Summary
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Allied Nevada's production will be lower than expected for the fourth quarter.
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I didn't anticipate this, although I assumed the lower-than-expected production in my recent bullish article.
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Shares are 40% higher since I turned bullish on Allied Nevada, but I believe there is more upside.
Allied Nevada (NYSEMKT:ANV) recently announced that its October/November production will be lower than expected. The company is claiming that it encountered a significant amount of acid leach material in its planned mining areas, and this has slowed down mining and processing so the ounces the company expected to produce this quarter won't be produced until next quarter. As a result, management has lowered its full-year 2014 production guidance to 210,000-220,000 oz. of gold. Since production is down for the quarter, while net opex will likely not decline, this should add to the company's production costs on a per-ounce basis.
This is a negative development and it took the stock lower by >10%, although this is after shares more than doubled off of their lows. Investors are pricing in an extremely pessimistic scenario with shares down ~97% from their high, as the company's debt obligations came at a time of low gold prices.
In spite of the perfect storm that hit Allied Nevada, the company's flagship Hycroft Project remains one of the largest mines in one of the world's safest mining jurisdictions - Nevada. Weak production for one quarter doesn't change the story meaningfully in spite of the market's violent knee-jerk reaction. The fundamental bullish thesis - which I outline here - remains intact. The company will almost certainly be forced to raise capital in one way or another. While this may be dilutive and/or force management to sell gold at $1,200/oz. when it wants to sell at a much higher price, the capital raising scenarios I discussed in November all prove to be accretive, and the upside potential is enormous - it remains in the triple digits, and perhaps more should we see the gold price resume its long-term uptrend.
With this in mind, the risk/reward is highly slanted in favor of the bulls.