A Mining Company with Minuscule Dilution Risk and +2,000% Potential

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Submitted by Frank Rollins as part of our contributors program .

The director of a small mining company keeps pouring millions of his personal dollars into open market stock purchases. The buying is relentless. I have been following the legal filings required by the U.S. Securities and Exchange Commission, and it has simply been a continuous stream of acquisition notifications.

* 8/23: Director acquired 5,000 PGLC at $0.32
* 8/30: Director acquired 322,000 CRGC (controlled by PGLC)
* 9/6: Director acquired 100,000 CRGC (controlled by PGLC)
* 9/10: Director acquired 96,000,000 CRGC (controlled by PGLC)
* 9/11: Director acquired 40,000 CRGC (controlled by PGLC)
* 9/14: Director acquired 10,000 PGLC at $0.345
* 9/24: Director acquired 2,000,000 CRGC (controlled by PGLC)
* 9/26: Director acquired 100,000 PGLC at $0.337
* 9/28: Director acquired 900,000 PGLC at $0.331


Although I have written about this man in the past, I want to provide an update on what is happening at this mining company with minuscule dilution risk and +2000% potential: Pershing Gold ( PGLC ). I am so fascinated by this stock because it is one of the only gold mining companies that will be leaving the exploration phase and entering the mining phase within the next 18 months. This makes me excited. This is truly the one of the only small-cap gold stocks you can buy and confidently hold through its transition into a producing miner.

Let's Be Honest for a Moment

Most small-cap gold company have more than five years before production, and the vast majority of them will need so much cash along the way that common shareholders will be diluted to ruins. Common investors have very little chance of success when buying small-cap gold stocks, and I personally hate the entire sector.

Can you say it with me? "I hate small-cap gold stocks!" Feels good, doesn't it? Try again. "I hate small-cap gold stocks!" Shout it out loud. "I hate small-cap gold stocks!"

Oh, do I ever I hate dilutive financings. I wholeheartedly despise having absolutely no chance to make money as an ordinary investor, because I am always paranoid about when the next financing round will send my shares plummeting -50%.

That is why I hate small-cap gold stocks. To my absolute surprise, however, I do not hate Pershing Gold.

I Can Handle the Risk of 20% Dilution

No sugarcoating- let's jump right to the cash burn rate. As an investor, you want to know the brutal truth, so here it is.

Start by reading the SEC risk profile for Pershing Gold. Next, notice that Pershing Gold has about $3 million in cash and burns around $600,000 every month. This means that the company will need at least $10 million to get to its forecasted production date of early 2014 (by simple math, and yes, if you are wondering, $10 million is far above the estimate released to the SEC.)

Its $25 million ore processing facility is already built, licensed and permitted; the land is already negotiated, licensed and permitted; and only minor upgrades and mid/low-level employee hires need to occur for the open pit mine to begin operation.

Still, as a conservative investor, let's go ahead and triple the expected cash burn rate to $30 million, just to be safe. With that, we should all be able to agree that in the worst case scenario, Pershing Gold needs $30 million to get from today to mining gold out of the ground.

We will not include any dilution after the point of mining gold out of the ground, because once Pershing Gold begins production, it should be able to generate plenty of cash flow to finance its operations, meaning that dilution from that point onward should be almost nonexistent. (Gold is currently worth over $1700 per ounce, and the company has well over $1 billion worth of gold in the ground, according to its latest presentation, so cash flow should be excellent once mining commences. More on this later.)

To summarize, Pershing Gold is a $100 million company by market capitalization, and it will need a maximum of $30 million to get to production.

Non-Dilutive Options to Raise Cash

Now, we can conservatively assume that $10 million of Pershing Gold's (conservatively overestimated) $30 million cash need during the next 18 months will come from a non-dilutive financing. Why? Because Pershing Gold has numerous non-dilutive options available:

* Selling some of its 25 million shares of Valor Gold ( VGLD ), currently valued at $25 million
* Auctioning a small, residual percentage of its future $5 billion+ gold revenue in exchange for an upfront royalty payment
* Signing a contract to process another company's ore at its processing facility
* Negotiating a non-dilutive private placement (side note: recall management's extraordinary negotiation track record with Coeur d'Alene investing at $0.32 per share- a zero discount to the market price and therefore a literal dream come true for common shareholders)

Reviewing the options above, we actually notice that all of the $30 million of cash (and then some!) that Pershing Gold needs during the next 18 months can be raised without diluting shareholders at all; but to be conservative, we will limit non-dilutive financing to $10 million. This leaves us with Pershing Gold needing to raise $20 million in cash through dilutive financing during the next two years.

In summary, Pershing Gold is valued at $100 million, so raising $20 million in cash would dilute shareholders by -20%. The downside dilution risk, aside from general market fluctuations in share price, is -20%.

The upside, in contrast, is conservatively +2,000%.

Why +2,000% Upside Is Conservative

By early 2014, Pershing Gold will be mining gold out of the ground at its Relief Canyon mine at an estimated rate of 50,000 ounces of gold per year for more than a decade. Even if achieves only half of its goal, it will generate $40 million per year. This would equal $400 million in revenue for a company now worth $100 million altogether.

Yet Pershing Gold has far more than +300% in its future: specifically, tens of thousands of additional acres beyond the Relief Canyon mine. Indeed, its NI 43-101 resource report is due out this quarter. We already know that the company is expecting total ounces to increase to at least 600,000 just based on past drill tests, let alone future discoveries.

So when Pershing Gold is generating a (laughably conservative) $40 million per year, it will take a couple of those millions and perform more drill tests on its additional acreage. Given its prime location by the top-producing silver mine in America, Pershing Gold will likely find that its currently estimated 600,000 ounces of gold is in fact millions of actual ounces.

Therefore, instead of $40 million per year for one decade, Pershing Gold could be mining closer to full production of its processing facility (or $170 million per year in revenue) for several decades. Now, suddenly you are staring at lifetime revenues over $5 billion and a stock rally of +5,000% from current prices.

Let's be conservative and say it only gets to half of that. That is why +2,000% is conservative.

Conclusion

Pershing Gold will be conservatively generating $40 million a year from 2014-2024, and possibly generating over $1 billion per year within the latter part of the decade. In exchange for that upside of (conservatively) +2000% in stock price, you are risking a downside dilution risk of -20%. That is why, despite hating small-cap gold stocks, I do not hate Pershing Gold.

I have been following the development of Pershing Gold, including today's SEC filing regarding merging the previously-disclosed Continental Resources Group ( CRGC ) into the single entity of Pershing Gold. Overall, I am very impressed with management decisions thus far. I have no financial relationship with Pershing Gold or any company mentioned in this article nor do I own any of their securities. Pershing Gold's latest SEC filing contains a detailed risk profile that should be read by any investor. Be sure to read my past work on Trefis covering the Director who is pouring millions into constant share buybacks, the former COO of Franco-Nevada who is now Pershing Gold's CEO, and other fun factoids.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: ABX , CRGC , NEM , PGLC , VGLD

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