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On Jan. 6, 2011, I wrote my analysis on Yukon-Nevada. You can access the full report through the following link:
Many investors are confused by the price action because although the investment thesis has not really changed, the selling is relentless. Here is what I believe is happening.
If you are familiar with Yukon-Nevada, you know that the company almost went bankrupt because it was shut down due to environmental compliance issues. After the new management was brought on board, the company fixed the environmental issues and started producing gold. However, the company needed to spend about $150 million on capital expenditures because the previous management failed to maintain the facility. The new management’s original plan was to finance the majority of the capital expenditures through internal cash flows, and this seemed possible because the management was able to get the company to a level where it was producing 150,000 ounces of gold per year. Unfortunately, due to severe winter conditions, this plan failed and the company experienced heavy losses.
Consequently, the management decided to change direction and go with plan B, which will require the company to raise the necessary capital that internal operations failed to deliver. This is causing many investors to panic and sell because of the uncertainty associated with this. They question whether the company will even be able to get the necessary financing and how much dilution the equity issuance will create.
While I have no particular insight into the financing, I believe the company should not have too many problems achieving it. The financing is likely to be in the form of debt, equity, warrant exercises, and forward gold sales. Obviously, it would have been much better for shareholders if the company did not need to go this route. However, let’s put this into perspective – the company needs about $150 million for the capital expenditures needed to triple the value of the company from about $500 million to $1.5 billion. I don’t know about you, but this seems like a good trade-off to me.
There is another reason why I believe the stock was heavily sold this week. The following is the press release from April 20, 2011, stating that Orifer intends to sell up to 140,400,000 share purchase warrants of Yukon-Nevada.
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The commencement date of the sale was April 28, 2011, and the sale was based on the condition that the new buyer must exercise these warrants. The average exercise price of these warrants is $0.32 per share, which means that when the buyer exercises them, this will bring about $45 million to Yukon-Nevada. Because the company needs about $150 million for capital expenditures, the additional $45 million will be useful. The company will only need to raise the remaining $105 million from sources such as debt, equity, and forward gold sales. The good thing is that the share dilution shouldn’t be that significant.
The bad part is that the new buyer is exercising these warrants by buying shares of Yukon-Nevada for $0.32 per share and is probably turning around and selling the newly acquired shares immediately in the open market at a much higher price for a quick profit. The selling pressure is most likely the cause of the drop in the stock price. I have no idea how low the stock can go but these sales seem to be for profit-taking reasons.
Investing in deeply undervalued companies like Yukon-Nevada required lots of patience and iron nerves. It is never easy to see your stock decline 45 percent and pretend like it doesn’t bother you. However, if you cannot take the pain you don’t deserve to reap the spectacular benefits on the upside. I wish I could give you the answer of how low Yukon-Nevada can go but I am terrible at predicting short-term price fluctuations.
Disclosure: I, or persons whose accounts I manage, own shares of Yukon-Nevada Gold Corporation (YNGFF). This report is not a solicitation to buy or sell securities. Neither Mariusz Skonieczny nor Classic Value Investors, LLC, is responsible for any losses resulting from purchasing or disposing shares of Yukon-Nevada Gold Corporation (YNGFF). You are advised to consult your financial advisor or conduct the due diligence yourself.