I recently met the CEO of a Nevada gold company that will be mining gold within just 18 months, yet is trading at an 87% discount to its Net Asset Value ("NAV"). As this company gets into production, I expect the stock to trade near its NAV per share. In other words, this is a multi-bagger opportunity. Although there are risks related to this company, I hope to explain what he has been doing for the past year in northwestern Nevada. His name is Stephen Alfers, and he is the former Chief of U.S. Operations at Franco-Nevada (FNV).
Perhaps you have heard of Franco-Nevada: it's an $8 billion company. Alfers was there for four years, leading all U.S. operations. In early 2012, Alfers started work at a new company called Pershing Gold (OTC:PGLC), and it is trading at an 87% discount to my $3 per share NAV estimate. Pershing Gold controls 39 square miles of gold claims (including a mine that previously produced 390k ounces of gold) and a fully-permitted and debt-free processing facility.
With close ties to Newmont Mining (NEM) and a recent strategic investment by Coeur d'Alene (CDE), Alfers is driving Pershing Gold to become Nevada's next gold producer. Insider buying has been strong, attracting significant investments from private individuals like respected billionaire Dr. Phillip Frost and a Director of the company. I expect a re-rating in Pershing Gold's stock within the next 12-18 months to as high as $1.5 per share (or 50% of NAV), and up to $3 per share within 24-36 months.
Invest Alongside an Industry Veteran
I have had several discussions on the phone and met with Mr. Alfers in person on October 10th. Alfers makes things happen. He has recruited a tremendous team, grown and consolidated Pershing's land position, cleaned up the capital structure and introduced advanced technology that substantially de-risks the company. I am amazed at Alfers' command of all aspects of the business. As a long-time lawyer, he provides unequaled experience in the vitally important areas of permitting, regulatory issues and negotiations with third parties. When Alfers says Pershing will be in production by 2014, there is ample reason to believe him.
New Technology Leading the Way
A largely ignored press release by the company dated September 17th explains a key part of the Pershing story:
"By identifying two new styles of mineralization, we have made an important and exciting breakthrough in understanding the geology of the Relief Canyon deposit which we feel greatly expands our discovery opportunities. Our new exploration model greatly enhances our ability to identify new, high-priority drilling targets that we believe are likely to intercept new mineralization that could significantly expand the mineral resource…"
Advancements in technology have identified these new styles of mineralization not explored by prior owners. This suggests dramatic upside potential. The ore quality of Pershing Gold's resources is already improving - another quote from the September 17th press release:
"The Feeder Zones are expected to contribute significantly to the Relief Canyon gold resource because the grade in these zones is typically two to five times higher than the grade in the Main (previously exploited) Breccia Zone.
Discussion of Investment Opportunity
Based on my valuation, [model available upon request] Pershing's $117 million fully diluted market cap is trading at an 87% discount to my target NAV. This is in sharp contrast to emerging producers trading at lesser discounts despite significantly greater funding, permitting, exploring and managerial challenges.
From the same press release, quote by Alfers,
"We are in position to be Nevada's next new gold producer. We have a target date to be producing gold in 2014 from newly mined ore, gold-bearing materials on the dumps, and possibly toll ores from other properties. We believe we are ideally situated to emulate the production history at Hycroft where Allied Nevada Gold refurbished an existing heap leach facility and reactivated the Hycroft Mine in 2008 in record time and with limited additional capital investment."
Alfers has clearly chosen an asset and a strategic course of action that will facilitate the discovery and production of gold in an expedited and cost-efficient manner.
The Relief Canyon Mine will reach a run-rate of 50k ounces of gold in 2014. I forecast production of 150k ounces by 2022. Yet, this mine is on a small fraction of Pershing's 25k acres of under-explored claims. With modern technology, top geologists and aggressive exploration funded with free cash flow from the Relief Canyon Mine, additional gold will be found and new mines developed.
As a starting point on Pershing Gold's valuation, consider Midway Gold's proposed Pan project. Pan needs to raise $110 million to begin producing 81k ounces annually for nine years. All-in costs are projected to be $824 per ounce. Midway's stated NPV (7% discount factor, $1,200 long-term gold price) for the project is $156 million. However, a comprehensive report on Midway Gold from RBC states that at $1,600 long-term gold, Pan would be worth about $300 million.
Pershing's Relief Canyon Mine project has twice the ore grade and requires less than a third of the upfront capital. By my estimates, Pershing's all-in cost will be below $800 per ounce. With fully permitted and paid for processing facilities the risk of material delays in first production are minimal.
