerals, cemented together. There are a number of different types of breccia, one of which is epithermal. The formation process of epithermal breccia results in shallow (rarely deeper than 600 meters) deposits. Epithermal deposits are much higher grade than alternative forms of breccia. Most of the breccia deposits in the Relief Canyon are of this type. This benefits Pershing Gold two-fold: the deposits are closer to the surface and so easier to mine, and they are higher grade than many other formations.

No capex needed to build processing facility

As already mentioned, when Pershing Gold acquired the Relief Canyon mine, included in that deal was a fully built processing facility. For a number of years prior to Pershing Gold’s acquisition, Firstgold had been rebuilding and updating the facility, but hardly used it to produce gold.

This acquisition puts Pershing Gold in a unique position when compared to its peers in the industry. A large amount of junior mining companies’ expenditure goes towards designing and building a facility. This is not only expensive, but also time consuming. A large amount of the risk investors expose themselves to when devoting capital to junior miners is rooted in the time and cost it takes a miner to go from discovery to production. With Pershing Gold, the ready-to-go facility acquired with the mine mitigates the vast majority of this risk.

In an interview CEO Alfers stated that with a little expansion the facility could become a heap leach plant capable of producing between 60,000-80,000 ounces gold per year. The following statements come from the same interview, and describe the advantages of Pershing Gold's facility in Alfers' own words:

  • "Previous owners found themselves in bankruptcy before being even able to permit mining of fresh ores. They were heavily invested in the processing facility but unable to move forward with the production of gold."
  • "We acquired the existing mine and facilities, plus 155,000 ounces of inferred and indicated resources in the existing pit which we have drilled around and believe is larger."
  • "We are a fast-track story as the facility is there. The ores that are in the immediately developable deposits are amenable to that facility. The task for us is to continue to step out and drill out sufficient reserves to justify opening a very substantial mine, and as we do that, we already have the facility there."

In short, the existing facility enables Pershing Gold to undertake an aggressive exploration strategy with thepgoal of uncovering enough resources to justify, in Alfers' own words, a very substantial mine.

Profit potential

So what might these new holes mean for Pershing Gold and its current estimated potential?

In January 2004, a mineral resource estimate summary reported a measured 2,918,000 tons of mineralized material at 0.0149 ounces per ton. This equates to approximately 44,000 measured contained ounces gold. The same summary reported an indicated 21,627,000 tons of mineralized material at 0.0194 ounces per ton. This equates to approximately 419,000 further indicated contained ounces gold. In addition, the summary estimated an inferred 4.81 million tons of mineralized material at 0.021 ounces per ton, or 101,000 inferred contained ounces gold. Analysts expect that the new drill holes and mineralization results will enable Pershing Gold to double these estimates to more than 1 million ounces in the next four to six months. With the weighted average new-hole grade being more than twice the grade of Pershing Gold's previous resources, it is possible to further revised the current estimate to more than 1 million ounces of gold at an average grade of around 0.03 ounces per ton.

Comparison

Investors looking to gain some insight as to the scope for expansion of Relief Canyon and Pershing Gold could look to Allied Nevada's Hycroft mine. The Hycroft mine is located in the Sulfur Mining district, 54 miles west of Winnemucca in Humboldt County, Nevada. Allied Nevada acquired the mine in 2007. As with Relief Canyon, the acquisition included a fully functional processing facility and an existing pit. Since 2010 the company has undertaken an ongoing redevelopment project, and this year Allied Nevada expects gold and silver sales at the mine to increase to approximately 180,000 to 200,000 ounces of gold and 0.9 million to 1.1 million ounces of silver. Total proven and probable reserves from the Hycroft mine equate to 12.7 million ounces gold.

When asked about whether he felt it was a valid comparison in an interview, Alfers replied, "I think there are important similarities. Like Relief Canyon, the Hycroft Mine was a long-neglected, under-capitalized asset that had been previously mined. Similarly, there was a functional heap leach processing facility at Hycroft."

Continued successful exploration and further facility development could see Relief Canyon develop at a similar rate as Hycroft.

Industry-leading CEO

One thing that catches many investors by surprise when they look at Pershing Gold is the pedigree of its CEO. Prior to his employment with Pershing Gold, Alfers had served in a variety of roles for mining behemoth, Franco-Nevada since 2007. From his initial position as a senior consultant for the exploration and development drilling of the Long Canyon discovery to his ultimate role as COO of US operations, Alfers drove billions of dollars worth of growth.

Prior to his tenure at Franco-Nevada, Alfers founded NewWest Gold. Upon incorporation the company held a reported $50 million in assets. Under his leadership, NewWest made nearly 20 new discoveries that Alfers consolidated and eventually merged with the operations of Fronteer Gold. At the time of the merger, Fronteer valued NewWest's assets at CND $187 million. In February 2011, the U.S.'s largest gold-mining company, Newmont Mining, announced its purchase of Fronteer for CND $2.3 billion.

It is these exemplary credentials and Alfers' track record of success in the mining industry, both in a large company leadership role and a junior company growth role, that surprises investors when they look at Pershing Gold.

Investor Dr. Phillip Frost

Forbes-listed billionaire Dr. Phillip Frost is one of Pershing Gold's loyal supporters. Frost's initial position in Pershing Gold was obtained in May 2011 when Pershing Gold (then Sagebrush Gold) acquired Arttor Gold LLC, which held the mineral rights at Red Rock and North Battle Mountain and in which the Trust held a 33.33% ownership interest. Subsequently, in February 2012, the Trust acquired a portion of the Senior Notes that had been issued to former creditors of Firstgold. Over the next few months, through a series of transactions, the Senior Notes ultimately were converted into shares of common stock and Series D preferred stock of Pershing Gold. However, displaying continued interest, Frost (through the Trust) purchased an additional 1,562,500 shares of Pershing Gold at $0.32 per share in a private placement in June 2012.

