The investment analysis below is our sixth in our ongoing series of guest write-ups, and is brought to you by friend of the blog Jared Levin of A R Schmeidler & Co. We came across Jared’s outstanding recent write-up about a month ago, and frankly had to rub our eyes a little bit after our first read through (its not very often we come across asymmetrical risk/reward opportunities like Yukon). As Jared said, “after my first meeting with management I must have had a look on my face like I was stealing candy from a baby.” Indeed! After doing our own dd we felt the same way (and have been buying ever since).
Anyhow, for those of you out there scouring the markets for 1) an incredibly attractive “bottom up” bargain, and 2) an ideal macro hedge, then taking a deeper dive into Yukon Nevada will certainly be worthwhile.
[NOTE "UPDATES" AT BOTTOM OF WRITE-UP]
Yukon-Nevada Gold Corp:
(YNG.TO; NG6 (Frankfurt); YNGFF): $0.25
12-Month Target Price: $1.00 (+300% / 4x)
24-36-Month Target Price: $2.50 (+900 % / ~10x)
Company Web Site: http://www.yukon-nevadagold.com/s/Home.asp
Company Power-Point: http://www.yukon-nevadagold.com/i/pdf/YNG_10_05_17.pdf
Sell-Side Research Coverage: None
- Yukon-Nevada (“YNG”) is a deeply under-valued US-based small-cap gold miner with operations in Nevada, USA and British Columbia, Canada
- YNG is in the later phases of a turnaround:
- Company was previously mismanaged, leading to loss of environmental permits and a liquidity crises
- Today, company is newly-recapitalized and under the leadership of a proven turnaround CEO:
- In 2009, a Swiss group along with Eric Sprott put $60 million into YNG and installed new management
- Company is now debt-free
- Most operating permits have been re-instituted and YNG is executing on a court-supervised consent decree that spells out all of the remaining steps that YNG must take to become fully-compliant; YNG currently permitted to run at 75% of capacity, with remaining permits expected soon; note that future environmental liability is capped and constrained by the limits specified in the consent decree
- YNG re-commenced operations in October 2009 and recently achieved 150k oz/year operating rate
- Under low-risk expansion plan (based on the re-starting of existing mines and the milling of stockpiled ore), YNG’s production will grow from 150k oz per year over the next 12 months to ~400k oz in 2012 at a cost of ~$450 per oz
- No new equity issuance will be required to finance growth
- Company is currently finalizing $40mm loan and forward gold sale to finance re-opening of existing mines
- Free Cash Flow is expected to be over $75 million over the next 12 months at current metals prices, rising to $250-300 million-plus by the end of 2012 at current metal prices
- This is against an adjusted market cap of approximately $145mm
- Market does not yet appear to be aware of the progress of YNG’s turnaround:
- Company is currently net-debt-free trading at an adjusted market cap of $145 million—or 2x NTM free cash flow, and <1x expected 2012 FCF
- Mid-cap gold miners typically trade for 10-15x operating cash flow
- YNG is also trading at a market cap per resource oz of gold of approximately $35 per oz compared to a peer average of $150-200 per oz (peer group comprised of Alamos Gold, Aurizon Mines, Centamin Egypt, Kingsgate, Kirkland Lake, Mineral Deposits, Capital Gold and Semafo)
- There are multiple upcoming positive catalysts for YNG (see below) that will unfold over 2H 2010 that should quickly lift YNG closer to fair value
- Near-term price target of $1.00, or 6x NTM FCF should be realized fairly quickly as market becomes aware of the progress of YNG’s turnaround
Note: If YNG were re-valued to simply trade on a market cap/resource oz in-line with its peer group, YNG would currently be valued at $1.25-1.50/share
- Longer-term price target of $2.50 represents <10x 2012E FCF at current metals prices
The following catalysts will all be material positives for YNG and we believe have a very high likelihood of materializing when and as described:
- July 2010—Announcement confirming achievement of operational steady-state production of 150k oz per year at a cost of approximately $450/oz
- 3Q 2010—Completion of $40mm debt issuance/forward gold sale to finance expansion of Jerritt Canyon operations with the re-starting of the SSX/Steer underground mine (operations to re-commence in early 2011)
- 2H 2010—Announcement of multi-year contract/JV with Newmont Mining (NEM) and/or Barrick Gold (ABX) and/or other regional producers for purchase and processing of stockpiled medium-grade ore through YNG milling and roasting facilities
- 2H 2010—Announcement of drilling results as YNG executes on its planned $5 million 2010 exploration program on its Jerritt Canyon property
