Summary
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Allied Nevada failed to meet lofty production targets, but production rose nonetheless.
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This is in line with expectations.
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Debt remains a key issue, but the upside potential is tremendous making this a speculative buy for gold bulls.
Allied Nevada Gold (NYSEMKT:ANV) just announced its 2014 production results. Gold production rose from 191,000 oz. in 2013 to 214,000 oz. in 2014, while silver production more than doubled from 882,000 oz. to 1.82 million oz. The company expects production to be flat in 2015, as its goals consist of finding efficiencies at its Hycroft mine in Nevada while financing its expansion project. Given the difficulties the company faced in 2014, the former is certainly achievable, whereas the continued difficulties in the mining space will make financing such a large project as the Hycroft expansion difficult to achieve.
Given the company's recent financing and its large debt load, Allied Nevada shares remain under enormous pressure, and should gold price fall, there is a very real risk of a liquidity shortfall or even bankruptcy. 2015 will be a difficult year on this front given the company's obligations, which exceed $100 million. The company already had to raise capital at $1/share in spite of the fact that it traded at ~$40/share just a few years ago, and this put further pressure on the stock. As a result, Allied Nevada is one of the cheapest companies in the world relative to its gold production and relative to its total number of gold ounces in the ground.
While the risk is high, I think the reward at the current valuation is higher, and I argued that speculators and those looking for leverage to the gold price should take a position. I ran through a series of scenarios in which Allied Nevada raises capital in fairly punitive ways and each time I came to the conclusion that the company's valuation is simply way too low. Should the gold price continue to rise, the company trades at an exceedingly low valuation relative to its cash flow giving it the potential to generate triple digit returns in a fairly short period of time. Longer term, should the company overcome its debt issues and should the gold bull market return, this stock is capable of generating quadruple digit returns given the high quality of the Hycroft mine and the company's current valuation.