For the Relief Canyon Mine, I assume a 10-yr mine life with 15k ounces of production in 2014, 50k ounces in 2015-16, 75k in 2017-18, 100k in 2019-21 and 150k in 2022-24, for a total of 1 million ounces. The NAV of the project at current gold prices is about $500 million or $1.4 per share. But this is only the beginning, as every four years I assume a new 10-yr, 1 million ounce mine commences, for a total of four mines over 22 years. With this sequencing, peak production in any single year would be 325k ounces in 2024.
These four mines generate an NAV per share of $3. Producing gold companies in Nevada have analyst price targets of 1.0x-1.5x their respective NAVs. With less than 18 months until planned production, Pershing's stock will be re-rated. My price target is 50% of NAV, or $1.5 per share within 12-18 months and 100% of NAV, or $3 per share within 24-36 months.
The first 10-yr, 1 million ounce mine requires $25 million to get into production. A 6% discount factor and $5 million of annual maintenance capital is assumed. Upon stepping up production to 100k ounces in 2019, an incremental $20 million of capital is deployed to upgrade processing facilities.
Three subsequent 10-yr mines are modeled the same way except that the discount factor increases from 6% for the Relief Canyon Mine to 8%, 10% and 10% for the next 3 projects. An assumed $50 million is spent on new processing facilities for each new project.
Upside to Key Assumptions
Advanced technology: Dramatic improvements in 3-D seismic could allow for more than four new mines, greater than 1 million ounces per mine, longer mine lives, higher average ore grades and lower strip ratios, leading to lower costs per ounce.
High discount factors: Upside upon de-risking of each project. If instead of 6%, 8%, 10%, 10% I used a 6% discount factor for all four mines, the NAV per share would increase by $0.90 to $3.9.
$50 million for processing facilities for each new mine: It will likely be cheaper and more efficient to expand processing facilities instead of building new ones.
Conservative share count assumption: I assume 350 million fully diluted shares, (pro forma for an assumed $15 million capital raise at $0.40 per share). This compares to the existing 304 million fully diluted shares.
$800 all-in cost assumption: In my opinion, (not necessarily that of management) all-in costs will be comfortably below $800 per ounce. A 10% lower all-in cost assumption would increase the NAV per share by $0.30 to $3.30.
-- Filing in Q4 of an updated NI 43-101 report: Up to a tripling of the resource from 248k to 600k - 750k ounces is expected, and that's on a small portion of Pershing's expanded acreage.
-- Release of Preliminary Economic Assessment, (PEA), 1st quarter, 2013: A third party analysis of the potential economic viability of the resources. This is a key milestone that is a prerequisite for possible royalty agreements and project financing.
-- Open market purchases by Director(s) and Dr. Frost.
-- New discoveries on the company's 39 sq miles of claims in proven mineralization zones.
-- Procurement of a royalty deal, 2013: This would offset the possible need of further equity raises next year.
Risk Factors - For a comprehensive list of risk factors, see pages 5-12 of this S-1 Filing:
-- Lower gold prices: At a long-term gold price of $1,400, (20% below current levels) the NAV would decline by about $1 to a NAV of $2 per share.
-- Loss of Alfers: He has an employment contract through 2015 and a large shareholding position.
-- Changes to Nevada's tax or royalty regimes: Nevada is ranked #8 of about 100 mining jurisdictions in the world by the Frasier Institute (see page 10)
-- Delays in permitting new mines or delineating new gold deposits: A 1-year delay in all four mines would lower the NAV by about $0.40 to $2.6 per share.
-- Equity dilution above that in my model: Pershing has a history of significant shareholder dilution.
-- Pershing has no proven or probable reserves
--Funding risks: External sources of funding are likely needed, from the S-1 Filing, "Our estimated total cost for 2013 for exploration, permitting, landholding, facilities re-commissioning and for general and administrative costs is approximately $13 million"
Junior gold mining stocks are highly speculative, there's no way around that fact. However, when a proven leader joins a small cap company and attracts the attention of Newmont and Coeur d'Alene, not to mention a billionaire investor like Dr. Frost, that company deserves attention. I conducted extensive due diligence and met with the CEO in person. Mr. Alfers strategy appears sound as evidenced by the significant progress he has made in a short period of time.
Investors are strongly urged to do their own research. My risk appetite in choosing this investment is very high. This investment is not suitable for all investors. By far the most recent and detailed source of information is the company's S-1 filing, especially the risk factors on pages 5-12 (linked above).
Finally, I referenced the company's press release of September 17th three times. This press release contains a detailed and balanced update of Pershing Gold. Prospective investors are urged to study this press release (linked above).