“When I was young people called me a gambler. As the scale of my operations increased I became known as a speculator. Now I am called a banker. But I have been doing the same thing all the time” – Sir Ernest Cassell, Banker to Edward VII
”Equity is the sliver of hope between assets & liabilities” Russel Napier
Yukon Nevada Gold (YNG) is a substantial holding in my portfolio currently and has been the cause of much heartache and distress to its shareholders over the last couple of years. I think I’m risking 5% of my portfolio for an asset backed shot at spectacular returns. My write up here is heavily influenced by various other far superior write ups and research reports I have found dotted around the internet from the last 2 years and listed at the bottom. I am standing on their shoulders to write this report. The story is changing constantly so I imagine this will be out of date by the 30th of January.
Yukon-Nevada is a deeply under-valued US-based small-cap gold miner with operations in Nevada, USA and British Columbia, Canada. I believe YNG is approaching an inflection point where it may begin to realise something approaching its “true value”. I will try to convince you below that there is the strong possibility that YNG is not worth $224m at today’s price of $0.24 per share but instead is almost certainly worth $1.00, is probably worth $2.50 and could even be worth $7.00+. If you can’t handle 7% daily swings in the share price – Stop Here.
In its current form Yukon Nevada Gold was created via a merger in May 2007, between Yukon Gold Corp and Queenstake Resources Ltd. As a result of the combination of the businesses and assets of the two companies, Queenstake became a wholly-owned subsidiary of YGC, and YGC changed its name to the current Yukon-Nevada Gold Corp.
YNG is in the later phases of a turnaround and thanks to an arduous 2011 is now a substantially de-risked (but certainly not without risk!) proposition. By 2013, the company is planning to produce at a run rate of 300,000 ounces of gold per year. This is a long way from the current run rate of circa 80,000 ounces per annum. The production rate of 300,000 ounces of gold per year was achieved before, from 1987 to 2002. In its last full year of production under AngloGold, it produced 338,000 ozs of gold. There is no reason why they cannot achieve it again with its newly renovated roaster and 3.5 million ounces of gold in the ground.
What makes YNG different to other smaller gold miners is that its assets have a history of production and secondly that it has in its possession one of only three refractory mills in the state of Nevada. Not only does Yukon Nevada have the prospect of having three of its own mines in operation on its Jerritt Canyon site by 2014, but its key asset is the only refining mill with any spare capacity in the state of Nevada.
YNG is in the process of proving they have around 6m ounces of Gold in the ground currently according to a recent interview with the CEO.
Above Average Odds Investing said that at $0.25 “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)
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.
Note that YNG has historically converted resources into reserves at a 120% rate.”
Since this time YNG has made several additional discoveries adding to their resources. That is a big discount.
At first, newly merged company seemed successful because during the first two quarters (Q3 and Q4 2007) the company was producing gold profitably. Then, by Q1 2008, problems started to emerge. During this quarter, the company shut down its operations in Jerritt Canyon to address myriad infrastructure, environmental (dangerous mercury emissions), cash flow and safety concerns. It was an unmitigated disaster. 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.
The situation became so severe that the company was 24 hours away from declaring Chapter 11 bankruptcy. The stock price went from $2 per share to 2 cents causing investors to lose almost their entire capital. Anytime a stock price falls almost 100 percent like it did with Yukon-Nevada due to the fear of declaring Chapter 11 bankruptcy, it creates emotional scars investors. YNG has done the round trip from $2.70 in Dec 2006, to $0.02 at the end of 2008, to $0.95 at the end of 2010 and now to $0.24 at the start of 2012. Face Smelting Volatility!
In early 2009, a European shareholder group called Orifer 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 who lost the permits and the 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.
The wholly owned complex that YNG has at Jerritt Canyon consists of an array of open-pit and underground mines that have been exploited to various degrees over the last 30 years. There are further unexplored areas of the property that they intend to drill over time. The property is 120 square miles with 3 current / former operating gold mines—the Smith mine, SSX/Steer and Starvation Canyon and the strategic asset of the processing mill.
The Jerritt Canyon property in Nevada has produced 8m ounces of gold since 1981. If Nevada was a separate, stand alone country it would be up there with the top producing countries in the world.
Jerritt Canyon is located just North East of the prolific Carlin Trend in Nevada. One of its key assets is its roasting capacity used to process Sulfide Ore and turn it into Gold. Currently, there are only 3 roasting facilities in Nevada, owned by YNG, Barrick Gold and Newmont. It is a widely held belief that there will never be another roasting facility permitted in Nevada due to their lack of popularity with environmentalists. With roasting capacity constrained and finite, producers naturally err to processing only their highest-grade ore, while stockpiling their low and medium-grade ore.
The Last Year or so….
Many investors learned about Yukon-Nevada in the middle of 2010 and during that time, the stock price was at $0.25 per share. Within six months, the stock had rocketed to $0.90 per share. It was all playing out just as expected, the gold price flying was helping too. Management and shareholders were geniuses; turning the company around, operations showed profitability, and future growth productions targets were stunning.
The new CEO Bob Baldock took over in 2009, he told the Board that the plant was in need of more than $100 million in capex in the form of winterization and refurbishment. However, at that time, the controlling shareholders strongly opposed the issuance of more shares which was the only real access to capital. It was decided that without the capex, the management would restart production with the hope of producing enough cash to pay for the capital expenditures. This was Unmitigated Disaster 2.0. “As a result of this, the company began production without having winterized the plant. In this respect an avoidable dilemma was charged at full head-on and the dilemma won.”
Production plunged as soon as the non-winterised plant ran into highly foreseeable problems with the first batch of wet ore. Then, in Q1 2011, the company announced YNG lost money in Q4 2010. Only when it became clear that the company’s existence was in question did the board of directors give the management the green light to raise enough money to fix the malfunctioning plant.
The COO responsible for this mistake has now shifted to “corporate development” and was replaced with the current COO Randy Reichert (whom I have heard good things about from the sell side).
A plan was put together to engage Deutsche Bank to provide the company with a total of $179 million from private placement, warrant exercises, and pre-paid gold forward facility. On May 24th 2011 Yukon-Nevada reported that it had raised $59 million. only part of the $179 million in financing required. The day after the announcement, the stock price increased to $0.56 per share which represented a 40 percent jump in one day – this is an example of what can happen