I used the irrational and strange sell off on Friday of Allied Nevada (ANV) just after the company’s operational report to up my position and make this pick my largest gold stock holding. In general, gold stocks are very oversold and universally despised, the perfect breeding ground for major up legs. In March, three separate corporate officers purchased 43,000 shares worth nearly $800,000 in the aggregate.
ANV’s corporation presentation is located here. Its mine, Hycroft, is located in Nevada, a state where mining jurisdiction risk is low. I calculate a market cap and enterprise value at $1.5 billion. AVN is moving through a four year mine development program of $1.25 billion with about a third of capex spent to date. The development of mines has its challenges, but in this case the market’s valuation has turned outright bizarre. Costs are fixed at 55% and so far development is running well under budget. In the latest operational review, all production goals were said to be on track and costs are reported to be well enough under budget to allocate $97 million to contingency.
Hycroft will gear up with about 100,000 ounces in the 1H, 2013, and is shooting for 125,000-150,000 in 2H at $575 an ounce counting silver byproduct. This production will fund the most of the rest of plant development without the need for dilution. In 2014, the plan calls for 400,000 oz in production.
When finished and in full operation in 2015, the de-risked plant and mine will result in a 10-year average annual production of approximately 552,000 ounces of gold and 25.5 million ounces of silver, or 1.0 million ounces gold equivalent. Counting silver as a byproduct, the adjusted cash cost is only $146 per ounce, a virtual mint. In other words, this property would generate a pre-tax cash flow of $750 million (at 1500 POG) starting in 2015. An enterprise value of $1.5 billion doesn’t even remotely value the potential of one of the premier new operations in the world. The deposit size is 41.2 million oz. reserves and resources, with open ended exploration targets. So we’re talking about a very long life in one of the largest mines in the world.