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Allied Nevada's stock declined 50% and has hit my target.
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The company used up a lot of cash this quarter, plus they added to their debt load and diluted shareholders.
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There is still no word on whether Allied Nevada is any closer to a buyout/JV deal, and they might just hold off selling.
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I still wouldn't buy the stock as there is too much risk to the downside if gold and silver decline further; there are plenty of other opportunities available.
I have received requests to update my article from late October on Allied Nevada (NYSEMKT:ANV). In the article, I said investors should continue to avoid the stock as it could decline to $0.50-$1.00. The shares are down about 50% since that time, and closed today at $0.86 per share. Back in September, I wrote another article on the company, warning that they better start hedging or the shorts would be all over the stock and drive it down to ridiculous levels. Well, they have done that. Mission accomplished. Just look at how much Allied Nevada has underperformed the Gold Bugs Index and the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) since that time.
ANV data by YCharts
Let me just say that the window to hedge for the company has closed. Gold and silver are just too low now to consider this. At $1,300 gold and $20 silver this would have been a very wise move for Allied Nevada. They mentioned possibly hedging production but they never pulled the trigger. It's a shame because it could have saved shareholders a lot of money over the last 3 months.
Now hedging doesn't make sense. The stock has already imploded, the whole point of hedging was to prevent this from happening. The company is now in survival mode as they wait for a buyout/joint venture or find some way to stay afloat until gold and silver rebound.
Speaking of a buyout/JV, the company has still made no mention of any progress on that front. In their Q3 conference call, they said they continue to work with Credit Suisse and Scotiabank to find investors for their mill expansion. The company is having dialogue with interested parties, but won't say anything more regarding where they are in the discussion/negotiation process. All they are saying is they do want to conclude this by the end of the year and make a decision:
We're still focused on an end of year conclusion to the process and we would hope to be able to announce something at that stage whether we got an interested party and have an investment going forward that we believe is beneficial or whether given this commodity price environment, we have decided just to wait for better times in the gold business and continue the dialogue but put the process on hold.
That last part bothers me, this is what is so frustrating about the company. Are they getting high offers? No, probably not, but look at where gold and silver are at and look at the debt on Allied Nevada's balance sheet. What Allied Nevada thinks is fair value for their stock, and what the market is telling them is fair value are two completely different things.
Take their wire rope shovel for example. They have had this for sale for what seems like forever. In the Q3 conference call they said the following:
We continue to work with our Cat dealer. Cashman assist us in selling the shovel. First couple of months of the quarter and I'd say even probably through September not a lot of activity on that shovel. More recently Cat has actually sold four of those shovels and now there's an 18-month wait time to get one of those shovels, so over the last three weeks or so we've been getting a lot of more calls on our shovel.
An analyst asked why they didn't sell it, and notice the response from Allied Nevada's CFO:
And why didn't you sell them?
Steve Jones - EVP and CFO
Because the shovel is worth more than what the bids we've been given to date.
The market is setting the price, yet Allied Nevada refuses to sell this shovel. The mindset of the company is don't sell anything below what they think is fair value, including the company itself. I understand the reluctance to sell an asset below the value that you think it's worth, but sometimes you just can't fight the market.
Besides, almost every gold and silver stock is trading below fair value, that's the reality of the situation. If Allied Nevada is bought out in an all-stock transaction, then they shouldn't be so worried about valuations. The company that is going to acquire Allied Nevada has most likely also declined substantially in terms of stock price. As long as Allied Nevada doesn't take an all cash offer, then shareholders should still benefit from a rebound in the price of gold.
