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Allied Nevada has made minimal progress in addressing its high debt load as it continues to burn through cash.
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Contrary to my hopes we have seen no JV deal or royalty/streaming deal that would de-risk the stock and send shares soaring.
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Management has failed to publicly address the company's most pressing issues as the situation becomes more dire.
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Leverage-seekers have better places to put their money.
Overview
Allied Nevada Gold (NYSEMKT:ANV) owns the Hycroft Mine in Nevada. It is a massive project with nearly 250,000 oz. of annual gold production with the potential to grow substantially from here. In developing the project to this point the company took on a substantial amount of debt. Meanwhile the company's aggressive ramp-up plan coincided with a decline in the gold price, which has left the company in a lousy situation.
In November, 2013 I warned investors that the company's stated production costs were not taking into consideration its financing obligations, which meant that the mine was barely turning a profit. A small decline in the gold price would turn the company cash-flow negative, and given its debt load this could have put the company in a really bad situation. On the other side of the equation a rising gold price would dramatically reduce the company's financing costs relative to its cash-flow. With that in mind I did point out that there was a speculative opportunity, but that it was not worth taking unless you believed that the gold price was poised for a dramatic near-term turnaround.
The gold price didn't turn around and Allied Nevada's debt load proved to be a burden in 2014. Not only that but production costs rose slightly, but given the company's razor-thin margins this slight increase in operating costs had a dramatic impact.
The market, which had remained somewhat favorable on the stock all the way down, began to revolt, and shares traded down to $1 each, or ~75% from where I gave my initial warning.
As a contrarian, however, I saw an opportunity. Allied Nevada was between a rock and a hard place, and I felt that its dire financial situation would force it into a JV or a royalty/streaming agreement. The terms would not be favorable in either case, but the market was pricing in such a lousy situation that my math showed that, even in a conservative "bail-out" scenario, that the stock had tremendous upside.
What's Happened Since?
Since then the stock has been on a wild ride, with shares rising as high as ~$2 each and as low as $0.72 each. With shares closing at $1.38 on December 8th the company announced a secondary offering at just $1/share (and each share came with a $1.10/share warrant) on December 9th that sent shares down to $0.93 each by the close of that trading day. Then last month the company came out with its Q4 and 2014 operating results which showed an increase in gold and silver production to ~250,000 gold equivalent ounces.
This is good, but the gold price has remained at ~$1,200/oz. while the company's debt obligations for 2015 are expected to top $100 million or a whopping $400/oz. of AuEq. production! As a result cash has continued to dwindle despite December's $21.5 million capital raise. Days after the company put out its 2014 operating results reports came out that the company had hired Moelis as a financial advisor in order to help it deal with its large debt load. Nothing has come of this although we have seen rumors that bondholders are considering a cash injection that will stave off a liquidity crisis.
What Should Investors Make Of The Situation?
While I bought the stock and held it briefly after the December secondary offering I have been disappointed and frustrated in the company's recent lack of progress. Since this progress was the driving force of my speculative long thesis back in November I have decided to jump ship.
Not only has the company failed to make a deal such as one of the several I described in November, but management has been secretive about how it is addressing its current situation. For instance we learned about the Moelis hire from outside sources while Allied Nevada failed to put out a press release on the issue.
Given the company's lack of transparency, and given that we haven't seen the catalysts that I suggested could drive the stock price higher I am becoming more doubtful that we will see such a catalyst (although it is not impossible). So as of now the only catalyst I can see is a rising gold (and silver) price.
Now Allied Nevada continues to offer incredible leverage to the gold price going forward--possibly more-so than any gold producer out there. But the half-life on this leverage is growing ever-shorter, and I think that investors who are looking for significant leverage going forward have better options that don't face near-term liquidity issues.
1--International Tower Hill Mines
International Tower Hill Mines (NYSEMKT:THM) is a company that has been left for dead given a disappointing feasibility study put out in 2013 that showed that its flagship Livengood project is not worth building at the current gold price. The company brought in a new leader in Tom Irwin--who has 40 years experience in the industry--to find ways to optimize the project. Progress has been slow yet real, and the company is well capitalized as its gold in the ground trades at just ~$2/oz. Furthermore the stock appears to be bottoming in the low $0.30's, and this level has held since the failed feasibility study in 2013.
2--Chesapeake Gold
Chesapeake Gold (OTCPK:CHPGF) has a monster project--Metates--with a whopping 18 million ounces of gold and over half a billion ounces of silver. Initial estimates put peak annual production at a million ounces of gold per year although initial capex would exceed $4 billion. Like International Tower Hill Mines Chesapeake is working towards optimizing its project and preliminary efforts show that the company can start with a smaller mine and scale up using cash-flow. The new project would cost $1 billion to build. This is a lot but it is easier to find than $4 billion. If you back out the company's ~C$30 million in cash you'll find that the stock trades at roughly $2 per gold equivalent ounce, and the project is economical--albeit not especially attractive--at $1,200/oz. gold.
The Bottom Line
Allied Nevada has failed to deliver, plain and simple, and for this reason I think investors are better off putting their money elsewhere. There's no doubt that I will be disappointed if the company announces next week that it has found a JV partner to expand Hycroft or that it has sold a royalty or a stream that will put enough money in the company's bank account to postpone liquidity issues for another year. But if we do see something to this effect investors can always get back in the stock, and I would rather own fewer shares and have this clarity than own the stock today not knowing if the company will have the capital it needs to get through the next few weeks.