A Transformational Year for Pershing Gold
Since my initial article on Pershing Gold (OTCQB:PGLC), significant de-risking has taken place, yet the share price is largely unchanged. Recent events make it clear that Executive Chairman & CEO Stephen Alfers continues to execute the company's aggressive strategy.
Key Events of the Past Two Months
On November 26th, Alfers announced two enhancements to his team. Alex Morrison joined the Board. Mr. Morrison is a mining expert, chartered accountant and CPA with over 26 years of experience. He currently serves on the Boards of Detour Gold and Taseko Mines. Mr. Morrison served as VP & CFO of Franco-Nevada, (NYSE:FNV) from 2007 to 2010. Please see press release here.
In addition, the company designated Eric Alexander, Principal Financial Officer and Principal Accounting Officer. These moves mark a significant milestone. By beefing up Pershing's team, Alfers demonstrated his confidence in near-term production.
Drill Results Under-Appreciated
Drill results were announced on December 4th. New and infill drilling results are being used to finalize Pershing's upgraded resource estimate [600k-750k ounces expected]. This is exciting as each new ounce identified today is potentially producing cash flow in a little over a year. Also in the drill results press release was confirmation that Pershing's waste dumps are likely amenable to reprocessing. Reprocessing would improve the logistics and economics of the project.
A vital takeaway, not explicitly stated in the press release, is that Pershing's 600k-750k prospective ounces of gold appear to be located in an area of about 1k acres, just 4% of the company's consolidated 25k acres. This is why Alfers, Coeur d'Alene Mines (CDE), and key financial backer Dr. Frost are so excited about the blue-sky potential and why Alfers has been able to attract top talent to a fairly small company. Please see press release here.
Pershing Funded Through Expected Release Date of PEA in 1Q 2013
Most important for me, Pershing removed the overhang of a secondary issuance by raising $3.1 million from shares + warrants. This amount was well below a feared raise of $12 - $15 million. Pershing must be confident that alternative means of non-dilutive funding will be available after delivery of its Preliminary Economic Assessment, "PEA" in 1q 2013. Please see SEC Filing here.
Key Peer Comparison Shows Pershing to be Materially Undervalued
Nevada peer development-stage company Midway Gold (MDW), offers a compelling comparison to Pershing because it recently issued $70 million of preferred shares, effectively marking-to-market Midway's valuation. Pro forma, it has approximately 187 million fully-diluted shares. Based on the company's corporate presentation, it still needs an additional $30 million to reach first production by 2014. Please see Midway's latest corporate presentation here.
At Midway's stock price of $1.39, plus its stated need for $30 million, the company is trading at a fully-diluted valuation of $290 million. However, Midway has a tangible asset that could be sold. The value of this asset should be treated like cash and subtracted from the company's EV for comparison purposes.
Midway is partnered with Barrick Gold (ABX), on an exploration-stage project named Spring Valley. Analysts estimate that Midway's 30% minority interest in the project could be sold for $60 million. Subtracting that $60 million from Midway's EV implies an adjusted EV figure of $230 million.
Pershing and Midway to be in Production Soon
Pershing and Midway hope to be in production in 2014. Midway has twice the identified gold resources, but half the ore grade. Note, Midway's 1.44 million Measured & Indicated ounces does not include its Spring Valley JV. I separately accounted for Midway's 30% minority interest in this project by attributing a value of $60 million.
Like Midway, Pershing has tangible assets that could be sold and should be treated like cash to adjust its EV for comparison purposes. First, Pershing owns 25 million shares of Valor Gold (VLGD.OB) (Please see a December 10th update on Valor here). Assuming a one-third liquidity haircut, those shares are worth about $12.5 million. Second, Pershing owns a fully-permitted, funded and built heap-leach processing facility. The all-in replacement cost of this facility is estimated at $30-$40 million. Adjusting Pershing's fully-diluted EV of $110 million for these assets implies an adjusted EV of $62.5 million.
If Pershing's valuation were to trade at parity to Midway's, Pershing's stock price would increase to $0.75 cents, 115% above the current price of $0.35. I believe $0.75 is an achievable target over the next six months. With Pershing funded through the release of its PEA and upgraded NI 43-101 reports, institutional funds will be taking a fresh look at the company.
Further De-Risking Ahead in 2013
Investors are days away from an updated resource estimate. From 248k prospective resource ounces, management has given a range of 600k-750k ounces. Confirmation of this number will mark another key milestone, and next year the resource figure will jump again based on drilling in H1 2013.
In Q1 2013, all eyes will be on the PEA. Pershing is taking extra care to generate a high quality, detailed report. Upon delivery of the PEA, Pershing's funding and strategic options multiply. At that point, (in my opinion only) a royalty deal could be signed, further strategic investments made, equipment financing lined up, a JV partner announced, and credit facilities obtained. In 2h 2013, a Pre-Feasibility study is expected. This report will substantially increase the visibility of Relief Canyon's annual production, per ounce costs and mine life.
Investors have even more to be excited about. For example, Pershing expects to upgrade its stock exchange listing. Exiting the OTC bulletin boards will attract the interest of institutional funds and sell-side equity research analysts. The testing and re-commissioning of the company's processing facilities next year could allow Pershing to process third party ores.
Couer d'Alene's CEO Speaks at Investment Conference
Couer d'Alene has made eight equity investments in exploration and development-stage companies. However, only Pershing is in the U.S. Pershing would be a natural expansion of Coeur's prolific but mature Rochester Mine located on Pershing's northern border.
At an investment conference on November 29th, Coeur d'Alene's CEO stated that of all his company's projects, in the U.S. and Mexico, he is most excited about efforts to revitalize the company's storied Rochester mining complex. Last year Coeur spent $27 million on the Rochester mine alone.
Early next year companies like Pershing Gold will receive a great deal of attention. Spearheaded by Alfers, a number of very significant improvements have been achieved. Yet, the stock languishes, but possibly not for long. While I don't know the timing or magnitude of future events, I do expect that continued de-risking of the Pershing story will move the stock higher. If Pershing's valuation were to match that of Midway Gold, its stock price would more than double to $0.75. Readers should take a closer look before institutions do in January.