Pershing Gold (NASDAQ:PGLC) released the long-awaited pre-feasibility study for its Relief Canyon Mine. The preparation of the PFS took longer than expected, and it was released several months later, compared to some of the original projections. But this milestone was finally reached, and Pershing Gold can focus on other steps on its way to first gold pour. Although some of the results presented by the PFS are worse compared to the PEA, the PFS confirms the viability of the project. However, I must admit that I am a little disappointed by the notable growth of estimated capex.
What is important, Pershing Gold was able to convert a better part of its resources into reserves. According to the PFS, the Relief Canyon contains measured and indicated resources of 789,000 toz gold, at a gold grade of 0.651 g/t and inferred resources of 45,200 toz gold, at a gold grade of 0.308 g/t. The resources include also proven and probable reserves of 634,900 toz gold, at a gold grade of 0.719 g/t. Besides gold, there are also silver reserves of 1.63 million toz, at a silver grade of 3.87 g/t.
Another positive aspect of the PFS is that Pershing Gold was able to improve the expected gold recoveries. While the PEA was based on gold recoveries of 80%, the PFS expects that the recoveries should be around 83%. Also, the estimated average annual production was improved. The number grew from 88,500 toz gold to 93,900 toz gold, or by 6.1%. As a result, the estimated AISC declined slightly, from 804$/toz to 802$/toz.
Source: Pershing Gold
But not everything is rosy in the PFS. The PEA outlined two potential scenarios. The first one was based on contract mining, and the second one was based on self-mining. In the first case, the initial capex was only $12.2 million, the AISC was $804/toz gold, and the NPV (5%) was $159 million. In the second case, the initial capex was $22 million, but the AISC was only $709/toz gold, and the NPV (5%) was $189 million. According to the PFS, the management has chosen the contract mining option. What is worse, the PFS estimates the capex at $23.6 million, which is even higher compared to the capex for the self-mining option according to the PEA. Also, the sustaining capex has increased quite notably, from $16.6 million to $22.8 million. As a result, at gold price of $1,250/toz and silver price of $16.75/toz, the after-tax IRR declined from 109% to 85%. However, the after-tax NPV (5%) remained almost unchanged.
I still don't doubt that Pershing Gold will be able to finance the mine construction. However, the upside potential of its share price is slightly lower now. In my previous article, I estimated that the share price should climb to the $6.6-8.5 range. But the situation has changed, and the estimate must be adjusted accordingly. I expected that the management will choose the self-mining method, but it has chosen the contract mining method. Moreover, the capex should be slightly higher than in my calculations. It means that the price target must be adjusted to the downside.
As of the end of Q1, Pershing Gold held cash & cash equivalents worth $6.9 million. As the company has announced a new exploration program, it is able to assume that all of the cash will be expended for exploration, administrative costs, etc. It means that Pershing Gold will probably need to draw the whole Sprott credit facility worth $20 million. In this case, according to the agreement with Sprott, Pershing Gold will have to issue new shares worth $20 million. As a result, it will have $40 million to its disposal, which should be more than enough to take Relief Canyon into production. Conservatively assuming, that the shares will be issued at $2.5 per share, which represents a 15% discount to the current share price, the fully diluted share count should climb approximately to 45 million.
Production of 93,900 toz gold per year, at an AISC of $802/toz, should lead to earnings of approximately $30 million per year, using the current gold price of $1,290/toz, an interest rate of 9% paid to Sprott, and a tax rate of 30%. Calculating with the fully diluted share count of 45 million, the EPS should be around $0.66. At a conservative P/E ratio of 10, the resulting price target should be around $6.6. In other words, the lower boundary of my previous estimate seems to be more probable right now. The company has also a relatively strong leverage to growing gold price, as gold price growth by $100 adds approximately $40 million to the NPV (5%).
The management also works on addressing some of the shareholders' concerns, especially the relatively short mine life and the permitting of pit expansion.
The Relief Canyon deposit is still open in several directions (map below). The company has also identified an area right to the south of the current deposit that has the potential to contain some satellite deposits. There is quite a good potential that the projected mine life will be expanded by several years, especially if the gold price keeps on growing. A higher gold price will enable conversion of a bigger part of the current resources into reserves. Also, the recently announced drill campaign may turn out to be very important for the future of Pershing Gold. It will take place in the Blackjack Hill area that is located only 10 kilometers to the south of Relief Canyon. This area hasn't experienced any extensive exploration activity yet, as it had been fragmented into several smaller properties. Pershing Gold finished consolidation of the property only in April. If a viable gold deposit is identified at Blackjack Hill, it should be used to expand the mine life of the Relief Canyon Mine.
Regarding the pit expansion permitting process, the management has decided for a staged permitting. All of the permits to restart the mine are in place. Pershing Gold will need further permits later during the mine life to expand and deepen the pit. The management has stated that it will apply for the permits later this year. The sooner Pershing Gold receives the permits, the better.
Although some of the aspects of the PFS were less positive than I originally expected, the project is still good, and shares of Pershing Gold offer a meaningful upside potential of more than 100%. If everything goes well, first gold should be produced next year. There are a couple of near-term catalysts that should help to push the share price higher. According to the previous statements of the management, the mine start-up decision should follow shortly after the PFS. And also, the results of the Blackjack Hill drilling should be released in the coming months. And also, the gold and silver prices will be important for Pershing Gold's share price.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.