As Gold Miners Consolidate, Some Juniors Reap the Benefits

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PershingGold

The devastating bear market in gold miners, particularly juniors since 2011, has hit gold stock investors hard. If you’ve been a buy and hold long term in this sector, then you better be young and gainfully employed or you’re in big trouble. The top majors including Barrick (ABX), Goldcorp (GG), and Newmont (NEM) have slipped an average 70% since peaking in September 2011. Junior miners (GDXJ) have been even worse, down 85% from their highs.

In the face of this devastation in the resource sector, silver (or gold) linings are now emerging which may provide an opportunity to significantly recoup losses even before this market turns around as a whole.

Gold miners have been pummeled by a deadly combination of falling gold prices and the rising costs of mining. While gold did have a “bull market” up to 2011 in the sense of rising gold prices, these prices did not rise sufficiently even at their peaks to cover the equally extreme rise in mining costs.

For Newmont, for example, all-in costs began to skyrocket in 2011, just as gold prices were topping out. They began to really spiral out of control in 2012 topping out at $1,192 per ounce just in cash costs, barely improving in 2013 to $1,105 an ounce. Barrick and Goldcorp fared a bit better in cash costs but all three still suffered massive losses after the gold bull topped. Barrick in particular had enormous impairments in 2013 of over $13B and hasn’t had a profitable year since 2011.

Newmont, on the other hand, has been weathering the gold bear relatively well, not in terms of stock price, but in terms of its bottom line. After suffering a $4.3B impairment in 2013, it somehow turned a profit of half a million in 2014, despite gold prices continuing to languish.

Part of the reason Newmont has been successful relative to its competitors since the gold bear began is that it has made a herculean effort since 2012 to consolidate its assets, focus on its core business, and not take too many risks with new ventures in order to lower per-ounce mining costs. Now, as of the end of Q1 2015, and for the first time since the last gold bull ended, Newmont has finally lowered its all-in costs on a year over year basis.

Newmont CEO Gary Goldberg reported 18% lower all-in sustaining costs in Q1 2015 over Q1 2014, down to $849 from $1,035 an ounce. Total all-in costs which taking into account new ventures together with sustaining costs for current mining projects, went down to $1,215 from $1,300 per ounce. $1,215 is even lower than its 2013 costs of $1,274 per ounce, so it seems that Newmont’s cost cutting measures are finally getting somewhere.

As for Goldcorp and Barrick, Goldcorp is likewise shaving down its all-in costs significantly since 2013 after breaking $1,660 in 2013, then down to $1,400 an ounce Q12014, much higher than Newmont which is why Goldcorp is having a harder time. All-in cost per ounce is now down to $1,210, around the same as Newmont. Barrick, however, is going in the opposite direction. All-in costs came in this quarter at $1,024, up from $938 per ounce last year, but that is still better than the $1,317 per ounce in 2013. Barrick can afford to spend a bit more on mining since $1,024 is still sufficiently below spot price to pull a profit.

Even some mid-tier miners like Sandstorm (SAND) have been successfully cutting costs, with companies like Sandstorm down to $1,140 per ounce in 2014, down from $1,281 in 2013.

Whatever the all-in cost level is for each miner, all three companies know very well that gold prices have not recovered and may not recover significantly in the near future. Though gold bugs may strongly disagree with that assumption, the safest play for all three considering the last three plus years of carnage is to assume that prices will not recover to their previous highs in the near term and cost cutting measures are absolutely imperative.

That said, cost-cutting measures have sometimes been done with blunt instrument in a rush instead of carefully with a scalpel, considering the urgency. This shedding of assets sometimes offers opportunities for newer, smaller juniors who pick them up – juniors that were never affected by the latest bear market because they didn’t exist or were not doing any significant business back before 2011.

With majors consolidating into their core business and divesting from riskier projects, a big find by a junior picking up those divestitures is bound to happen at some point. The question is finding it. It is still too early to tell for certain, but Pershing Gold (PGLC) may have a real find in the Relief Canyon Mine in Pershing Nevada, which it acquired from none other than Newmont in several stages. Newmont was looking to sublet this mine out in 2012 as it was hit by the first year of the gold bear, and Pershing took the sublease in April of that year. On January 19th, Pershing dug deeper, both financially and literally, into the real estate and put up another $6M for 1,600 more acres with other surface mining claims at Relief Canyon.

Then in March, two months after the latest deal with Newmont closed, Pershing reported finding intercepts as high as 124 grams per ton, or 3.6 ounces per ton on the acquired land.

As to why Newmont gave up these claims for cash, the answer is that, having decided to relinquish Relief Canyon in stages years ago, and having decided on a consolidation strategy as well, exploring risky assets is not its main business plan. Cutting costs is.

The next questions are, first, does Pershing have the capital to see resource production through? And second, what are the concrete plans for the mine?

In terms of the first question, Pershing is backed by billionaire Dr. Phillip Frost, who owns 15% of the company. The other main investor is Barry Honig, who owns 28.5% of the company and just purchased more shares this month. Pershing just raised $11.5M in a private placement to continue development of Relief Canyon.

As for concrete plans going forward, its most recent press release on April 27th states that completion of the regulatory resource estimate is expected next quarter.  This includes estimates of production rates, cash costs, all-in-sustaining-costs, life-of-mine, and NAV estimates.

Pershing already has all of the state and federal permits to start mining in the existing open-pits, and has submitted an expansion proposal to the Nevada mining authorities that would involve three years of mining and five years of heap leaching. Further technical details are available in the release, but judging by the timing of insider buys and a planned resource estimate next quarter, it seems that the project can very well begin next year and be ongoing for the next three years considering proposals for permits already filed.

Pershing is only one example of a junior capitalizing on the cost cutting measures of the majors. On May 5, Premier Gold (PIRGF), a midtier miner, acquired 40% of the South Arturo mine from Goldcorp, also in Nevada, after Barrick did not intervene with its right of first refusal.

When big mining interests like Newmont and Goldcorp need to consolidate, it’s the midtiers and junior exploration stage ventures that can stand to benefit if they pick the right merchandise at the fire sale.

While there is no assurance that Pershing has for certain acquired the right asset yet, the news keeps improving, and the insider buys keep coming.

 

 

 

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