If Allied Nevada still refuses to sell due to low offers, then their only option at this point is to hang on for as long as they can and hope that gold and silver rebound soon. Can they do this? Yes, assuming the precious metals turn higher in Q1 or Q2 of next year. But that doesn't solve the problem, which is Allied Nevada will have to raise $1.4 billion to build the mill at Hycroft, and they still had $570 million of debt to repay as of Q3. That debt load is now higher as the company said in an early December operational update:
As of November 30, 2014, we had cash and cash equivalents of $1.3 million, $10 million in restricted cash deposits with the revolving credit facility ("Revolver") lenders, $48.0 million drawn on the Revolver and an additional $14.2 million of letters of credit pledged to collateralize the mark-to-market liability position of a portion of our cross currency swap. We now have $12.8 million remaining available under the Revolver.
The company had $66 million available on the revolver when I wrote the article at the end of October. We found out when they released Q3 results in early November that they drew down $5 million of that, then in Q4 they drew down $48 million, so that is where the $12.8 million remaining balance is coming from.
As for where that $48 million went. The company said in the Q3 call that this quarter they expected to use $11.5 million of cash for operations, $10 million for cap-ex, and they have debt payments of about $11.5 million. Clearly though the company burned more cash than expected.
Of course with only $1.3 million left in the bank at the start of this month, and the revolver almost fully tapped, they had to raise more cash. So they went out and did a stock offering at $1.00 on December 9th, raising $21.75 million.
Allied Nevada did have an agreement in place to sell four trucks, and that was supposed to generate in excess of $2.7 million in cash after repayment of the debt on those trucks. They also had an agreement to sell one of their drills, which would be $400,000 or so of cash after debt repayment.
I'm assuming that these are the sales agreements they were referring to in their December update:
During the fourth quarter of 2014 we entered into sales agreements for total proceeds of $8.9 million, of which a portion of the proceeds ($5.4 million) will be used to eliminate the capital leases associated with that equipment. As of November 30, 2014 we had collected $5.0 million and had used $3.8 million of that to retire the related capital lease obligation.
The company ended Q3 with total capital leases of $181.4 million, that's down from $224 million at the beginning of the year. So they are making progress paying these down, and that total should continue to decline now that they have sold more equipment. But all of that progress on repaying the capital leases is being more than offset by the additional debt that has recently been taken on.
If you add up the cash and the amount left on the revolver, the company has about $35 million in liquidity. The debt payments over the next four quarters total about $50 million, including the one that was made December 1. The next payment isn't until June 1. So the first and second quarter they won't need as much cash as they will this quarter. In other words, that cash could hold them over for another few quarters.
The stock has reached my price target but I'm not buying the shares, even though any day now the company could be bought out for a 100% premium. The problem is the message that Allied Nevada is sending to shareholders. They are basically saying "we will hold off doing a deal if we don't get the price we want". And the recent highly dilutive stock offering confirms that the company might just be planning to do this.
It's a huge risk. If they forgo a buyout/jv deal, and gold and silver take one more leg lower early next year, then Allied Nevada's share price will go below $0.50. The company could still stay afloat for a few more quarters, but shareholders would be crushed in the short-term. If gold and silver rebound then Allied Nevada should outperform, maybe by a large margin. The question though is if it's worth the risk investing in Allied Nevada for this possible outperformance? I say no.
There are 20-30 high quality gold and silver stocks that are trading at ridiculously low levels as well, but these don't have huge risks attached to them like Allied Nevada. Allied Nevada's stock price could have a very strong rebound if gold and silver increase, but so will the vast majority of companies in the sector.
I still think this all ends in a buyout, and the market might just force Allied Nevada's hand. The premium could be substantial, several hundred percent, but Allied Nevada could decline much further before it's forced to sell. Hycroft is a good project, and I plan to load up on the stock of the company that ends up buying it.
For now, buying undervalued, high-quality, much lower-risk gold and silver stocks is the smarter way to play the sector. I feel like buying Allied Nevada is more gambling than investing. It could pay off big or it could end in disaster.
It was pretty easy to see this coming with Allied Nevada and their share price. The company has a short-term funding problem and they have no solution on the table other than to add debt. The shorts have had their way with the stock for the last several months, as they saw the opportunity and pounced.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.