Yukon-Nevada Gold Corp. – The Nightmare is Over

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.

31 Comments to Yukon-Nevada Gold Corp. – The Nightmare is Over

  1. May 26, 2011 at 5:34 am | Permalink

    great summary. i agree, plenty of upside still remaining. once again management proves that it can get the job done, although not an easy ride.

  2. May 26, 2011 at 5:57 am | Permalink

    This management team solves problems and they have done it again. I have no doubt that they will be able to deliver on its promises but I also know that there will be more problems in the future. We are dealing with the mining industry which is a high-risk business.

  3. Jeff's Gravatar Jeff
    May 26, 2011 at 6:04 am | Permalink

    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.

    How did continuing production through the winter starve the company of cash?

    What is your take on the fact that YNG is selling 33 million units to Deutsche Bank for $0.43? Since each unit is one share and one warrant at an exercise price of $0.55, that implies a value for the shares below $0.43. I suppose you have to give a discount to make the deal happen, but as a value investor, a company selling stock at well below intrinsic value is annoying. Why do mining companies tend to finance themselves in this way?

  4. May 26, 2011 at 2:14 pm | Permalink

    How did continuing production through the winter starve the company of cash?

    When the weather gets too cold, the plant shuts down. Consequently, they lost a lot of money.

    What is your take on the fact that YNG is selling 33 million units to Deutsche Bank for $0.43? Since each unit is one share and one warrant at an exercise price of $0.55, that implies a value for the shares below $0.43. I suppose you have to give a discount to make the deal happen, but as a value investor, a company selling stock at well below intrinsic value is annoying. Why do mining companies tend to finance themselves in this way?

    Yukon really had no choice but to do the deal. Their back was against the wall thanks to the European investors. Taken everything into account, we are getting diluted about 6 percent. It is not bad considering the stock is was down 50 percent from January 1.

  5. Chris's Gravatar Chris
    May 29, 2011 at 4:59 pm | Permalink

    Hello,
    i bought a lot of warrants from YNG with a strike of 3 dollars until june 2012. Are I a crazy and anrealistic guy? I believe very strongly in this company and its management, but was this a good idea….

  6. anton's Gravatar anton
    May 31, 2011 at 3:54 pm | Permalink

    Hello Chris,
    my feeling is that you have done the wright thing. Maybe a rich man soon.
    Anton

  7. bob's Gravatar bob
    May 31, 2011 at 9:09 pm | Permalink

    mariusz-

    are you still bullish on prxi after the recent earnings & potential need for dilution? thx in advance for response.

  8. May 31, 2011 at 9:52 pm | Permalink

    I don’t know what I am going to do yet. Obviously I am pretty upset with the management because they seemed to not know what they are doing. One quarter, they are downsizing, and another quarter, they are growing. As far as dilution, how much is it going to matter after the stock already declined so much more than the dilution would create? I think I want to wait until August court date and see what happens next year with all the hype that 100th anniversary of Titanic will bring. I guess I don’t want to sell because from my experience every time I sell something because of being upset I always see the stock go up and prove me wrong. I have a call scheduled with the CEO tomorrow so I’ll see what he has to say.

  9. bob's Gravatar bob
    June 3, 2011 at 12:16 pm | Permalink

    conference call tomorrow at 1030 est for yukon nevada

  10. bob's Gravatar bob
    June 3, 2011 at 12:29 pm | Permalink

    sorry. conference call actually happened this morning. webcast replay available on website.

  11. bob's Gravatar bob
    June 4, 2011 at 5:46 am | Permalink

    mariusz, wondering what you thought of conference call? thx in advance.

  12. June 4, 2011 at 9:38 am | Permalink

    I thought it was good. The management messed up by not delivering on previous promises because of lack of money. Now they have the money and gave us a new time line for achieving these goals. If they start showing some progress towards these goals, the stock price will keep going up. It is all about execution now but the most important thing is that their hands are not tied behind their backs. However, this doesn’t mean that there won’t be any problems. There will be but I believe that they will perform. Yukon is now my biggest position and I will not be losing sleep at all.

  13. bob's Gravatar bob
    June 5, 2011 at 6:20 am | Permalink

    thx for the perspectives. three things concerned me about the call though: 1. plant sounds like it might be in an overall state of breakdown the way baldock was describing, wondering if the cap ex will be an ongoing issue even after the september shutdown and the fixes? 2. baldock snuck in a comment that he might use equity for financing in the future. he said this very fast at one point during the call -. it definitely surprised me. 3. all questions via email only. is this standard for canadian companies?

    i am heartened by the fact that insiders are holding onto their actual shares through all of this.

