Allied Nevada Gold Is Close to the Inevitable

Allied Nevada Gold is considering selling a stake in itself.

Jun 25, 2014 at 2:53PM

Back at the beginning of June, I wrote an article on Allied Nevada Gold (NYSEMKT:ANVGQ) 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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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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