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Yukon Nevada Gold (YNGFF.PK) – Still Stunningly Cheap

October 16, 2010 | About:
Friend of the blog Jared Levin was kind enough to offer our readers an update on what we believe is hands down the very best opportunity in the gold mining space today. For those who may have missed it, Jared’s original write-up can be found here.

On a side note, we also highly reccomend our readers check out The Gold Reports recent interview with Byron Capital’s Drew Clark. The late September interview offers investors both Drew’s latest thoughts on YNG (and why he believes it remains a table pounding value proposition) and better yet, one of the best primer’s on how to intelligently “think about thinking about” investing in miners (or any commodity producer for that matter) we have ever seen.

Enjoy!

UPDATED DATA:

(1) My impression is that company is on track to produce 12k oz in Oct, which is a run-rate close to their targeted 150k oz for the 12 months from August. This is a nice improvement from the ~8.5k they did in September, their second month in commercial production. Production is supposed to ramp up further in early 2011 when their second mine, SSX opens, as SSX ore is higher grade than the stock-piled that is using up part of their current capacity. Once SSX opens, they will be processing 2.4k tons per day of their own ore at 0.25 oz/ton, or 600 oz per day, plus another ~1k tons per day of remaining stockpiled ore at ~0.07 oz/ton, or 70 oz per day, for a total of 670 oz per day, or more than 230k oz for the year. Blended costs on this production could run around $600, which at current metal prices would generate $750 per ounce, or close to $175 million of Cash Flow from Operations. This annual cash flow will grow further when YNG’s Starvation Canyon mine opens in 2012 and YNG’s contract with their contract miner expires (also in 2012), which at current prices could boost annual Cash from Operations to over $200 million (I’m happy to walk anyone through the math). This does not include any contribution from Ketza river, an ore JV or any acquisitions. So if management did not succeed in anything else, the company would be trading for an EV / CFO of ~3.0x

(2) It sounds as though YNG is getting closer to announcing an ore JV with a neighboring mine. As a reminder–YNG has one of only 3 refractory ore roasters in Nevada (no other roasters are likely to be built, as they are very difficult to permit and take years to build). There are several neighboring mines that are stockpiling medium-grade refractory ore that is not economic for them to process and is lying worthless. YNG believes they can structure a deal for partner to put ore into a JV at the cost of producing it, while YNG contributes the refining process and they split the profits. An illustrative deal might be to have enough ore for 2k tons per day * 0.30 oz/ton, or 600 oz per day, or 210k oz per year, with YNG’s profit share at current gold prices of $350/oz. This would add a low-risk 210k oz * $350/oz = $73.5 million to YNG’s Cash from Operations, bringing their total (adding (1) above) to ~$270 million, implying an EV / CFO of 2.2x

(3) There are as many as 15 properties surrounding Jerritt Canyon with refractory ore than cannot be economically processed. Company is in active discussions with many of them, exploring a potential acquistion, most likely to be funded by debt. Management envisions a plan whereby they acquire a decent-sized deposite (say, e.g., 2.5mm oz) and install a “concentrater” on the property, allowing them to condense 0.2 oz / ton ore down to 1.0 oz / ton ore, which would be very economic to ship. Over the next few years, imagine a scenario whereby YNG can utilize its 3k tons/day of excess capacity with its own 1 oz/ton ore from a nearby property. This would generate 1 million oz per year. Try the math on the cash flow contribution. Such a scenario would be quite exciting, but it cannot be counted on at the current time. But I am encouraged to see the way management is thinking about growing value here. A further point here is that an acquisition of any company possessing oxide ore might allow YNG to re-open its idled 5k ton / day wet-circuit mill. Again–let’s watch and see if management can execute on this–at the current valuation, we are not paying for it after all.

(4) As an encouraging FYI, Sprott Asset Management recently increased their equity holdings to 19.9% of the outstanding stock–a nice vote of confidence.

UPCOMING CATALYSTS:

(1) Potential ore JV (see above)

(2) The bulk of the Company’s warrants expire in Q1 2012. They are in-the-money and would bring $80 million of cash into treasury. The Company is talking to the warrant holders about converting early, since the money could be put to good use today, whereas by 2012 they should be swimming in it. It remains to be seen if they will be successful at accomplishing this.

(3) YNG is targeting a reverse-split and Amex listing in the first half of 2011. Capital Gold recently accomplished this successfully. This would potentially qualify YNG for participation in gold ETF’s and indexes.

(4) A few analyst initiations are expected to come in next few quarters

(5) YNG will be presenting at the John Tomazos conference in November–further exposure of the story can only be helpful

Above Average Odds

aboveaverageodds

About the author:

Above Average Odds
Above Average Odds: The author is a co-managing partner of a Kansas City based value investment firm, and runs separately managed accounts and a private investment partnership modeled on the original Buffett partnership from the 1950’s. His investment blog Above Average Odds Investing is dedicated to the premise that there is a “better way” for the average investor to protect and grow their wealth over time. Contact the author at: aboveaverageodds@gmail.com”

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