Allied Nevada Gold (OTC:ANVGQ) is an outsider even among the beaten gold miners. The company has lost as much as 87% of its capitalization this year. Allied Nevada outpaced such companies as Harmony Gold Mining (NYSE:HMY), which is down 65%, and Gold Resource (NYSEMKT:GORO), which is down 63%, in the race to the bottom.
You'll agree it's an achievement the company cannot be proud of. Sure, some investors fear that the company is heading right into bankruptcy. However, not everything is lost for Allied Nevada.
Running out of money
Allied Nevada has a single operating mine, Hycroft. This mine is going through the expansion project, and the company's future depends on whether it will be finished or not. The company has already spent $392 million on capital expenditures year-to-date.
Allied Nevada had $154 million of cash on its balance sheet at the end of the third quarter. With more capital expenditures and a debt payment before the end of 2013, the company expects to enter 2014 with $50 million of cash.
What's more, Allied Nevada expects that it will have no more than $35 million to spend on capital expenditures in 2014, as it will also have to pay a $61 million lease payment. This sum is not enough to make meaningful progress at Hycroft.
Harmony's and Gold Resources problems look small when compared to those that Allied Nevada has to deal with. Harmony suffers from the difficult mining environment in South Africa. Strong unions negotiate aggressively on wages and push the costs up. Despite this fact, Harmony managed to reduce its all-in sustaining costs to $1,264 per ounce in the third quarter. That's meaningful progress, but, to Harmony's pity, the gold price is just a tick higher than its costs.
Gold Resource is being hit by the new Mexican tax on miners. The company has no flexibility regarding this issue, as all its operations are in Mexico. Gold Resource stated that it will reduce the capital that it puts to work in Mexico and focus more attention on projects that are located outside of the country. However, it will take several years to execute this plan. Until then, Gold Resource will remain under pressure if Mexican authorities do not change their mind and cancel the new tax.
Dealing with debt
With $549 million of long-term debt on its balance sheet, Allied Nevada is not financially secure. The company has to repay the debt, and at the same time to devote money to Hycroft's expansion. The mine has finally delivered a $6.5 million positive cash flow in the third quarter. That's better than in the second quarter, but clearly not enough to make a big difference.
Allied Nevada will have to pay $53 million under its lease and term loan obligations in 2015. There's no way the company could do it given current gold prices and current Hycroft's operational performance. It means that Allied Nevada will have to raise it somewhere.
There are three main ways to do this. The first one is to finance Hycroft's expansion with the help of streaming and royalty companies like Franco-Nevada or Royal Gold. The second one is issuing debt, and the third one is issuing equity.
Allied Nevada has already issued equity this year. The company sold 14 million shares of stock at a price of $10.75 per share. Those shareholders are not happy now, as the stock trades below $4. I think it is unrealistic to expect that Allied Nevada could issue more stock at current prices.
Issuing more debt is also difficult. The company is not able to draw from existing revolver credit from October, 1, due to restrictions imposed by the creditors. Allied Nevada hopes to eliminate financial ratio covenants to be able to draw from this revolver credit, but it is unclear that it will be able to do so.
Time is running out for Allied Nevada. The company has approximately one year to find additional financing. There's one thing I should note. Hycroft mine is a valuable asset, which is expected to produce up to 200,000 ounces of gold this year. Allied Nevada could easily become a takeover target for those who search for mining assets at depressed prices.