Value Microcaps Junior Miners

[checkmate28]

LC Re ANV Allied Nevada Im not here to tell you they'll make it, but I did mention them here 2 times here as a good potential leverage turn around play with a good degree of risk but high reward.
The potential of ANV with their backs up against the wall, getting things in order, becoming reality, would make a swift move up in the share price netting several hundred % profit in short time.

ANV has assets/production/ that would sell for more then the current MC and would make a great value buy for a cash heavy company looking for production. Their problem is servicing the debt load $250/oz with their current costs. Their are several options for an ANV up against the wall to mitigate the risk.


Hot off the press, an author who agrees and makes the point much better then I could.

Allied Nevada Has Been Left For Dead: Why A Speculative Long Position Makes Sense

http://seekingalpha.com/article/2642585-allied-nevada-has-been-left-for-dead-why-a-speculative-long-position-makes-sense?app=1&uprof=44

Meanwhile, the good news is lost in the chaos, and while it isn't plentiful, it does exist. But more importantly, the dire situation facing Allied Nevada has forced it into a corner: it needs to solve its problems now, or the bondholders will wind up owning the company.

That being said, I think there is an opportunity in Allied Nevada shares. It is not a "no-brainer" buy, and it certainly isn't without risk, but considering that the downside is priced in, and considering that the company is going to act in order to improve its financial situation (even if this means diluting shareholders or selling assets at a depressed price), I think that the risk/reward favors the bulls at this point. Before considering why this is the case, let's first briefly look at the situation that the company is in now.

An Overview of Allied Nevada

Allied Nevada owns one of the largest gold and silver deposits in Nevada at its Hycroft Project. The project currently produces a little more than 200,000 oz. of gold per year, although this is very little compared with the massive resource, which exceeds 18 million gold equivalent ounces. 2.7 million of these ounces will be processed using heap leaching, while the rest will be milled once the company completes a much anticipated expansion plan.



The milling operation requires well over $1 billion in initial capital that Allied Nevada doesn't have, and this asset is essentially on the backburner unless it is used as a bargaining chip in a merger or a JV deal, although it is a quality asset.

The current heap leaching operation should be slightly cash-flow positive even at the current gold price. The company generated ~$5 million in cash flow in the third quarter on 52,000 oz. of production, with gold price about $100/oz. higher than today's price. But investors need to keep in mind that the company sacrificed gold production and efficiency in the third quarter, in order to reduce its strip ratio in future quarters. It is worth citing the exact language found in the Q3 earnings press release (p. 2-3)

During the third quarters of 2014 and 2013, our waste to ore strip ratio (excluding stockpiled ore) was 3.7:1 and 0.7:1, respectively, and during the first nine months of 2014 and 2013 our waste to ore strip was 1.7:1 and 0.7:1, respectively. The mining of increased waste tons during the third quarter and first nine months of 2014 resulted in lower third quarter production but was necessary to open up new mining areas for the 2015 mine plan. During the fourth quarter of 2014, we plan on lowering our strip ratio by focusing our efforts on mining increased ore tons with ore grades higher than those mined during the first nine months of 2014.

In short, the company mined additional waste in the third quarter, in order to reduce its costs in subsequent quarters. This should lower costs so that the lower gold price is offset, making the operation cash flow-positive going forward.

But the real issue is the company's enormous debt obligation, which I've previously stated adds ~$250/oz. to production costs when we consider interest obligations alone. The following table lays out the company's future debt obligations, and as you can see, they are substantial in the near term.

Missing Chart***


(Source: Allied Nevada's 10-Q)

Now $128 million in obligations in the next year is substantial. The company had $170 million in working capital, but only $5.7 million of this is in cash/equivalents, and $188 million is in gold and silver ore on the leach pad, which has been shedding value and which takes time to process, making it not immediately available. While the company does have an additional $75 million credit facility ($58.6 million available as of Sept. 30th), increasing the debt load won't solve any problems, but will only stave off immediate ones which are becoming more pressing.

