Allied Nevada Gold Is Close to the Inevitable

Back at the beginning of June, I wrote an article on Allied Nevada Gold (NYSEMKT: ANV  ) where I suggested that the company could become a takeover target in the longer term. As it turned out, the company could be making a first step toward this scenario. The Wall Street Journal reported that Allied Nevada Gold is negotiating a sale of a big stake in the company or in its Hycroft mine in Nevada.

The mystery of the January bid was solved
Allied Nevada Gold was in takeover talks in January, when a mysterious company called China Gold Stone Mining Development offered a $7.50 bid for the company. Now, this is no mystery anymore. The SEC revealed that a person called Luis Chang bought shares of Allied Nevada Gold and then constructed a fake bid for the company, profiting from the spike in its shares that followed the fake offer.

Yet, the story highlighted the fact that Allied Nevada Gold could be viewed as a takeover target. During the first-quarter earnings call, the company's CFO Stephen Jones said Allied Nevada Gold was not looking to sell itself. However, as is turned out, the company is ready to sell a big chunk of its shares.

This is not a major surprise, as Allied Nevada Gold does not have money to fund Hycroft mine expansion, for which the budget is estimated at $1.3 billion. For a company with $85.5 million of revenue in the first quarter, this is an impossible task. Thus, the sale of the company or a stake in it was a question of when, not if.

Is it good for shareholders?
The bid war for Osisko Mining, in which Agnico Eagle Mines (NYSE: AEM  ) and Yamana Gold (NYSE: AUY  ) jointly defeated Goldcorp (NYSE: GG  ) showed how a price for an attractive asset could surge in a round of bids. However, there is a very big difference between Osisko's Malartic mine, for which Agnico Eagle, Yamana Gold, and Goldcorp were competing, and Allied Nevada's Hycroft mine.

The Malartic mine is operationally strong and delivers free cash flow. The Hycroft mine is an asset waiting for significant capital spending. This leads to the conclusion that the price for Hycroft mine will not be stellar. A buyer must take the obligation to fund the expansion of the mine. Otherwise, the purchase does not make sense.

In better days, Allied Nevada Gold shares traded above $40. In current conditions, long-term shareholders shouldn't expect the company to be valued at even half its previous size. The good part for long-term shareholders is that the company will not be entirely sold, as this leaves room for future upside should the Hycroft expansion succeed.

Bottom line
In the last few years, Allied Nevada Gold stock was not for the faint-hearted. Technical problems and the lack of financing resources plagued the company and wiped out its capitalization. All in all, the news about the possible sale of a part of a company is good news. Allied Nevada Gold needs to fund the Hycroft mine expansion, and couldn't do it on its own. The scenario of a partner owning a big stake in the company is better than the acquisition scenario, as it makes upside possible for Allied Nevada Gold shares.

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  • Report this Comment On June 26, 2014, at 4:31 PM, TigerPack1 wrote:

    I am a proponent of one of the majors taking out ANV for $5 or $6 a share this summer in an "all stock deal." That way I will participate in gold through a bumped up value in another undervalued but profitable gold miner at $1300 an ounce.

    The advantage for the acquiring company is no up front cash, while purchasing 100% of $30 billion in gold and silver in the ground, proven, in Nevada at a permitted and operating mine.

    ANV's net $400 million in debt and $1.3 billion in expansion required the next 3 years is easily digestible by a major to get tens of billions in value over several decades at $1300US gold and $22 silver. You double the metals pricing and the acquiring company can earn much more than the $2 billion investment required the next 36 months.

    Every other idea makes no mathematical sense to either company.

    I am not aware of any other precious metals investment in North America that is situated like ANV right now. Yes, I do expect at least 2 or 3 bids to properly value ANV. It is "worth" something like $10 a share using the current pricing and asset valuations of other miners.

  • Report this Comment On July 09, 2014, at 7:04 AM, JerseyJoe wrote:

    Well said Tiger. ANV is indeed a very unique opportunity. The short overhang is so huge that a reasonable rebound in PM prices to $1400 in the coming weeks could prove breathtaking.

    On June 16, the company declared their milling issues resolved which should also improve their numbers.

    One other issue many fail to note, at the current new production levels and a reason price improvement in the precious metals, ANV would not need to rush into any deal or into the new expansion for that matter.

    The price suppression of the PMs is criminal but it will end. It always does and usually in a profound manner.

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