Over the last several weeks, being invested in the stock of Yukon-Nevada Gold Corporation seemed like an unending nightmare that finally came to an end with the news released May 24, 2011, that the company had obtained financing. I said to several people that when the company completes the necessary financing, the stock would be up 50 percent in one day. Well, I was off by 10 percent because the stock appreciated 40 percent from $0.40 per share (when I made this prediction) to $0.56 per share. Even though the price appreciated significantly in a short period of time, I believe that there is still another 435 percent of potential appreciation remaining.
What Caused the Stock Price to Drop?
Since Yukon-Nevada was rescued from near-bankruptcy in early 2009 by a group of European investors who provided the company with an immediate cash injection, it has been on track with its turnaround efforts. They brought in Robert F. Baldock, 30-year veteran mining turnaround expert who put the company back in production and made the company cash flow positive. Consequently, the stock price increased from $0.02 per share to $0.89 per share by November 4, 2010. This represented a return of 4,350 percent. Just to put things in perspective, a $100,000 investment would have grown to $4.5 million.
Fast forward to May 4, 2011, and the stock was trading for as low as $0.15 per share, down 68 percent that day. Yes, you read that correctly – on May 4, 2011, at one point, the stock was down 68 percent. What happened?
When Baldock took over in early 2009, he knew that Yukon-Nevada needed more than $100 million in capital expenditures because the previous management failed to maintain the facility. Unfortunately, the initial capital injection by the European investors was not enough to complete the necessary improvements. Because European investors were strongly opposed to any additional dilution, the management made a bold move by continuing gold production through winter. This turned out to be a huge mistake which starved the company of cash.
Based on my conversation with other investors, the European investors came up with a solution – let’s have the warrant holders exercise their warrants early by giving them an 18 percent discount to the exercise price. This was a brilliant idea which was going to raise enough money to winterize the plant facility. Investors, such as Eric Sprott, agreed to it and exercised their warrants. Then, to everyone’s surprise, the European investors who came up with this idea did not follow through. This created a huge problem, and once other investors learned about this, they sold the stock off ruthlessly. The European investors must have acknowledged that they made a mistake by not exercising and attempted to sell these warrants to someone else. For various reasons, they were not able to sell them. Because of their inaction, they cost themselves about $50 million, which is not chump change for a group of individuals. Ignorance is expensive.
When the company realized that the European investors were not going to exercise, the management had to go to plan B and attempt to raise money from other sources. On April 11, 2011, they postponed a conference call and, at that time, it was not clear why they chose to do so. The stock closed at $0.63 per share that day. Because of this uncertainty, the stock price just kept getting lower and lower. On May 3, 2011, the stock closed at $0.47 per share, which was 25 percent lower than the closing price on April 11, 2011.
Then, on May 4, 2011, the panic selling was at an all-time high. About 2.2 million shares traded that day in contrast to the average volume of about 700,000 shares. As I mentioned before, this was when the stock traded at $0.15 per share, which meant that it was down 68 percent in one day. Apparently, this was a mistake because someone wanted to sell for $0.51 per share, and instead typed in $0.15 per share. Even though the trade was canceled, other investors joined the panic and sold, making the stock close at $0.39 per share at the end of the day.
The next day, the management announced that there had been no material changes to its operations, and that the company was not aware of any undisclosed development that would account for the unusual trading activity on May 4, 2011. They also said that the company was actively pursuing various forms of financing to fund the capital budget requirement for Jerritt Canyon and was in an advanced stage of negotiations with financial institutions. After the release, the stock appreciated 28 percent the next day.
You might think that after such a release, the stock price would stabilize. Instead, panicky investors sent the stock as low as $0.38 per share on May 18, 2011. They could not take the pain of not knowing whether the company would be able to get the financing.
Finally, at around 1 PM on May 24, 2011, Yukon-Nevada reported that it raised $59 million. With two hours left to trade, you would have thought that the stock would take off like a rocket because so much uncertainty had disappeared. Instead, the stock actually went down for no apparent reason. With that being said, the next day the stock price appreciated to $0.56 per share, which is 40 percent higher than $0.40 per share. I think it will go higher when investors realize how monumental this financing news is.
What is Next?
Based on the May 24, 2011 press release, the exercise of the share purchase warrants and the closing of the private placement will provide the company with gross proceeds of $59,328,000, which will be spent on capital expenditures to upgrade the Jerritt Canyon Gold Project in Nevada. The company is also in the process of working with Deutsche Bank on a Gold Forward sale under which the company would sell forward a portion of its production to raise up to an additional $120 million.
With this money, the company is planning to return to a gold production rate of 150,000 ounces per annum by the end of calendar year 2011. When it is able to achieve this goal, Yukon-Nevada is a $1.50 stock, in my opinion, which is triple the current price. After this initial goal is achieved, the next step will be to increase production to about 300,000 ounces per annum by 2012 to 2013. I believe that by that time, Yukon-Nevada will be more than $3.00 per share stock, which is a six bagger from here.
Disclosure: I, or persons whose accounts I manage, own shares of Yukon-Nevada Gold Corporation. 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. You are advised to consult your financial advisor or conduct the due diligence yourself.