Submitted by Frank Rollins as part of our
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
5,000 PGLC at $0.32
* 8/30: Director
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 (
). I am so fascinated by this stock because it is one of the only
gold mining companies that will be
the exploration phase and
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
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
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
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
* Selling some of its 25 million shares of Valor Gold (
), 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
* 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
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
of its goal, it will generate $40 million per year. This would
equal $400 million in
for a company now worth $100 million
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
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
Let's be conservative and say it only gets to half of that. That
is why +2,000% is conservative.
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 (
) 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
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.