I've seen this all before. A new geological/drilling report is about to be issued by an exploration stage miner. Rumors of positive results abound. Potential investors point to evidence of insider buying to try and make the case that the company's board knows what's going to be in the report. The trading volume then explodes and the stock price starts to climb.
This is exactly what is happening now with Pershing Gold (PGLC.OB) and speculation over their Relief Canyon mine in Pershing, Nevada. The recent article published on Seeking Alpha, linked above, attempts to draw positive conclusions from very little substantive evidence. The Article makes a case, focusing on insider moves before this new NI 43-101 Report, especially those of Phillip Frost who now owns 47M shares, or 18% of the company.
I am not belittling Pershing as it is not my objective here. Rather, I'd like to make a different, long term case for Pershing. What I think is happening now is this. The extreme heavy volume trading in PGLC and speculation over a positive NI 43-101 over the last week has pushed the stock up from 42 to 62 cents, and into the hands of emotional and volatile traders looking for a quick buck. Pershing has set expectations quite high for a tripling of inferred gold resource in the Relief Canyon mine from 248K to 750K ounces in its own investor promotion literature. I think we can safely assume that the report will come out positive, as no company would get investor hopes up to such a level without having some degree of certainty that their assumptions are more or less accurate based on their own analysis. The recent insider moves cited would tend to confirm this.
Since last Thursday (January 17) PGLC went through a 25% profit-taking correction and is now back at 50 cents, shaking off some of the more volatile day traders, though I doubt they have all lost their positions just yet. What I expect to happen now is one more push higher towards the recent parabolic top timed with the report's release, followed by a gradual unwinding just above current support levels. The inexperienced thrill seekers will begin to drop out as more and more of them realize that Relief Canyon will not be producing gold in the next two days, and news surrounding Pershing begins quieting down along with much lower trading volume. This is generally what happens with an exploration stage company after they release a positive geological report of some kind.
For these reasons, the immanent NI 43-101 is not what interests me about Pershing. Nor do the recent insider moves. I feel we can be fairly certain what will play out and how it will affect PGLC's price. What interests me specifically are Pershing's hefty assets and staying power as an exploration stage junior miner, coupled with what I think will happen to the price of gold in the next two to three years.
Pershing has one of the strongest balance sheets of a mining start-up that I have seen. Despite negative cash flows and a net loss of almost $38M last quarter, their balance sheet is remarkably healthy, with an astonishingly low $500K in long term debt as compared with over $25M in assets. What this tells me is that the company has some really serious backing that is willing to keep it debt free while Relief Canyon continues development.
What I'm trying to say is that Pershing has ample time on the clock before it really has to start producing gold and seeing some serious income. The real case for Pershing is not some report that attracts the attention of penny stock newsletters and has emotional traders dreaming of truckloads of bullion and comforting themselves with insider buys to confirm their fantasies, but the company's stamina, so to speak.
Over the next two years, nominal gold and silver prices are going to reach obscene levels not seen since 1980, when the Dow/gold ratio reached 1:1. People forget that this was the real gold bubble, and that today's numbers haven't even gotten close to that figure. The lowest it got at gold's peak in September 2011 was just below 6:1. We're now back up to 8:1.The Federal Reserve keeps pumping money, $85B a month, into the economy via investment banks that they magically credit when they "purchase" Treasury Securities. These banks put much of that money into Wall Street. That is their job. With that kind of money being pumped in every month, the Dow cannot collapse again in nominal terms like it did in 2008, so the Dow/gold ratio cannot approach 1980 levels that way. But the dollar itself can indeed collapse, especially when trillion dollar deficits are aggravated with insane ideas like trillion dollar platinum coins even being considered. When that happens, gold and silver go the other way.
Not many junior miners have Pershing's resources and the deep pockets that are obviously keeping the company healthy. Over the next two to three years, way after the recent gyrations in PGLC over some resource report and "Mining without Risk" are long gone, Pershing will still be on the scene. The biggest gains to be made from gold and silver's rise will be in the junior miners, as those are the ones naturally most leveraged to the price of gold, and there are many in the 78 holdings of the junior miners ETF GDXJ that have no revenue like Pershing but are in a much more precarious financial situation. And yet, their stock prices generally move with gold, so will Pershing's. Yes, they'll have to produce gold within the next 2 to 3 years to capitalize on this, and I believe they will. Nevertheless, the recent hype is overblown and the stock is overbought, so prepare to buy the dips.
Before considering investing in PGLC directly, it is crucial to note that Continental Resources Group (CRGC) entered into a merger agreement with Pershing back in July 2011. Continental sold all of its assets to Pershing in exchange for 76M shares of PGLC. The tickers are still separate however, and as of now, 95M shares outstanding of CRGC control 76M shares of PGLC, meaning every 10 shares of CRGC is equivalent to 8 shares of PGLC. At CRGC's current price of 33.5 cents, 10 shares can be purchased at $3.35, which translates to 42 cents a share for PGLC. PGLC's direct price right now is 50 cents, meaning you can acquire PGLC at a 16% discount through buying CRGC instead. Once the registration statement for the shares is deemed effective CRGC's shareholders will capitalize on this further discount.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.