RE:great article goldguy Goodday,
I thought Kramer-Miller made some good points in his essay regarding ANV being a decent long speculation.
The big unknowns are the future POG and how long ANV can keep servicing their debt.
If that becomes a problem, it is possible that the company will have to go through restructuring (bankruptcy) proceedings.
They have valuable assets and those assets are probably worth significantly above what the market is assigning to them now.
I don't have detailed knowledge of the debt structure and to what extent that there are bond holders.
Bond holders usually have first claim on a company's assets and shareholders can potentially be wiped out during restructuring.
Also, the shares would, I assume, not trade during a bankruptcy process and shareholders may have to wait for many months to learn the outcome and value of their shares.
I own a fairly small number of shares and it would not be a problem if I had to wait for a considerable time to be compensated after restructuring.
If another miner bought the assets it may not take very long.
I just don't know.
goldguy
Below are some selected passages from Kramer-Miller's essay
Meanwhile, the good news is lost in the chaos, and while it isn't plentiful, it does exist. But more importantly, the dire situation facing Allied Nevada has forced it into a corner: it needs to solve its problems now, or the bondholders will wind up owning the company.
That being said, I think there is an opportunity in Allied Nevada shares. It is not a "no-brainer" buy, and it certainly isn't without risk, but considering that the downside is priced in, and considering that the company is going to act in order to improve its financial situation (even if this means diluting shareholders or selling assets at a depressed price), I think that the risk/reward favors the bulls at this point.
But the real issue is the company's enormous debt obligation, which I've previously stated adds ~$250/oz. to production costs when we consider interest obligations alone. The following table lays out the company's future debt obligations, and as you can see, they are substantial in the near term.
Now $128 million in obligations in the next year is substantial. The company had $170 million in working capital, but only $5.7 million of this is in cash/equivalents, and $188 million is in gold and silver ore on the leach pad, which has been shedding value and which takes time to process, making it not immediately available. While the company does have an additional $75 million credit facility ($58.6 million available as of Sept. 30th), increasing the debt load won't solve any problems, but will only stave off immediate ones which are becoming more pressing.
The Current Situation And The Potential To Generate Value
In essence, the company is nearing the end of its rope. But just because Allied Nevada is being forced into survival mode doesn't mean that it is a poor investment, especially from such a depressed level. The fact that Allied Nevada in particular is in this situation is actually extremely promising for those looking to get into the stock at current levels because of the vast disparity between the quality of the company's assets and its fiscal situation. Virtually any of the actions that the company can take in order to stave off bankruptcy - other than borrowing more money - can be extraordinarily bullish.
An Outright Sale of the Company
Allied Nevada is worth substantially more in the hands of a major that is well-capitalized than as a standalone company. The reason for this is that in the hands of a major, Allied Nevada's obligations wouldn't impact the effective production cost per ounce to the extent that they are now
We saw, for instance, that the company's interest expenses alone are tacking on $200/oz., and this rises even higher when we consider that the company has to pay off the principal on its obligations as well. If a company such as Goldcorp (NYSE:GG) were to buy it, the interest expense of ~$40 million/year would smooth out over 3+ million ounces, and the obligation would be virtually negligible on a per-ounce basis. Thus, the company's debt load would have a minimally adverse effect on the DCF valuation of its assets, making the company's cash flow potential roughly $40 million/year greater for the acquiring major. That, combined with the fact that the company has an economical expansion project in one of the best mining jurisdictions in the world make this a no-brainer for a potential acquirer, so long as that acquirer is willing to put the time and capital into bringing out the value of its assets.
Allied Nevada has seemingly reached rock-bottom, and for this reason, investors have left it for dead, in spite of the high quality of its assets. While the disparity between this and the company's steep capital needs, along with the weak gold price has kept me on the sidelines, there is simply too much upside potential for investors to ignore, now that the shares trade at just over $1.
That isn't to say there isn't substantial risk. Even if I am right about a secondary offering or a takeover bid, we might not see one of these until the shares fall further, making a buy at ~$1/share a potentially dangerous proposition. But everybody - management included - knows that a big move is coming, and we've seen how such a move can generate enormous value for those who have the courage to step in and buy the shares now, as nobody wants them.
So while the bottom may not be in, and while a bet on Allied Nevada may ultimately be a loser, the upside potential is simply too compelling to ignore. For this reason, I think it is a compelling speculative buy at current levels.