- 2H 2010—Announcement of settlement of 2 lawsuits brought by former employees and outsourced engineering firm, both of which were terminated by current CEO (note that bid/ask for the two settlements currently at a combined total well under $10mm; initial hearings have all been going in YNG’s favor)
- Q4 2010—Announcement of updated 43-101 resource estimate which should substantially increase YNG’s resource base, while converting a large portion of existing resources into reserves
- Last resource update by the Company was based on drill results through 2007 using an assumed gold price of $520/oz
- Updated 43-101 will be run using a 3-year average gold price of $1,000 (making a much larger portion of their mines economic, and thus expanding recoverable resources and reserves) and will also include drilling results from the last 3 years plus results from YNG’s current $5 million drill program
- Note that YNG has historically converted resources into reserves at a 120% rate
- 2H 2010 / 1H 2011—Potential re-initiation of sell-side research coverage. Note that several analysts used to cover YNG prior to the management turnover and permit suspension in 2008/2009. Current management believes that some former analysts would consider picking up coverage again after YNG announces that they have returned to 150k oz production (note that there is significantly less visibility on this specific catalyst and it is beyond management’s control)
YNG’s Jerritt Canyon property based in Nevada, USA has produced 8 million oz of gold since 1981. Prior senior management was weak and in 2008, production was suspended as a result of environmental violations and a lack of liquidity. As just one example of prior management’s incompetence, the Jerritt Canyon property at the time of shut-down was operating with over 500 employees while current management is running nearly the same throughput was fewer than 150 employees.
In early 2009, a Swiss shareholder group saved YNG from declaring bankruptcy by injecting an emergency overnight financing. Over the next several months, this same Swiss Group along with Eric Sprott of Sprott Asset Management put nearly $60 million into YNG, fired the old management team and engineering firm that was assisting with operations and brought in a new CEO named Robert Baldock who has a 30-year track record of overseeing turnarounds in the mining sector. Since taking over, new management has paid down the Company’s debt, made key maintenance investments to update machinery and equipment and come to a court-overseen consent decree with the Nevada Division of Environmental Protection (NDEP) that allowed the re-start of its facilities in October 2009.
Jerritt Canyon is located just Northeast of the prolific Carlin Trend in Nevada. One of its key assets is its roasting capacity used to process sulfide ore. Currently there are only 3 roasting facilities in Nevada, owned by YNG, Barrick Gold and Newmont. There will likely never be another roasting facility permitted in Nevada due to their lack of popularity with environmentalists. With roasting capacity limited, producers tend to process only their highest-grade ore, while stockpiling their low and medium-grade ore. In NEM and ABX’s case, they have over 100mm tons of ore combined sitting in Nevada that may never get processed that is listed on their balance sheets as assets. Eventually they will be forced to write-down that ore as liabilities if they cannot demonstrate to their auditors that there is any chance of processing it in the foreseeable future (there are also environmental clean up costs associated with it). Although under prior management YNG often processed ore on a tolling-fee basis for Newmont, current management is focused on securing a long-term profit-sharing ore-purchase contract to acquire additional mill feed stock.
YNG’s wholly-owned Jerritt Canyon property is 120 square miles with 3 current / former operating gold mines—the Smith mine, SSX/Steer and Starvation Canyon. The Jerritt mill is engineered to produce 6k tons of ore per day. Currently permits are in place for ~4.3k tons per day of ore throughput. YNG is currently completing stacking tests that should soon allow permitted throughput of 6k oz/day, which is the current engineering-rated capacity. Over the next 12 months, YNG plans to process 3k tons per day (at an average grade of 0.15-0.20 oz/ton, translating to >150k oz/year), with roughly half of the ore coming from YNG’s Smith mine and the other half coming from a stockpile of ore on YNG’s property. Over the next few years, as YNG’s SSX/Steer and Starvation Canyon properties come online, YNG would like to be supplying 50% of production from its own mines, or roughly 3k tons per day, which would still leave capacity of at least another 3k tons per day for entering into JV/purchase transactions to process and roast and sell the low-to-medium grade stockpiles of neighboring mines such as for Newmont and Barrick. Management is confident of being able to sign such an agreement by year-end 2010.
