I listen to investing advice from self-made billionaire investors, and I try to ignore advice from everyone else. I suspect readers on this website will appreciate this, where thankfully the Focus is still Gurus. To this end, I bring you the instructive story of Pershing Gold Corp (OTCQB: PGLC) and Levon Resources (TSE: LVN) (OTCQX: LVNVF).
This story is about investing in gold. Billionaires have allocated a portion of their capital to gold investments for centuries. Yet if you want to invest in gold like a self-made billionaire, here is a quick hint: Forget bullion and coins. Focus instead on businesses.
Equity. There is no faster way to build wealth than equity, and the same holds true for gold investing. Gold itself cannot scale. Businesses scale.
Scale is the most powerful wealth-building tool in the world. Scale is the unique ability of businesses to increase sales at a parabolic rate and be acquired for this future potential. I have been examining how a self-made billionaire is weaving two scaleabe gold businesses together: Pershing Gold and Levon Resources. His approach to gold investing is instructive for all of us.
Dr. Phillip Frost is the billionaire here. He founded and sold a company for $587 million, and then founded and sold a company for $7.6 billion, and then founded and currently operates a $3.5 billion company. Those are the only credentials I care about.
Now, his largest gold investment is a mine in Nevada called Relief Canyon through two companies. He owns 17% of Pershing Gold and a single-digit portion of Levon Resources, the two companies vested in the success of Relief Canyon.
Moral #1: Invest in gold businesses, not bullion.
Pershing Gold is 100% focused on the mine, and Levon Resources is essentially a cash vehicle with an excellent management team and some property. Levon Resources owns 9.9% of Pershing Gold. Again, Dr. Frost owns 17% of Pershing Gold and a single-digit portion of Levon Resources. (I wrote about Levon Resources when Dr. Frost invested last week. Its market cap was $50 million and it had $40 million in cash.)
Both companies have plenty of cash and have historically raised funds at-market. Pershing Gold has raised all of its recent funding around $0.30 per share (its current stock price), and Levon Resources just announced a C$0.22 round (just 4 cents below its current stock price). Whereas most pre-production mining businesses are forced to slash the price of private placements by 50% of more from their common stock prices, Pershing Gold and Levon Resources have proven their ability to attract capital at favorable prices and terms to existing shareholders like Dr. Frost.
The executive teams at both companies also strengthen one another. The CEO of Pershing Gold is Steve Alfers who founded a mining company that he sold for over $150 million, and the team at Levon Resources is solely responsible for over 700 million tons of silver discoveries. Both companies' executives have personal connections with potential acquirers like Franco-Nevada, Newmont and Barrick. All are self-made millionaires, and most have decades of work experience in the mining industry.
Moral #2: Invest in synergistic companies that can support each other within the same industry.
Now, the reason billionaires invest in mines versus physical gold is simple. Underground gold is much, much, much cheaper than extracted gold. Once extracted, gold costs $1,230 per ounce, yet investors can buy pre-extracted gold for mere hundreds per ounce. If an investor is willing to support the business of gold extraction, the business rewards the investor for taking that risk.
This strategy has rewarded Dr. Frost handsomely. The Relief Canyon mine is now just one year from opening and continues to announce record drill results. Just this month, Pershing Gold announced its final permitting approval. Just this morning, Pershing Gold announced its best drill results ever, including expanded gold veins on its property. As a long-time shareholder, Dr. Frost regularly benefits from milestones like this for free.
Moral #3: Invest in high-quality, pre-producing mines. As drilling and permitting progress, you will benefit for free.
How much of a discount is Dr. Frost getting, exactly? Well, gold is currently worth $1,230 per ounce, and Cantor Fitzgerald estimates all-in sustaining costs at Relief Canyon to be just above $800 per ounce. Cantor Fitzgerald also estimates the mine will be producing about 100,000 ounces of gold per year by 2019. So approximately $400 per ounce of profit multiplied by 100,000 ounces means the company would profit $40 million annually.
The market capitalization of Pershing Gold is $95 million. Needless to say, if Dr. Frost's $95 million business produces even a fraction of $40 million in annual profit by 2019, Dr. Frost will easily bag 10x his investment.
Moral #4: Get a good discount (33% off the price of gold in this example) with 10-bagger potential.
Dr. Frost's mine in Nevada is located in Pershing County, the quintessence of "the middle of nowhere" where the only event annually is the Burning Man Festival. The remaining 11 months of the year, the county's population is 6,753 people.
Below are pictures of his mine. Secluded hundreds of miles from the nearest city, its infrastructure is already built (roads, offices, open pit and processing facilities).
Moral #5: Invest domestically. If the point of gold investing is to diversify for safety anyway, why add foreign sociopolitical risks when there are terrific investments within the USA?
Obviously, with 17% of Pershing Gold and a single-digit percentage of Levon Resources, gold represents only a small portion of Dr. Frost's billion-dollar portfolio. His focus continues to be on his own company, as it should be. Yet I find his gold allocation strategy incredibly instructive: (1) an equity-focused strategy weaving together (2) synergistic team members advancing (3) late-stage yet pre-production mines offering a (4) substantial discount to the price of gold in a (5) safe jurisdiction.
These are guru lessons for all of us.