At that time, Frost was contacted to comment on his investment in Pershing Gold. He stated, "I am confident that Pershing Gold will be able to bring the mine at Relief Canyon into operation. I am pleased with the physical resource potential of this company and the leadership of Alfers and his team. My continued investment speaks for itself."

Alfers explained what he thought about the investment when Dr. Frost later increased his stake, "It speaks volumes when such a renowned investor as Dr. Phillip Frost continues to increase his stake in Sagebrush Gold. This demonstrates his confidence in the team we are building to carry out the vision we have laid out."

Investor Barry Honig

Dr. Frost continues supporting and investing in the company, and he is joined by another self-made tycoon Barry Honig. Honig made his fortune from interCLICK where his equity was acquired during a Yahoo! (YHOO, Financial) acquisition for $270 million. Honig was co-chairman of interCLICK from August 2007 to December 2011, responsible for much of its growth prior to its acquisition by Yahoo!. (In 2007, Honig invested in interCLICK at a market capitalization of $20 million with annual revenues around $3 million. At the time of acquisition, interCLICK was generating in excess of $150 million in revenues per year.)

Honig had used personal money to buy millions of dollars worth of additional Pershing shares in the open market and consistently leads follow-on financings.

Pershing Gold benefits from incessant insider buying at open market prices. Investors must ask themselves the question: "Why might these renowned and successful investors be willing to throw money into a gold exploration and development company at market price?" The reasonable suggestion is that they believe the stock has upside potential.

Investor Coeur Mining

Next on this list of investors is the $1.1 billion mining giant, Coeur Mining. In June 2012, Coeur announced it had has purchased 10,937,500 shares of Pershing Gold common stock in a private placement priced at $0.32 per share. Why might the largest U.S. primary silver producer want a share of Pershing Gold? Coeur's management reported, "Between January 1, 2011 and September 30, 2012, the company made strategic minority investments in eight silver and gold development companies in North and South America as part of its business growth strategy." Pershing Gold’s land borders Coeur’s holdings to the North. While impossible to say for certain, the suggestion here is that Coeur believes the land Pershing Gold is mining holds valuable deposits.

Finally, Pershing Gold attracted a number of new and significant investors with its latest financing round. On August 27, the company announced it had completed the round, during which it a raised total of $11.1 million in gross proceeds. Honig led the round and participants included Ingalls & Snyder, LLC, Dundee Corporation and Paramount Gold and Silver Corp.

In response to all of these investments, Alfers commented, "This financing is a significant milestone for Pershing Gold." As to how Pershing Gold would spend the proceeds, he said, "This financing enables us to advance aggressively our work at the Relief Canyon Mine by expanding and upgrading our NI 43-101 compliant resource through our drilling programs now under way."

Low cost of mining

Pershing Gold's estimated all-in costs of $750 per ounce allow the company to continue its mining pursuits with $350 per ounce in potential profit. Because most projects in the U.S. cost $1,200 per ounce –Â $450 per ounce higher than Pershing Gold and equal to the spot price of gold –Â major mining companies have consequently lost more combined market capitalization during the past two years than during any other time in history. Pershing Gold, in contrast, has not lost any market capitalization during the past two years.

Companies are mining gold out of the ground in full knowledge that watching grass grow would be a more productive use of their time. Right now, the majority of gold mines in the U.S. are toilet bowls for money. The average all-in cost for gold mining in the U.S. is $1,200 per ounce. Add in corporate and operating expenses, and their cost of pulling gold out of the ground is higher than what it fetches in the marketplace ($1,300 per ounce). Tragically, mining companies could put their cash to better use as bathroom tissue.

"$1,300 is not a sustainable gold price" says Peter Gray, managing director of Headwaters MB. Fidelity Investments' Joseph Wickwire agreed, "Below $1,300 gold, about 30 to 40 percent of mine production is probably not cash-flow positive."

Goldcorp (GG, Financial) discloses all-in costs for its gold mines: $1,135 per ounce. Newmont (NEM, Financial) estimates $1,100-1,200 per ounce. Barrick estimates $1,000-1,100 per ounce. (All of these figures would increase by $100-300 per ounce if administrative and corporate expenses were included). Thomson Reuters GMFS also published updated numbers on what the all-in cash costs for gold producers were in 2012. With gold selling for just $1,200 per ounce, profit margins are nonexistent, and unsurprisingly, all three companies have fallen over 50% since 2012.

In comparison to the surrounding mines, Pershing Gold boasts the lowest all in sustainable cash cost per ounce of gold. Spot gold is around $1,200 per ounce, so a simple calculation reveals that at today's prices Pershing Gold can glean over $500 profit from each ounce produced.

Conclusion

For all of these reasons, Pershing Gold presents investors with one of the industry's most favorable risk vs. reward profiles. The latest drill results suggest that the area’s initial resource estimate might only represent half of what exists, and further drilling could confirm this before the end of the year. Review Pershing Gold's drilling program for yourself to verify its consistent success. Add to this the fact that the company has over 90% of its land holding still to explore, and even a doubling of the current estimate seems conservative.

In short, Pershing Gold is a junior miner on the fast track ticket to production. Its operational and management teams are among the industry’s best, and its production facility is state of the art and fully permitted. Even with the low price of gold, there is enormous profit potential from its mine. Investing now could generate a substantial return within just one year.