The precious metals sector has been unkind to investors for the last five years.
However, after enduring a crushing bear phase that shredded the valuations of resource stocks across the board, it seemed like the good times were back to stay when the recovery kicked off early this year.
Most of the mining companies and many junior explorers took off like they were shot out of a cannon. Then things stalled out in the typical summer doldrums and a nasty retracement has gripped the sector thereafter. So where do things stand now?
Nothing surprises me anymore in this market. Still, given the severity and duration of the bear trend, I simply do not believe that long-term oversold condition was resolved with a few months of giddy bullish sentiment.
My expectation is that the next big move for gold and silver stocks will be up, and therefore this nasty little correction that has hit the sector should be considered a superb opportunity to load up on quality emerging producers.
Any conversation about gold producers should include some names that operate within Nevada. The state remains the largest gold production centre in the United States, and ranks among the top five gold producers worldwide year after year.
The Fraser Institute has ranked Nevada second among the best jurisdictions in the world for mining activity.
The highly prospective geology, excellent access to infrastructure and services, and a regulatory and political regime that is very supportive for mine development, all contribute to a lower-risk investment environment for junior mining companies.
One such company that has been on my radar screen for a while is Pershing Gold Corp. (NASDAQ-PGLC). Pershing Gold has been advancing its Relief Canyon mine project in Nevada and is on the verge of restarting operations at this mine, which produced in the past.
There are many aspects to Pershing Gold that appeal to me as an investor.
Relief Canyon is located in the midst of several large mines, within an established trend. The project encompasses a land position of 25,000 acres with three open pit mines, along with several undeveloped deposits and numerous exploration targets that could significantly expand the resource base.
There is a fully operational processing plant in place at Relief, along with a leach pad and supporting surface infrastructure. It is significantly less complicated to restart an existing, well-maintained processing plant than it would be to construct and commission an entirely new facility.
In addition, the company has gone on to complete several successful exploration programs during the last few years. The most recent resource estimate for the project has documented 778,000 ounces of gold within the measured and indicated categories, plus a further 47,500 ounces inferred.
This estimate did not include a number of promising drill-hole intercepts and there are several target areas for further expansion that have not been tested, so it is likely that the mineral inventory for this project will increase as more work is completed.
The company has already received regulatory approval for its plans to expand the existing mine workings and upgrade surface infrastructure prior to recommencing mining at Relief Canyon. This will also enable further exploration drilling to continue. In a perfect world, Relief Canyon could be back in production by mid-2017.
Aside from the project's potential, I like Pershing Gold's clean balance sheet, which includes about $10 million in working capital and no debt. Access to funding is a critical component for the success of any mining operation.
An independent consulting firm prepared a preliminary economic assessment (PEA) for Relief Canyon; it demonstrated positive projected operating metrics with gold production of more than 88,000 ounces per year.
The PEA further anticipated that the operation would include silver extraction as a byproduct that would also boost the economics for the project. It projected all-in sustaining costs would come in at US$709 per ounce of gold, which would position the mine among the lowest-cost midsize gold producers.
Another positive aspect to this mine is the fact that most of the total gold resource is located near the surface, hosted within oxidized rock units, and may be extracted from an open pit.
This is the least-challenging mining scenario and enables lower-cost gold recovery using a heap leach pad.
Historic data along with recently completed metallurgical testing suggests that the company could reach gold recovery efficiency in the range of 80 per cent using conventional processing, which is more than adequate for robustly profitable economics.
In the months ahead, Pershing is working to complete upgrades to and refurbishment of the surface infrastructure.
As well, studies are in progress to incorporate all drill-hole data for optimizing the existing mine pit shell and modelling the design of satellite pits that will extend the life-of-mine plan.
The company will have to decide whether it should operate the mine directly or hire a contractor to carry on active mining operations. The planned economics using a contractor would still come in very favourably; estimated all-in sustaining costs would be in the range of US$800 per ounce, but much lower initial capital spending of US$12.2 million is attractive.
A contractor may be the ideal choice given the circumstances.
Pershing Gold is well-positioned to prosper as it draws closer to establishing production again at Relief Canyon. The mine is an excellent asset that should yield many years of profitable gold production.
Internally generated cash flow can then be deployed to expand resources and develop new deposits to extend the life of the operation. This is an ideal growth platform for an emerging gold producer.
Precious metals prices tend to be notoriously volatile (as proven during the last five years) but it encourages me to think that even if we do not see significant upside in the spot price, one may expect profitable operations once the decision is made to restart mining.
Plus, if gold and silver embark on another surge in price and rise to new all-time highs during the life of the mine, as I expect, stocks like Pershing Gold have the potential to generate gains of several hundred per cent during the bull market run.
Mike Kachanovsky is a freelance writer specializing in resource and technology companies. Besides being a founding partner of the website smartinvestment.ca, he's a regular contributor to several newsletters and blogs. He also does consulting for institutional blogs and evaluation of mining projects.
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