Over the next 12 months, if YNG is successful at producing in excess of 150k oz at their targeted cost of under $450 per ounce, cash from operations would exceed $105mm and FCF would approximate $75mm. Over the next 24-36 months, if YNG successfully re-opens its SSX/Steer and Starvation Canyon mines along with an ore-processing arrangement with one or more of its neighbors, then daily throughput should average 6k tons at average grades of 0.20 oz/ton, which would result in annual production of close to 400k oz (including regularly scheduled maintenance stops). (Note that YNG is considering restarting its wet mill for the processing of oxide ore, which would add additional mill throughput capacity of 5k tons per day—this would be upside to the assumptions described immediately above).
YNG also owns a mine at Ketza River in the Yukon Territory of British Columbia. Ketza River is a former producer with much of its infrastructure in-place that was closed down in 1990 when it became un-economic to mine (at ~$300 gold prices). In May 2010, YNG raised $10mm of flow-through financing for Ketza River and plans to commit another $11mm out of FCF to have a 60k oz/year mine up and running by sometime in 2012 (note that Ketza River was producing 100k oz/year when it was closed down in 1990). The mine would have a cost profile of less than $300 per ton and would be capable of generating approximately $50mm of annual FCF. This would bring 2013 production for YNG to 400-450k oz, assuming no contribution from incremental oxide processing capacity, acquisitions or contributions from further successful drilling and mining on YNG properties.
Yukon-Nevada is substantially under-valued but no one is yet paying attention. Many investors were burned by prior management and are still stewing. In addition, the market cap is small and with large insider ownership (greater than 60%), there is limited float. There is also no sell-side research coverage. Because of these factors, there is a window of time for opportunistic investors to perform their research and come to a view on YNG. This window is likely to begin to close in July when the company announces it has achieved steady-state production of 150k oz. The reward for moving in early on YNG could be substantial, as a non-demanding multiple of under 10x 2012/2013 FCF would suggest a 10-fold return for the stock over three years.
July 24, 2010
Some recent news on YNG, all generally supportive of thesis:
July 22: Company announces hiring of new Chief Geologist and outlines 50k foot drilling program for 2010, designed to extend the run-rate of 150k ounces of production (fed by their own mines, as opposed to purchased-ore from neighboring mines) from 4 years to 7-8 years (http://www.yukon-nevadagold.com/s/NewsReleases.asp?ReportID=410285&_Type=&_Title=Yukon-Nevada-Gold-Corp.-Announces-The-Recommencement-Of-Exploration-Drillin… ) (Note: I believe their is still a second press release expected in July confirming they have achieved 150k oz of run-rate production in their mills)
July 20: Boutique firm Byron Capital Markets launches on YNG with a Strong Buy and $0.50 price target
July 13: YNG announces $25mm forward gold sale financing to Eric Sprott’s Sprott Asset Management (http://www.yukon-nevadagold.com/s/NewsReleases.asp?ReportID=408905&_Type=News-Releases&_Title=Yukon-Nevada-Gold-Corp.-Negotiates-US25-Million-Note-Financing )
July 6: Boutique firm Hallgarten & Co initiates coverage of YNG with a $1.50 price target
As described above, the market has not revisited YNG since its difficulties under prior management. It is only due to the fact that we meet so many small-cap gold mining management teams each year that we were fortunate enough to be introduced to YNG’s new management, otherwise we would be in the dark as well as to the progress they are making
Note however, that upside case requires successful execution by management that at times may face set backs and not progress in a straight line.
The gold price is near an all-time high in US$ terms and could easily face a 10-20% correction beginning at any time. Note that despite having a substantial margin-of-safety, it is not uncommon for small-cap gold mining stocks to sell off, sometimes significantly, on any pull-back in the price of gold.