Today the gold price passed the $1500/oz. line for the first time in human history, yet gold miner Yukon-Nevada Gold’s (YNGFF) stock is more than one-third lower than prices reached last year.
Company’s annual report provides some explanation on the price movements.
In the fourth quarter of 2010, the Issuer successfully negotiated a trial three-month contract with Newmont for the delivery of 2,000 tons of gold-bearing ore per day commencing October 30, 2010. During the quarter, the issuer purchased 86,257 tons of ore from Newmont under this contract containing 16,905 ounces, at an average cost of $198.53 per dry ton. Due to the success of this initial contract, Newmont is continuing to deliver at a rate of 1,000 tons per day in 2011 while finalizing a longer term contract.One way to turn gold bearing ore is to use a facility called “roaster.” In the Nevada and surrounding region, there are only three such roasters. Two belong to Newmont and Barrick gold. At least for now and in the foreseeable future, the company has the only permitted and operational spare roaster in the region, and it has excessive capacity to process more gold bearing ore than it can mine itself. Investors were excited about the prospect of utilizing the company’s resources into gold, so they pushed the stock to a 52-week high of $0.90 late last year.
Then winter came, and the something of less perfect happened, according to the annual 2010 report:
At the beginning of 2010 the Issuer prepared a capital budget that included significant expenditures for the commencement of the construction of a second tailings facility (construction to be completed in 2011), completion of several Consent Decree requirements, and also the winterization of and improvements to the mill facility. This winterization would be achieved by installing heat tracing materials on all piping, housing key areas of the crushing circuit (such as fine crushing), construction of an improved ore dryer which would also be protected from the weather, and increasing the level of materials and supplies on hand to reduce the down time caused by a lack of spare parts. In the second quarter the Issuer made significant progress in completing this capital budget but required additional funding to complete a large portion of the required work. To finance this budget the Issuer negotiated with several lenders during the year but was unable to obtain debt financing until late in the third quarter of 2010. Due to the timing of closing this financing and also the requirement to settle outstanding claims against the Issuer to clear title to the property, a substantial portion of the winterization project was not completed and the Issuer was forced to delay commencement of contruction of the second tailings facility. As well, due to the early onset of severe weather certain Consent Decree projects such as the reclamation of one of the off-take ponds (referred to as the Duck Pond) and the construction of a water treatment facility for acid rock clean up were not completed by their scheduled time.Things could be worse for the company during the winter.
The delay in these capital investments impacted the milling operations of the Issuer and the corresponding financial results for most of 2010. As a result of being unable to complete the full winterization project and restock materials and supplies to higher levels prior to the onset of severe winter conditions, the operations at Jerritt Canyon experienced significant downtime as sections of the mill, primarily fine crushing and the refinery (where the heat tracing work was not completed prior to winter), were exposed to severe cold and snow resulting in additional strain on equipment, breakdowns, and clogged chutes (due to the freezing of wet ore). This problem was aggravated by the need to freight in necessary parts to complete repair work due to the lack of in house inventories. The delays in completing key environmental projects required by the Consent Decree also resulted in the NDEP levying a significant fine against the Issuer ($0.8 million) late in the fourth quarter. As a result of these issues and resulting low throughput the Issuer continues to experience higher than normal production costs that will need further investment to correct in 2011.
As a result, the company ended the year with a loss from operations of $29.6 million and a net loss for the year of $93 million.The company also incurred a negative cash flow from the operating activities (-$16.9 million). It raised $35 million from various sources and invested $16 million into different projects. The company ended the year with $2.4 million in cash at the end of the year.
Call it living on a shoe string — the company could really use some cash. One of the sources of cash the company is trying to collect is from the warrant holders. As of Dec. 31, 2010, the company has 257 million shares warrants outstanding with different exercise prices, ranging from C$0.07 per share to C$5.50 per share (see Page 24 of 2010 Financial Statements for details. Most of the warrants are in the money. When warrant holders exercise, they pay to the company to have their warrants converted into common shares.
In order to expedite the conversion process, the company announced that it lowered the exercised price across the spectrum of the warrants by 15% during a 30-day window from March 14, 2011 to April 13, 2011. After the window, the exercise price will be reverted to the original price. If all of the warrants are exercised at their reduced prices, the company will have raised approximately $59 million. The proceedings could solve the company’s cash problem for now.
It could be that the recent weakness in stock price is due to that some warrant-holders-turned-shareholders are tempted by the quick profit of selling the shares.
The mishaps that occurred in the winter of 2010 should be solvable with money. If you believe the projection of the management in March 11, 2011, presentation (Page 17), Yukon-Nevada gold has the potential of becoming a major gold producer, with market cap of the company multiplied a number of times by 2013.
Only time will tell. For now, it needs to take baby steps and solve its cash problem.
Disclosure: Long YNGFF
About the author:
My name is Ben C. and I am 2nd year MBA candidate at the Anderson School of Business at the University of California- Los Angeles. I have a BS in Economics from the Wharton School of Business at the University of Pennsylvania. Before coming to Anderson I worked as a generalist equity research analyst for Right Wall Capital, a long-short equity hedge fund located in New York City. Prior to working at Right Wall I worked as an analyst at Blue Ram Capital, another long-short equity hedge fund located in Rye Brook, NY. This past summer, I worked for West Coast Asset Management as a research analyst. West Coast, which was co-founded by Kinko’s founder Paul Orfalea, is run by well-known value investors Lance Helfert and Atticus Lowe.