I want to thank Ryan O’Connor for telling me about Yukon-Nevada Gold Corp. He runs a great blog www.aboveaverageodds.com. I also want to thank Jared Levin of A. R. Schmeidler & Co., Inc. for contributing this idea to Ryan’s blog and speaking with me about the company when I was still learning about it.
Yukon-Nevada Gold Corporation is a gold explorer and producer. Most of its assets are located in the United States and Canada. The company was formed in June 2007 when two entities, YNG Resources, Ltd. (“YGC”) and Queenstake Resources, Ltd. (“Queenstake”), combined their operations. The purpose of this transaction was to combine YNG Resources’ exploration project, Ketza River (Canada), with Queenstake Resources’ production asset, Jerritt Canyon (Nevada, USA).
At first, the merger seemed successful because during the first two quarters (3rd and 4th of 2007) following the merger, the company was producing gold profitably. Then, by the first quarter of 2008, problems started to emerge. During this quarter, the company shut down its mining and processing operation in Jerritt Canyon to address infrastructure and safety concerns.
Within several months, production resumed only to be shut down again due to liquidity and environmental problems. The Nevada Department of Environmental Protection (NDEP) issued a “stop order” due to mercury emissions to the atmosphere. 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.
In early 2009, a group of European investors saved the company from declaring bankruptcy by providing it with an immediate cash injection. They also brought in Robert F. Baldock, 30-year veteran mining turnaround expert to get the company back on its feet. He immediately reduced the workforce and fired the old management team.
The following is a link to a video interview with Baldock in March 2010. In the video, he explains why he took the job and what he is doing to turn it around:
Since taking over, Baldock has done a tremendous job with his turnaround efforts. On September 22, 2010, Drew Clark, one of only two analysts covering this company, said an interview, “The company has already surpassed my estimated output rates for 2010 and has positioned itself to post strong production numbers for the remainder of 2010 and 2011. We are extremely encouraged by the progress made at Jerritt Canyon.” The positive turnaround efforts are already being reflected in the stock price which recovered significantly from its lowest point of 2 cents per share, but is still nowhere near to where it should already be by now and what it will be in the future.
Now, the company is in full environmental compliance and is operating and producing gold. It is now producing at an annualized rate of 150,000 ounces of gold per year. Baldock has a goal to increase production to nearly 1,000,000 ounces per year by 2015 as shown by the following illustration:
The following is a link to another video interview with Baldock on October 21, 2010, which provides a more updated picture of the turnaround process.
Even though the stock price of Yukon-Nevada appreciated significantly from its lows, the company is still undervalued and the future price potential of its stock is tremendous. The company announced that it is currently producing gold at an annual rate of 150,000 ounces per year. This translates into the following cash flow calculation:
|Annual Production (In Ounces)||150,000|
|Price of Gold||$1,300|
|Revenues (150,000 x $1,300)||195,000,000|
|Mining and Processing Cost (150,000 x $600)||-90,000,000|
|Operating Cash Flow||95,000,000|
|Number of Shares||1,001,675,000|
|CF per Share||0.09|
Assuming the price of gold is $1,300 per ounce and the cost to produce an ounce is $600, the operating cash flow comes out to be $95 million, which translates to $0.09 per share. Gold mining companies trade between 10 to 15 times the operating cash flow. Consequently, Yukon-Nevada should be trading between $0.90 and $1.35 per share very soon based on the current production level. But, as mentioned before, the company is in the process of increasing production, and when this happens, the stock price will move up much higher. In 2011, the targeted production is 250,000 ounces per year, and this will translate into the following cash flow calculation:
|Annual Production (In Ounces)||250,000|
|Price of Gold||$1,300|
|Revenues (150,000 x $1,300)||325,000,000|
|Mining and Processing Cost (150,000 x $600)||-150,000,000|
|Operating Cash Flow||165,000,000|
|Number of Shares||1,001,675,000|
|CF per Share||0.16|
When the annual production of 250,000 ounces per year is achieved, the operating cash flow will be $165 million or $0.16 per share. Applying a multiple of 10 and 15 translates to a stock price of $1.60 and $2.40 per share.
The story gets even better as we look further into the future. By 2012, the company is planning to produce 400,000 ounces of gold per year and by 2015, 1 million ounces per year. If everything goes according to plan and the price of gold stays at $1,300 per ounce, we may be looking at a stock price of $10 per share. This is not outrageous. With the production of 1 million ounces of gold per year, this would translate into a market cap of $10 billion or about $10 per share.
While I realize that in order for the stock price to reach $10 per share, many things have to happen, I am not focusing on this number very much. Considering that we purchased shares between $0.69 and $0.74 per share, I will be very happy with a stock price of $1.40. Anything above that number would be a nice bonus.
Why Is Yukon-Nevada Still So Cheap
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 a long-lasting wound for investors. Many of them are still licking their wounds and are taking a “wait and see” approach. Meanwhile, more adventurous investors are choosing to invest ahead of them, getting a better price.
One of the reasons why I like this company so much is because there are a number of catalysts along the way that are likely to make the stock price move higher. When the company nearly went bankrupt, it lost its sell-side research coverage. Now that the turnaround is almost complete and the company is about to become a major gold producer, the analyst coverage is likely to be reinitiated, thereby increasing exposure. Also, the company is also about to release its NI 43-101 update, which is a way for Canadian companies to disclose information about mineral properties. The last time this type of update was done was in 2007 when the price of gold was $580 per ounce. Now, with the gold price above $1,000 per ounce, this will make a larger portion of mines economically feasible, thus increasing recoverable resources and reserves. Also, because the stock is trading at a low price per share, the company is considering doing a reverse-split and obtaining an Amex listing sometime in 2011. This would potentially allow the company to participate in gold ETFs and indexes, which would be very positive. The order and the exact timing of these catalysts is not precisely known, but if they do occur, they are likely to move the stock price higher.
The price of gold has been going up over the last several years. The investment community is divided as to whether the price of gold will keep going up. While I have no special insight into the future, I believe that gold is more likely to go higher than lower. How much higher? I have no idea but because of reasons such as future inflation and currency devaluation, the demand for gold is likely to stay high, maintaining its current price or pushing it higher. Investing in a turnaround gold miner such as Yukon-Nevada Gold Corp. offers one of the best ways to benefit from it.
Disclosure: I, or persons whose accounts I manage, own shares of Yukon-Nevada Gold Corporation (YNGFF). This report is not a solicitation to buy or sell securities. Neither Mariusz Skonieczny nor Classic Value Investors, LLC, is responsible for any losses resulting from purchasing or disposing shares of Yukon-Nevada Gold Corporation (YNGFF). You are advised to consult your financial advisor or conduct the due diligence yourself.