On these hallowed pages - especially in the comments - there seems to be a fairly large contingent of readers who think they can make a quick buck every time a bullish/bearish post on a company comes out. While not impossible, more often than not, those out for a quick profit often end up worse off rather than better. Such as it always has been and such as it always shall be. I'd like to use Pershing Gold (NASDAQ:PGLC) - a very promising opportunity, not without risk of course - to illustrate this point, and at the same time, explain why this company presents good risk-adjusted return potential over the longer-term ("longer-term" is crucial to understanding the following, as the title to this post suggests).
- If this young company, which should be producing by 2014, continues to execute at the pace it has over the past 12 months, it could potentially be worth up to $1 billion in the next 24-36 months.
- In the short time since CEO Steve Alfers has taken over (previous COO of US Operations of Franco-Nevada), the company has grown the land position, previously land-locked constrained, from ~1,500 acres to >25,000 acres, all directly south of Coeur d'Alene's flagship Rochester mine, and adjacent to Newmont's as well (there's more with Newmont but that's beyond the scope of this post).
- Steve Alfers has just added another well-respected, experienced resource executive to the Board of Directors with pedigree background, Alex Morrison. He sits on the board of Detour Gold, a $2bn+ company, and was previously the VP & CFO of $8bn Franco-Nevada Corporation. I think it's pretty obvious both Alfers and Morrison wouldn't have joined Pershing Gold, were they not remarkably confident in the firm's prospects. Why would they risk their respective reputations, earned over long careers otherwise?
- The updated resource report discussed in the S-1 is coming shortly - before the end of the year - which must be a key reason why Morrison is jumping on board now, and why you probably should at least consider getting in now, too - if you understand this story and the huge upside potential - rather than miss a good deal of growth.
- From people I've spoken to, smart money, institutional investors are taking the "wait & see" approach, waiting to buy the stock, most likely because they are waiting on the updated resource report
- If the new resource report is near the number the company believes it will be, I think its reasonable to expect the shareholder base will transform from mostly retail to institutional, long term owners.
- I think one important factor people are missing is that the stock is already pretty liquid, even with a largely retail base; this is a key factor that should help drive institutional investors into the name. As institutions move into the stock, the price should go up some purely from the share accumulation.
- If Pershing Gold can continue drilling as they have in the past 12 months for the next 12 months, I wouldn't be surprised if they're pushing close to 1,250,000 oz, getting ready to commence production in 2014. As they get closer to production, the value of the resources on the balance sheet should increase as well, so we would expect the stock price and firm value to increase, as well, no?
- The current ~$100mm market cap implies ~$200/oz for an anticipated 500,000 oz. If the new resource report shows a number closer to the firm's expectations of ~650-750,000 oz, the stock price should rise a bit. Click to enlarge
- This time next year, if I'm even close to right, Pershing is sitting on 1.25 million oz, and things go even close to as expected, they should be valued using a higher $/oz number as they'll be that much closer to starting production.
- Thus, even if we keep the multiple at $200/oz on the resources 1.25mm ounces - which could still be a conservative number - barring further discoveries, by simple multiplication the company would have a $250mm market cap.
- I believe the company has at least three different options to raise money if needed ("if needed" being the key phrase):
- Royalty financing: let us not forget both CEO Alfers & Morrison were formerly high ranking executives at Franco-Nedava, the largest mining resource royalty company in the world. I doubt it'd be too difficult to pick up the phone and call their former colleagues to arrange a deal on rather favorable terms.
- Debt financing: which, to silence some of the critics, would not be dilutive, just like a royalty deal. This is corporate finance 101, but from some comments I've received in the past, I felt the need to point this out.
- Worse case scenario for shareholders, Pershing issues about $20mm in 2013q2, given the current price and without an update to the existing resources, they'd have to issue about 50 million shares. This would take the share count to about 320 million shares, which given the above assumptions would put the share price around $0.75-$0.80. Even if you're more cynical, the price should be well above where it's trading now.
- One of the most compelling reasons why I think this is a solid long-term investment is Barry Honig's involvement. He's a board member, continues to buy stock - and two weeks ago invested >$1,000,000 in the company - has a solid track record, to put it gently. He bought almost 10% of Neuralstem (NASDAQ:CUR) at $0.40 and look where it went after:Click to enlarge
- He bought >5% of Broadvision (NASDAQ:BVSN) & wrote the company a letter at $8, and guess what happened after? Click to enlargeWhen he purchased those stocks, he not only made himself pretty darn good returns on his investments, but investors who followed his moves did as well. This time around, he's buying restricted shares in Pershing that he can't sell/flip for a quick buck; he's in it for the long term, by definition. Given his bird's eye view as a Director and major owner, I think it'd be prudent to assume he's at the very least extremely confident in the company's prospects as a longer-term investment. Just think; he hasn't sold a single share of Pershing Gold since inception. Is that something a quick-buck artist would make? Methinks not.
While each bullet point is crucial to understanding the opportunity, the one immediately above should clarify - with crystal clarity - why this is an investment for the long term, and not a day trade. I've had the chance to speak with some of the Board members, and while I'd be naïve to expect anything besides optimism, combined with their significant long term ownership stakes and the sheer excitement they conveyed, even as a born skeptic, I've got to admit, they explained a very compelling opportunity and addressed most of my initial concerns, which is not easy.
If you think I'm wrong, that's fine, and that's what makes a market, but if that's your position, for your own sake, do the research to support it, because I think you'll find it a difficult to impossible to counter most if not all of these bullet points. You may think both the company and myself are being overly-optimistic, but even then, you should even more heed the previous sentence. Attack me because I've never run a gold mine, resort to ad hominem attacks or whatever floats your boat, but I don't think you can argue against these facts which support my bullish view. Is there risk? Of course, just like with any investment, but if you understand the story and relevant facts, it's pretty apparent this firm is making the right moves to ameliorate them, and as an investor, you have the ability to manage any risk factors yourself, as well with stops/limits, position sizing, etc.
As always: CAVEAT EMPTOR
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Stone Street Advisors’ company policy is to keep the bespoke, paid research and analysis we do for clients confidential. However in certain circumstances – and only with a client’s explicit permission – we may share some or all of that research publicly. The above (the analysis/article) contains some of the research we performed for/with a client and from whom we received compensation for so doing. The client who paid for this research may have a long position in PGLC and stands to gain if PGLC markedly increases in price. In addition, following publication of this article, our client may continue to hold, add or reduce its position if any. The opinions presented herein are those of Stone Street Advisors LLC. Neither Stone Street Advisors LLC nor any of its members has a position in PGLC, nor do we have any plans to initiate one. The information and opinion presented in this article is presented as-is, and does not constitute any offer or solicitation. Stone Street Advisors LLC makes no representation as to the accuracy or completeness of the information contained herein and has no duty to update the information and opinion in the article. The content presented is not investment advice, nor is Stone Street Advisors LLC a Registered Investment Advisor.