Allied Nevada: Deep Value

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.


  • mike ginn

    ANV is my largest PM holding, I am enthusiastic about Hycroft.

    per 2012 Annual Report (and president’s letter to shareholders) 11.8M gold reserves at Hycroft and plan to mine 5.52M over ten years starting 2014, with ample silver credits to help pay for operational costs. About 500M in current debt (400M was newly placed in 2012) and 120M revolving credit which will be used to some extent for the mine expansion.

    The way I look at ANV is if they realize after net operational costs ~$700/oz (my conservative thumb-in-the-air estimate) at $1200-1400 POG they will have stream of $3.5B income over ten years, enough to pay off mine expansion and cover current market cap 2.5x. I have not calculated IRR for these numbers. The upside is higher POG, what Hycroft does after the ten years, and their other properties in development. If you believe the mine will proceed as planned (I do) and POG will not go below $1200 for an extended period of time, this is enough for me to be an investor.

    • mike ginn

      another upside is if they can realize higher net earnings per oz gold, which is possible depending on silver credits and realized operational efficiencies.

  • mike ginn

    what is impact of today’s sale of 14M shares?
    this is to compensate for lower operating cash flow given drop in POG? Increases shares outstanding by about 13%? I’m thinking that even though impact to share price is negative that in the long run it will be useful to have a bit extra cash to make sure there is enough to complete the mine. too bad it was from today’s price and not two months ago. probably better than signing away a silver stream, and debt availability may have disappeared. your thoughts Russ? can we now feel confident there is enough $ resource to finish the mine without additional equity hits?

    from the Q4 earnings call nine weeks ago:

    Scott A. Caldwell – Chief Executive Officer, President and Director

    “So things are looking pretty good on the capital front. Management still believes that we can fund this expansion with the cash on hand, operating cash flow and an undrawn line of credit, plus our capital lease financing on the mobile equipment. So we see that things are going pretty well. Lots of options out there. If we did need cash, we could perhaps do a silver stream sale, some things like that or additional debt. We’re not looking at equity.”

    • It is preferable to ensure that the mine is completed without hiccups or concern about a plunge in PM prices. So I am sure that’s the idea, but diluting at this price is not good. They should have just sold a modest silver stream.

      Personally I think this just makes them more vulnerable to an unfriendly takeover. The bottom line is the same, the stock is selling for less than the capex of a brand new state of the art mining operation, and the 47 million oz deposit is free.

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