Dermatologist-turned-pharmaceutical magnate Phillip Frost has made one of the most unusual investments of his career. He’s sunk $9.3 million into a gold mine in Pershing County, Nevada. To be more precise, Dr. Frost has bought up $9.3 million worth of the subordinated debt and preferred stock of a company called Pershing Gold (PGC), which is working to restart an existing mine in that area.
Phillip Frost has a long history as a value investor that can recognize undervalued assets. He made his fortune building his company, Ivax, into a major player in pharmaceuticals. Ivax was so successful that Frost was able to sell it to Teva Pharmaceuticals (TEVA) for $7.6 billion in 2005. The management team at Teva had so much respect for Frost that they elected him chairman of that company in 2010.
Dr. Frost was able to pocket $160 million earlier this year when he sold the medical services firm, Continucare, to Metropolitan Health Networks, so it’s always a good idea to pay attention when somebody like Dr. Frost makes an unusual investment, such as buying into a gold mine.
Pershing Gold’s shares are likely to increase in value as word of Dr. Frost’s investment gets out. His willingness to take a risk on such a small and new company should make a lot of people take notice of this little gold company.
It is easy to see why a value investor like Phillip Frost would be interested in a company like Pershing Gold. In August 2011, the company purchased the Relief Canyon Mine in Pershing County, Nevada in a bankruptcy proceeding. The property purchased contains three open pit mines and a recently renovated heap leach gold processing facility.
These facilities are located in a proven gold field – the Pershing Gold and Silver trend where major international mining companies are already very active. Mines in the area include the Wilco Project, which is being developed by Rye Patch Gold (RPM) on property owned by industry giant Newmont Mining (NEM). Rye Patch’s geologists have measured 625,000 ounces of gold at Wilco, and they estimate that there could be an additional 1,124,700 ounces of gold on the property.
The facilities purchased contain a substantial amount of equipment. More importantly, the Relief Canyon Mine already has all the necessary federal and state permits. That means Pershing is in a position to get production started quickly without investing a lot of cash. The facilities are also bigger than needed, so the company could potentially generate additional revenue by processing ore for other miners.
Pershing has also moved aggressively to secure its position at Relief Canyon by purchasing nearly 24,000 acres around the mine. That will make it easy to expand the mine and drill for new deposits. The Relief Canyon property contains an estimated 155,000 ounces of gold. The company has been aggressively drilling for gold on its claims and nearby lands owned by Newmont Mining. The company has successfully negotiated a mineral rights deal with Newmont, so it owns any gold it finds on that property.
This makes Pershing the dominant player in the southern half of the Pershing Gold and Silver Trend, a rich mineral formation in the area. Several successful mining companies including Newmont, Coeur de Lane (CDE) and Victoria Gold (VIT) own properties in the region. Coeur de Lane and Newmont are already actively mining there.
The Relief Canyon Mine has a lot more going for it than the gold reserves. It is located in a historic mining area of the state of Nevada, rather than a politically unstable developing country. This means Pershing doesn’t have to worry about political pressures, labor strife, violence, and electricity shortages like some mining companies do. The Relief Canyon Mine is located close to a major transportation artery, Interstate 80, which should reduce transportation costs.
Another reason why Dr. Frost invested in Pershing is the company’s management team. CEO Stephen Alfers is a recognized authority on U.S. mining law who has developed several successful properties in Nevada. Among other projects, Alfers helped develop the Long Canyon discovery in Northern Elko County, Nevada for Fronteer. That property contains an estimated two million ounces of gold. Alfers is so confident about Pershing’s future that he left a position as Chief of U.S. Operations for Franco-Nevada (FNV) to take the helm at a startup.
Mr. Alfers has assembled a team of seasoned mining industry professionals to help him develop the project. Each of the management team members has 25 to 30 years of experience in heavy metals mining. One of them, Debra Struhsacker, has helped several major mining and exploration projects in Nevada get permits.
That means there should be no expensive permit process or legal hassles at Relief Canyon. The mine already has the necessary permits, and Alfers has secured experienced help needed to get any other permits. It should also be noted that Relief Canyon is located in a fairly remote and largely uninhabited area, so there should be little or no opposition to expansion of the project.
Encouraging Results Could Make Pershing Gold a Takeover Target
Success at Relief Canyon could make Pershing an acquisition target. Relief Canyon would make an excellent addition to the portfolios of either Newmont or Coeur de Lane, which are already active in the neighborhood. It could also attract the attention of Barrick Gold (ABX), which owns and operates the very successful Cortez Mine in Elko County, Nevada.
Part of the reason that Pershing could be a takeover target is that 15,000 ounces of gold a year could be dug out of the Relief Canyon mine for several years at a very low cost. This potential cash flow is what attracted Dr. Frost’s attention. It’s likely to attract the attention of other value investors and major gold miners.
Risks do pose a threat to Dr. Frost and other investors looking at Pershing. First, the mine is not yet in operation, and no estimate on the cost of operation is available. New mine projects are notorious for running over budget. Although it should be noted that Pershing is not starting from scratch, as the mine and much of the equipment is already in place. Additionally, the necessary permits, the supply of electricity, and the transportation infrastructure are all present. If the project costs run rampant, Dr. Frost could end up losing big.
Another risk is that, despite his many accomplishments, Dr. Frost appears to have no experience with mining or gold mining. His expertise is in pharmaceuticals and medical devices, where he has developed several successful companies and made a large fortune. There is no indication that he has any special knowledge of gold or mining. The lack of expertise in the area of mining, specifically with the allocation of resources, could make him more vulnerable to mistakes.
Despite the risks noted above, I believe Pershing Gold is definitely worth considering now. It’s an interesting little company with what looks like a good management team and a sound business plan. If the price of gold remains high, Pershing should do very well.
Transparency/Disclaimer: I was compensated modestly by public relations to write this article. While I have vetted each company, researched it thoroughly and I’ve done my own due diligence, my due diligence is not a substitute for your own.