It could cost Pershing Gold Corp (TSE:PGLC) (NASDAQ:PGLC) as little as US$12.2 mln in initial capital expense to get the Relief Canyon gold mine in Nevada into production, based on a Preliminary Economic Assessment (PEA) completed in June 2016.
Given that on current plans Relief Canyon is expected to produce 88,500 ounces of gold per year over a 5.8 year mine life, that makes for some interesting numbers in the financial modelling.
Pershing is currently finalising a pre-feasibility study (PFS) that will nail down the economics with greater certainty.
But, as it stands, if the company chooses to mine Relief Canyon itself, the pre-tax internal return could be a very healthy 98%.
If an alternative option to use contract miners is pursued, then the IRR could be an even more impressive 125%, although the trade-off is that overall pre-tax net cash flow drops from US$247.6 mln to US$206 mln.
These are extremely nice numbers in a gold market that has become somewhat constrained since the election of Donald Trump, and could make a development decision straightforward once the PFS numbers come in.
Pershing Gold is led by chief executive Steve Alfers, who previously ran New West Gold and was chief of US operations at Franco Nevada.
His recruitment was the first of several key hires that have turned Pershing Gold into the strong proposition that it is today. The latest to join is Timothy Arnold, who formerly held a senior role at Nevada Copper. Already in place is chief operating officer Tim Janke, who has extensive experience operating mines in Nevada and a proven track record with mining start-ups. Also in place is permitting expert Debra Struhsacker.
“The management averages thirty years in the business,” says Pershing Gold VP of Investor Relations, Jack Perkins. So, with a good asset combined with a strong team the key ingredients for a successful mining story are in place.
The trick now will be to race on ahead and get Relief Canyon built. The plan is to get the results of the PFS releases in early 2017 and then to press the button on construction soon after.
Because this is a project that’s already permitted, and which has a plant already in place, the build time is expected to be a relatively short nine months. All of which means Relief Canyon could be up and running and in production by the end of this year.
There remains the question of the approximately US$12.2 mln in capital, or the approximately US$22 mln the company will need if it chooses to mine the project itself.
As at the last set of accounts there was approximately US$10 mln in the bank. A subsequent gross US$7.5 mln raise has boosted the coffers, and a line of credit with Sprott Resource Lending that undertakes to match the equity raise with an equivalent debt facility is currently being negotiated.
What will be really crucial now will be how the gold price moves.
“I think we’re going to see a tremendous amount of volatility,” says Perkins. “The mood around US interest rates has not been good for gold. But on the other side of that there’s going to be an inflationary effect, and gold is the traditional hedge against inflation.”
Perkins points out that under the assumptions set forth in the Company’s PEA, for every US$50 upward move in the gold price US$20 mln is added to the net present value for Relief Canyon.
Given the decreased risk in terms of finance, permitting and jurisdiction, the attractions are clear.
“For people who are interested in gaining leverage to the gold price, this could be quite an opportunity,” says Perkins.
The results of the PFS will make for fascinating reading.