For the last year and a half, this author has been keeping a close eye on Pershing Gold (NASDAQ:PGLC). I first wrote about the company in an article titled Adam Smith's Take on the Future of Gold Mining; an article that addressed the likely market response to the rapidly declining gold market and the importance of the all in sustainable cash cost of production as an analysis metric when comparing gold stocks. A number of fellow SA authors have highlighted the various potential benefits and pitfalls of investment in Pershing Gold over the past 15 months - most recently this piece, which did an excellent job of covering the latter. Despite this latest analysis, which essentially suggested Pershing Gold might be too risky an investment for many, this author now believes that - a year and a half after having hit his radar - now is the time to take a position. Here is why.
It is all about timing. Investment in development stage mining companies is very similar in concept to investing in junior biopharmaceutical companies that are seeking FDA approval. Both types of companies generally trade in a type of anticipation and response pattern as they work towards the end goal - be it approval or the commencement of production. Some traders like to attempt to draw short-term gain from the anticipation and response action, entering ahead of drilling report releases or trial outcomes for example. Others like to take an early position based on their own (or others') analysis and hold on to that position until the conclusion of the development phase. An entry into Pershing Gold now offers exposure to both types of strategy. A recent press release outlined the company's intentions to submit an updated NI 43-101 Technical Report during the third quarter of 2014. This report will offer insight not only into the potential resources at the company's 25,000 acre land package, but also estimates of anticipated production, cash costs and all in sustaining costs, and its tone could determine the medium-term direction of the company's stock price as it works its way towards production. The question investors need to ask themselves now therefore is how likely is this report to show a positive outlook for Pershing Gold? A look at the company's fundamentals and its progress to date suggests it is highly likely.
Many reading this will already be aware of the key fundamental aspects of the company, but for those that are not, here is a brief rundown of the company's assets operations. Pershing Gold is a Nevada-based gold producer whose landholdings cover more than 25,000 acres in Pershing County, Nevada. This acreage includes the Relief Canyon mine - a mine situated in a known gold and silver trend that includes mines owned and operated by industry incumbents such as Barrick Gold (NYSE:ABX) and Coeur Mining (NYSE:CDE). The mine has a proven history of production, with mining companies Lacana and Pegasus having produced 131,000 ounces of gold and 111,000 ounces of silver in the 10 years between 1983 and 1993. Over the next 20 years, Newgold conducted extensive RC exploration drilling at the property and, in 2008, constructed brand-new heap leach facilities. Two years after this construction completed, in August 2011, Pershing purchased the property. In short, the Relief Canyon mine and processing facilities are "shovel ready". The processing facility is fully permitted, and has the capacity to treat 8,000,000 tons per year. In addition, it contains a permitted leach pad with a 21,000,000 ton capacity. One of the major hurdles that junior developers generally face is the production of facilities such as this. Construction can be costly, and offering numerous financing rounds are required in order to meet the cost of completion. This dilutes the holdings of early investors. Pershing Gold investors do not face this problem. Another attractive feature of Pershing Gold is its institutional support. Dr Phillip Frost, chairman of generic pharmaceuticals giant Teva Pharmaceuticals (NYSE:TEVA), and Barry Honig, renowned institutional investors that have a tendency to buy and hold stocks for many years, both have large positions in Pershing. They have held, and added to, these positions for more than two years despite numerous opportunities to sell out and generate quick gains. The involvement of these two individuals and their potential contribution as far as making Pershing Gold a success cannot be overestimated.
How close is the company to commencing production, and what level of production is likely? In May this year, the Bureau of Land Management ("BLM") toured the mining and processing facilities at Relief Canyon, and are currently in the process of reviewing the company's updated reclamation cost estimate - typically the last step prior to authorizing a plan of operations. Concurrently, the company is preparing a plan of operations modification for expansion of the pits at the Relief Canyon mine. Pershing expects to submit this modified plan of operations to BLM during the third quarter of this year, and could be producing by the third quarter of next year. In a resource update released in March 2014, the company announced the updated calculation of mineralized material - the result of its 2013 drilling program. This calculation reported 34,062,000 t of gold mineralized material at an average grade of 0.019 ounces per ton gold. Alongside this in-house report, the company also announced that the Mine Development Associates ("MDA") of Reno, Nevada had completed an external updated resource estimate. This estimate reported a measured and indicated resource of 552,000 ounces of gold and an inferred resource of 165,000 ounces of gold. Company president, CEO and executive chairman Stephen Alfers stated that he expects the 2014 drilling program, which is targeting 20,000 to 30,000 feet of core drilling on a budget of approximately $1.5 million, to expand and upgrade the resource estimates noted above. Further, a recently released preliminary metallurgical report on column leach tests of gold bearing materials at the property reported an 81.8% gold recovery from a 91-day leaching period. Alongside this, as the composite showed a 79.2% gold recovery and 71-day leaching period. The article mentioned earlier highlighted some concerns about both the recovery rate and length of time required to achieve this recovery when compared with a number of other development projects. These concerns are valid, but do not detract from Pershing Gold as a long-term investment. As the operation expands, both economy and efficiency should improve; improvements that could put Pershing Gold's recovery rate in line with that of its competitors.
All said, an exposure to Pershing Gold is not without its risks - as the aforementioned article highlights. However, with resource estimates and gold recoveries that improve every time the company updates its expectations and the support - both operationally and financially - of Frost and Honig, and the potential to start producing 12 months from now, this author believes that now is the time to gain an exposure. Many would rather wait until the company releases its third-quarter report - a sound strategy and one that reduces the risk of investment in Pershing Gold as a result of the insight it offers - but doing so could mean stock acquisition comes at a premium.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in PGLC over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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