Update: Allied-Nevada Gold Earnings
https://seekingalpha.com/article/2634755-update-allied-nevada-gold-earnings?uprof=51&dr=1
Long/short equity, value, debt, base metals
Update: Allied-Nevada Gold Earnings
Summary
- Allied-Nevada Gold had to confess a huge loss in Q3 due to an impairment charge of the ore on the leach pads.
- This isn’t really unexpected, but the extremely low cash position is now really starting to worry me.
- If the situation doesn’t improve, Allied will either have to raise cash or find a strategic partner.
Allied-Nevada (NYSEMKT:ANV), which has seen its share price crumble over the past month despite a decent feasibility study on the expansion of its Hycroft gold and silver mine in Nevada, has reported its financial and operating results for the third quarter of this year. The company has produced almost 50,000 ounces of gold and just over half a million ounces of silver and now expects to sell 220,000-230,000 ounces of gold and 1.9-2 million ounces of silver. This means that the company needs to sell at least 51,400 ounces of gold and 0.5-0.6 million ounces of silver which is a very achievable target.
As the production costs were increasing and the value of the gold in the leach pads decreasing, Allied-Nevada had to record a $70M impairment charge on the value of its ore on the leach pads. This pushed the company into the red as it had to confess a pre-tax loss of more than $86M. It goes without saying that Allied-Nevada was once again free cash flow negative during the quarter, and its working capital position is melting fast. Whereas Allied-Nevada had a working capital of $248M, this has decreased to $173M (of which just $5.8M is cash, which isn't really a good place to be at). The situation isn't hopeless yet, but once again emphasizes that Allied-Nevada will be unable to fund the expansion of the Hycroft mine by itself and it will very likely need a strong partner. At the current gold price, investors can forget about being rewarded for holding out this long. However, as the market capitalization is just $145M right now, it's becoming increasingly likely that a more senior producer with the cash resources and technical knowhow might either team up with Allied Nevada, or just buy the company outright. I honestly believe that's the most feasible scenario to create shareholder value at this point in time.
I was honestly really hoping Allied-Nevada would have been able to turn the ship around, but the case seems to have become quite hopeless. With just $5.8M in cash (and the majority of its working capital in not-so-very liquid assets), the financial constraints after the most recent fall in the gold price will very likely hurt the company. The next few months will be incredibly important for Allied-Nevada's survival and I do hope the management team is currently pursuing strategic options. Unfortunately this company is a perfect example of why it makes sense to hedge a part of the output from time to time.