The stock of Yukon-Nevada Gold Corporation has caused a lot of pain for many shareholders. As shown by the following chart, you can see that the stock closed at $0.86 per share on December 31, 2010, and declined to $0.47 per share by May 3, 2011. This represents a 45 percent decline since the beginning of the year.
On January 6, 2011, I wrote my analysis on Yukon-Nevada. You can access the full report through the following link:
http://classicvalueinvestors.com/i/2011/01/yukon-nevada-gold-corp-turnaround-story-yngff/
Many investors are confused by the price action because although the investment thesis has not really changed, the selling is relentless. Here is what I believe is happening.
If you are familiar with Yukon-Nevada, you know that the company almost went bankrupt because it was shut down due to environmental compliance issues. After the new management was brought on board, the company fixed the environmental issues and started producing gold. However, the company needed to spend about $150 million on capital expenditures because the previous management failed to maintain the facility. The new management’s original plan was to finance the majority of the capital expenditures through internal cash flows, and this seemed possible because the management was able to get the company to a level where it was producing 150,000 ounces of gold per year. Unfortunately, due to severe winter conditions, this plan failed and the company experienced heavy losses.
Consequently, the management decided to change direction and go with plan B, which will require the company to raise the necessary capital that internal operations failed to deliver. This is causing many investors to panic and sell because of the uncertainty associated with this. They question whether the company will even be able to get the necessary financing and how much dilution the equity issuance will create.
While I have no particular insight into the financing, I believe the company should not have too many problems achieving it. The financing is likely to be in the form of debt, equity, warrant exercises, and forward gold sales. Obviously, it would have been much better for shareholders if the company did not need to go this route. However, let’s put this into perspective – the company needs about $150 million for the capital expenditures needed to triple the value of the company from about $500 million to $1.5 billion. I don’t know about you, but this seems like a good trade-off to me.
There is another reason why I believe the stock was heavily sold this week. The following is the press release from April 20, 2011, stating that Orifer intends to sell up to 140,400,000 share purchase warrants of Yukon-Nevada.
The commencement date of the sale was April 28, 2011, and the sale was based on the condition that the new buyer must exercise these warrants. The average exercise price of these warrants is $0.32 per share, which means that when the buyer exercises them, this will bring about $45 million to Yukon-Nevada. Because the company needs about $150 million for capital expenditures, the additional $45 million will be useful. The company will only need to raise the remaining $105 million from sources such as debt, equity, and forward gold sales. The good thing is that the share dilution shouldn’t be that significant.
The bad part is that the new buyer is exercising these warrants by buying shares of Yukon-Nevada for $0.32 per share and is probably turning around and selling the newly acquired shares immediately in the open market at a much higher price for a quick profit. The selling pressure is most likely the cause of the drop in the stock price. I have no idea how low the stock can go but these sales seem to be for profit-taking reasons.
Conclusion
Investing in deeply undervalued companies like Yukon-Nevada required lots of patience and iron nerves. It is never easy to see your stock decline 45 percent and pretend like it doesn’t bother you. However, if you cannot take the pain you don’t deserve to reap the spectacular benefits on the upside. I wish I could give you the answer of how low Yukon-Nevada can go but I am terrible at predicting short-term price fluctuations.
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.
Hello Mariusz,
Now that the price declined 45% and there is little fundamentally changed with the business do you consider buying more? If not, why?
Calin
I am going to buy more. There is no question about it.
The CEO postponed the conference call for an indeterminate period with no explanation last month. It’d be nice if this event was a sign of good news in the making, but I fear it could also be the first sign of cockroaches in the kitchen.
Disclosure: Long YNGFF
Today’s price actions was terrible. Maybe there is an issue that I don’t know about. At this point, I am not selling but I think I will wait with more buying.
The company just released a statement staying that the recent price action has nothing to do with operations:
http://www.yukon-nevadagold.com/s/NewsReleases.asp?ReportID=455293&_Type=&_Title=Yukon-Nevada-Gold-Corp.-Comments-on-Unusual-Trading-Activity
Any updated thoughts on yukon or does your thesis remain the same? Love the site and your perspective.
I am still holding and the thesis does not change. The only thing holding this stock is the uncertainty about financing for CAPEX. Do I think they will get it? Yes. Is there risk of not getting it? Absolutely. If they get it, this thing will fly. I believe we only have one week or less left to find out.
Thanks. Much appreciated
Mariusz, thanks for the analysis. If they do get the financing, do you think Yahoo will pick up the news on it? How do you track this? Do you call the company on a regular basis?
Yahoo will pick it up but you need to look under YNG.TO which trades in Canada not YNGFF in the US. I call the company every few days. I spoke with them yesterday.
Thanks for that information.
On another note, so Robert Baldock is the CEO of this co. and Monument Mining…. wow I have never heard of one guy being the CEO for two different companies as the same time! I know that lots of CEOs are on boards of other companies, but I didn’t know one could be the CEO of two different companies simultaneously.
Steve Jobs was the CEO of Apple and the CEO of Pixar at the same time.
if indeed positive news in a week, who in their right mind would be selling shares now – even if it is the warrant buyer sitting on a huge amount, you’d think they’d wait a week or so for the cap ex deal. this stock is difficult to figure out.
Well clearly those selling the stock are concerned that the news will not be positive. Wouldn’t you think the stock would get cut in half from here, if they don’t get financing?
Do you think Allied Nevada’s milling plans are playing a role here?
I don’t know.
well allied nevada have pegged the initial capital cost of building their mill at about $900 million. of course, they haven’t received permission to build yet! that said, baupost was buying in q1
What do you think of the financing arrangement? Seems like they got the money they need without too dilutive of an offering. Assuming the forward contract funding comes through at not too big of a discount (10% discount to regular forward contracts should net DB 12 million dollars with no risk as they arb it off their books), what do you think the NAV is here? Will there be any other major hurdles, aside from execution?
The news is absolutely super. I am shocked that the stock is not even moving. Originally it declined 50 percent because investors learned that the company needed to raise money. Now that the company raised the money and will raise even more, they are completely ignoring it. I officially know nothing about the stock market.
agreed. financing terms were not that bad. very surprised the stock is not ripping higher on this news.
true. not sure why no pop. think maybe no one was paying attention. i am just glad they got the financing done. it allows the game to play out and also gives you confidence in the team.
Financing was key.
I think the stock will have to go higher because who in the right mind would want to sell now after this news is out.