Corporate powerpoint presentations must always be taken by investors with a grain of salt. There are no audits of the information that go into these presentations and the companies are able to really stretch the truth without much fear of consequences.
With that in mind, let’s walk through Pershing Gold's (NASDAQ:PGLC) most recent presentation, which does paint a compelling picture on a variety of fronts. A picture made more compelling by insiders committing their own cash to this story.
A Compelling Valuation
The first slide that got my attention was the one below, which shows that Pershing Gold is being valued at a sizable discount to other similar companies.
Pershing is a pre-production gold miner. The slide includes three producing companies and three pre-production companies (including Pershing).
Source: Pershing Gold Presentation
Pershing is valued by the market at 60% of the net present value of the future cash flows from its assets. The three producing gold companies that Pershing includes in its presentation are valued at 200%, 140% and 140% of their net present value respectively.
That is a sizable gap.
Pershing is pre-production so a discount to these producing companies is appropriate. More relevant, is the fact that the two other development stage gold companies that Pershing includes trade at 130% of net present value, or double what Pershing trades at.
That is also a sizable gap and is one that is more relevant.
Pershing’s Economics Don’t Seem To Justify This Discount
Pershing just had an independent economic assessment completed on its Relief Canyon property. The purpose of bringing in an independent party is to provide an objective view of whether continuing to commit more capital is appropriate. It also provides comfort to shareholders and the overall market.
The results of the assessment were positive.
Against the companies that Pershing included in the previous slide, the economics of Pershing’s property as determined by the independent economic assessment look favorable.
Source: Pershing Gold Presentation
The slide above shows the cost per ounce of Pershing (shaded yellow) against the various companies Pershing was compared to earlier.
The commodity business is ruthless, so being a low cost producer is essential. A higher cost producer is eventually going to run into problems during an inevitable down cycle.
Pershing’s projected cost per ounce is similar, if not better, than all of these companies. That would make the discounted valuation the Pershing trades at based on net present value seem excessive, especially against the other two pre-production gold companies.
You will notice that there are two different cost per ounce bars included for Pershing. That is because, as part of the economic assessment that was completed, two different scenarios were included. One involves Pershing retaining full operatorship of the Relief Canyon Mine bringing in full time staff. The other scenario involves contracting out the actual work while retaining full ownership of the property.
The contracting out version is projected to generate higher costs, but also would generate fewer headaches and perhaps better mining results.
Source: Pershing Gold Presentation
Interestingly, as you can see in the slide above, which models the two scenarios the rate of return, is actually higher (125% IRR vs 98% IRR) under the contract mining scenario because it requires a lower up front capital expenditure.
Insiders Are Very Motivated And Seem To Believe
The Board of Directors at Pershing is very much aligned with shareholders. Combined the Board owns roughly half of Pershing’s outstanding shares.
As investors, we should always hope to be invested alongside a Board and management group that are incentivized to maximize shareholder value.
Source: Pershing Gold Presentation
That is good, better still is the fact that these insiders keep adding to their position and have done so all year at prices higher than where the stock trades today.
That does add some credibility to the bullish picture the company paints in its presentation. These guys are putting their own money on the line.
A Bird In The Hand Is Worth Two In The Bush
My opinion is that the market is correct to always be very skeptical about any pre-production miner. The insider buying at Pershing does make this company more interesting than most pre-producers. However, I would still be very cautious about assuming the company can deliver on what the economic assessment suggests. Very few operations like this go exactly as planned (in my experience).
What I don’t understand is why Pershing is valued at a discount to other pre-production operators. To me, either Pershing’s valuation needs to move higher or the valuation of these companies should be lower.
Either way, that gap should close.
Disclosure: I don't own shares of any company mentioned.