Summary
-
Allied Nevada has released the results of a feasibility study on its Hycroft mine expansion project.
-
The results were not that great, with an increase in initial capital requirements and only a slight increase in production.
-
The mine requires $1.39 billion in initial capital which the company simply does not have and likely won't be able to raise.
-
I wouldn't buy Allied Nevada and would instead point investors to less risky miners that have higher cash levels and projects with lower capital requirements.
Allied Nevada (NYSEMKT:ANV), a gold producer focusing on the Hycroft mine in Nevada, has announced the results of the Hycroft mill expansion feasibility study, which is an update from the company's previously released pre-feasibility study. Significant changes include a 4% increase in total life of mine gold production (7.43 million ounces) and a 4% increase in life of mine silver production (340 million ounces), a 1% increase in the project's life of mine after tax net present value ($1.81 billion) and life of mine after-tax internal rate of return (28.6%).
Other highlights: average annual gold production for the first five years is estimated at 458,700 ounces, a 1% increase, plus average annual silver production of 22.9 million ounces, a 9% increase. However, despite the positives, the payback period increased from 5.3 years to 5.5 years, as did initial capital requirements, from $1.32 billion to $1.39 billion.
In my previous article on Allied Nevada, I argued that the stock is a sell as the company suffers from a low cash balance ($13.6 million as of June 30) and high debt levels ($495 million), which makes the stock a very risky bet on rising gold prices.
The news of the feasibility study results confirms my stance that Allied Nevada is a sell. Although the feasibility study shows the potential for relatively low-cost gold production (adjusted costs under $500 an ounce and all-in costs likely in the $800-$900 range by my estimation), the project requires an enormous amount of capital to get there ($1.39 billion), which Allied Nevada simply does not have and likely won't be able to raise. I don't think taking on any more debt is likely (or even possible) and I can't see the company issuing a ton of shares to raise money at such low share prices.
In addition, I don't think a takeover is all that likely, considering the fact that many gold seniors are cutting back exploration and development costs in the face of lower gold prices, only taking on lower capital projects. If you think there is a gold miner out there with $1.39 billion to spend on a new project, please comment and prove me wrong.
For these reasons, I remain bearish on Allied Nevada, unless the price of gold rises rapidly in the near future.