The Current Situation And The Potential To Generate Value

In essence, the company is nearing the end of its rope. But just because Allied Nevada is being forced into survival mode doesn't mean that it is a poor investment, especially from such a depressed level. The fact that Allied Nevada in particular is in this situation is actually extremely promising for those looking to get into the stock at current levels because of the vast disparity between the quality of the company's assets and its fiscal situation. Virtually any of the actions that the company can take in order to stave off bankruptcy - other than borrowing more money - can be extraordinarily bullish.

Dilution

Long-term shareholders are probably now wishing that Allied Nevada had dumped stock onto the market at $40/share a few years back, but for those looking to enter at just over $1/share, dilution could be a catalyst.

If the company wanted to issue enough stock at, say, $0.90/share in order to meet its obligations for the year, it would need to issue about 140 million shares, bringing the total share count to 245 million, giving the company a valuation of $260 million. For a company that is going to produce 240,000 gold equivalent ounces next year, this is still a very low valuation. We need to also take into consideration the fact that my concerns regarding the company's effective cost of production would be behind the company. If the company can keep sustaining costs down, as it plans to in the 4th quarter (Q4 sustaining costs are expected to be $10 million), then sustaining capital is about $170 per gold equivalent ounce. Now cash costs were ~$850 per ounce in the third quarter, but we saw that this is elevated due to the higher strip ratio. Assuming a reduction to $800/oz. (probably conservative), the company's costs are roughly $970/oz, meaning that it is earning $200/oz. on an operating basis. At 240,000 gold equivalent ounces, the company is generating an operating profit of $48 million, which means the shares would be trading at just 5.4 times 2015 operating cash flow. Not only is this inexpensive, but we need to also consider that such a move would scare off the vultures looking to short the company into bankruptcy, and this would generate a short squeeze.

Selling A Stream or a Royalty

Dilution is going to irk long-term shareholders even more than the current carnage, so I think this is a likely option. Fortunately, it is a good one, and one that the company mentions explicitly in its 10-Q as a possibility.

There are innumerable ways for such a deal to play out, but if we were to assume that the company sells a 5% stream on the Hycroft Mine with a price of 25% of the spot price of gold/silver (a common type of deal we've been seeing of late), such a deal would generate $875/oz. in gold revenues and $12/oz. for silver. Now on the heap leach operation, this would amount to $10 million/year in revenue for the streaming company. Discounted at 5% for 10 years, it is worth $81 million.

But it gets better when we consider the expansion ounces, which would generate $30 million in streaming revenue per year for 18 years at current prices. Even if we discount it at 7% out 5 years, it is worth $230 million, meaning that a company such as Royal Gold (NASDAQ:RGLD) or Franco-Nevada (NYSE:FNV) would be willing to pay $300 million for the whole package, and possibly more, given the exploration potential. This figure dwarfs the company's current market capitalization, and having that sort of cash on hand would essentially eradicate market fears of a liquidity crisis, which would send shares soaring.

An Outright Sale of the Company

Allied Nevada is worth substantially more in the hands of a major that is well-capitalized than as a standalone company. The reason for this is that in the hands of a major, Allied Nevada's obligations wouldn't impact the effective production cost per ounce to the extent that they are now. We saw, for instance, that the company's interest expenses alone are tacking on $200/oz., and this rises even higher when we consider that the company has to pay off the principal on its obligations as well. If a company such as Goldcorp (NYSE:GG) were to buy it, the interest expense of ~$40 million/year would smooth out over 3+ million ounces, and the obligation would be virtually negligible on a per-ounce basis. Thus, the company's debt load would have a minimally adverse effect on the DCF valuation of its assets, making the company's cash flow potential roughly $40 million/year greater for the acquiring major. That, combined with the fact that the company has an economical expansion project in one of the best mining jurisdictions in the world make this a no-brainer for a potential acquirer, so long as that acquirer is willing to put the time and capital into bringing out the value of its assets.