The Curious Investment of a Billionaire Pharmaceutical Magnate in Pershing County, Nevada

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Submitted by Frank Rollins as part of our contributors program.

A man with over $2 billion in personal wealth has invested a substantial sum in a mining company with some property near the Nevada operations of Coeur d’Alene (NYSE: CDE). Dr. Phillip Frost, the self-made billionaire and CEO of Ivax (now of NYSE: TEVA), Key Pharmaceuticals (now of NYSE: MRK), and Opko Health (NYSE: OPK) has taken an uncharacteristic stake in a company totally outside his domain of pharmaceutical expertise. Dr. Frost invested $9.3 million in Pershing Gold (OTC: PGLC), a small mining company with some intriguing mineral claims in Nevada. What prompted this billionaire — a billionaire with executive responsibilities at several multinational pharmaceutical firms — to buy into an exploration-stage mining stock?

Dr. Phillip Frost currently works as the CEO of Opko Health (NYSE: OPK), a $1.3 billion company with operations across several continents. He also serves as Chairman of Teva Pharmaceuticals (NYSE: TEVA), the world’s largest generic drugmaker, and multiple advisory roles at The Scripps Institute, Ladenburg Thalmann (NYSE: LTS), and Schering-Plough of Merck & Co. (NYSE: MRK). Dr. Frost is listed on the Forbes 400 of America’s wealthiest individuals, with almost all of his fortune coming from the pharmaceutical companies he founded.

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Despite all of these responsibilities, something about a formerly-bankrupt mine in a deserted area of Nevada caught Dr. Frost’s eye. In a regulatory filing dated May 24, 2011, Dr. Frost announced that he purchased seven million shares of Pershing Gold. Over the past year, he has added to that stake until he exceeded $9 million in total investment Dr. Frost is not known for frivolous spending, having already dedicated half of his estate to charity alongside Bill and Melinda Gates, not to mention other significant humanitarian and medical donations. What was it about Pershing Gold that convinced Dr. Frost to put millions of dollars of his personal funds at risk?

Dr. Frost’s Investing Style: Serendipity

Dr. Frost is a self-proclaimed opportunist, a businessman who looks for situations that might produce fortunate outcomes. In an interview earlier this year, he explained the reason he invests in multiple areas, “All of our projects represent break-through type of projects, so that any one of them is enough to make the company quite successful… Basically we’re extremely opportunistic.” It seems that opportunity itself — the opportunity for serendipitous returns on an investment — remains one of Dr. Frost’s fundamental motivators for investing.

He also has somewhat of a knack for finding small companies with the ability to return thousands of percent on his original capital. For example, his stake in Key Pharmaceuticals earned him hundreds of millions of dollars. Soon thereafter, he earned about 6,000% from investing in Ivax. Even small investments have performed well for Dr. Frost; a few years ago, he bought a product called Rolapitant for a few million dollars and ended up out-licensing it to another company to recoup his original investment plus guarantee royalty income and up to $120 million in additional payments.

Why the Magnate Is Prospecting in Nevada

Of course, from the perspective of Pershing Gold, Dr. Frost’s investment is critical to the overall operation of the company. The company depends on the investments of long-term shareholders, and most of the companies Dr. Frost has bought have never needed to be sold; they simply become profitable entities under the umbrella of his larger corporations. Indeed, Dr. Frost’s Opko Health is best described as a “holding company,” conceptually similar to Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A). Dr. Frost buys companies with the intention of never selling them, hoping for them to become profitable contributors to his long-term business goals. As Warren Buffett says, the ideal timeframe for holding an investment is forever.

In the same way, Dr. Frost’s investment in Pershing Gold could become a forever investment if (and only if) the company is able to survive the exploration and development phase and start sustainable mining operations. Pershing Gold still needs to complete final tests to be confident that there is enough underground gold reserves to make a large-scale mining operation worthwhile. Assuming test results continue to be positive, as they have been so far, Pershing Gold will then have to spend the time to build up its extraction, processing, and work facilities for employees. Dr. Frost is aware of this, of course, and understands that although many exploration and development companies fail, other companies do what Allied Nevada (NYSE: ANV) did: graduate from pennystock status to that of a multi-billion dollar corporation trading on the largest exchange in the world at over $28 per share. After all, he has already grown several companies from their infancy through the $1 billion mark.

Who’s to say he can’t do that again with Pershing Gold?

Concluding points of interest:

* Pershing Gold bought a pre-built mine and larger-than-needed processing facility out of bankruptcy, so the usual overhead for plant expenditures is almost nonexistent.
* Pershing Gold’s mineral rights border active Coeur d’Alene (NYSE: CDE) and Newmont (NYSE: NEM) mines.
* Pershing Gold has pre-negotiated deals with Newmont for future mining royalties.
* Relief Canyon mine could generate over 15,000 ounces of gold per year for very low initial costs, allowing the company to use the cash flow to fund other operations.

* The current CEO, Steve Alfers, left his job as the Chief of U.S. Operations for Franco-Nevada (a $6 billion mining company) to join Pershing Gold.