  14. June 5, 2011 at 8:54 am | Permalink

    1. plant sounds like it might be in an overall state of breakdown the way baldock was describing, wondering if the cap ex will be an ongoing issue even after the september shutdown and the fixes?

    There is no way for you and I to find this out even if we visited the plant. The only thing that we can count on is that Deutsche Bank hire a consulting company to perform due diligence and got a green light.

    2. baldock snuck in a comment that he might use equity for financing in the future. he said this very fast at one point during the call -. it definitely surprised me.

    I think people are overblowing the dilution issue. This is why we are in the predicament in the first place – European investor were strongly opposed to dilution and they starved the company out of cash. Just like cash, common stock can be used as currency to make acquisitions. Issuing equity is not evil. What is evil is overpaying for acquisitions whether is it by cash or equity.

    3. all questions via email only. is this standard for canadian companies?

    They can have live questions but they preferred them emailed. I don’t know why. All I know that every single question except like one was mine.

  15. bob's Gravatar bob
    June 5, 2011 at 6:29 pm | Permalink

    thx. while listening to the conference call, i was actually wondering how all the email questions were so good (even though not live). good job questioning.

  16. anton's Gravatar anton
    June 18, 2011 at 10:14 am | Permalink

    Do you have an idea what is going on with YNG? Shares down 14%. Some bad news? Did the plant shut down for technical problems or something else?????

  17. June 18, 2011 at 11:44 am | Permalink

    No problem. I spoke with the CEO on Friday and everything seems to be going ok.

  18. anton's Gravatar anton
    June 21, 2011 at 11:30 am | Permalink

    Are there good news for wich we can hope for? What’s about the forward sale of gold?

  19. June 21, 2011 at 1:46 pm | Permalink

    Execution, execution, execution. Forward sale is in the workings.

  20. June 22, 2011 at 9:44 am | Permalink

    Mariusz,

    Great analysis so far. I bought at 53cents after the financing. Although the stock has retreated, i cant image it has something to do with the investment case. The operational leverage of this gold mine is tremendous and if the roaster doesnt end up being a complete disaster, the stock should be much much more expensive. Its also a question of how much you trust management, and what I have seen thus far is great. They appear to be very candid on what is happening.

    The only thing I doubt it whether they will be able to hit 1mio of production a year. You only need 150k production to make money at these prices, and 1mio would be great but it seems a bit farfetched.

    Anyway, this is not a case where you look at the stock price and see if this implies a change of operations. As you correctly said its just about getting the roaster and mine fixed. Its an operational turnaround at its finest.

    Floris

    If you cant take the heat, stay out of the kitchen.

  21. anton's Gravatar anton
    July 4, 2011 at 2:06 pm | Permalink

    Hello Mariusz,
    everything on track with the execution…..?
    Kind regards
    Anton

  22. July 6, 2011 at 8:45 am | Permalink

    Based on my conversations with them everything is going ok but we’ll never really know until it happens. They still need to complete the other portion of financing. This should happen any day now.

  23. jjw's Gravatar jjw
    July 13, 2011 at 8:03 am | Permalink

    What are your thoughts on today’s press release?

    http://finance.yahoo.com/news/Yukon-Nevada-Gold-Corp-cnw-1803296382.html?x=0&.v=1

  24. Jeff's Gravatar Jeff
    July 13, 2011 at 2:16 pm | Permalink

    YNG issued a press release complete with a snazzy infographic today:

    http://revolvemarketing.ca/pressrelease/yukon-nevada-gold-corp-produces-25713-gold-ounces-in-q2

    Not sure what the point of the infographic is, since it doesn’t really include any data that requires visualization, but I guess it’s cool.

    25K oz produced in Q2… wonder if they made any money…

  25. July 14, 2011 at 1:31 am | Permalink

    Last time I talked to the management, they told me that they were going to update the market about monthly gold production. I guess this is why the snazzy infographic.

  26. anton's Gravatar anton
    July 15, 2011 at 2:50 am | Permalink

    Hello,
    I think the actual gold production is a big deception and therefore YNG is still a penny stock and will be it for a long time more:
    Q1 2011: 14 477 ounzes produced, Q2 : 25713 ounzes produced, Q 3 (estimated based on Q2 monthly production minus 1 month) : 17142 ounzes, Q 4 (estimated): 25713 ounzes, Total 2011: 68568 ounzes.
    Compare this to the forecasts of the corporate prensentation March 2011: 250 000 ounzes for 2011, April and June 2011: 160 000 ounzes.
    So 68568 ounzes are not even the half of the last forecast!!!!!
    Bad management or I am wrong with my numbers ???

  27. July 15, 2011 at 7:47 am | Permalink

    You are not wrong with the numbers. You are simply looking backwards to determine the future which I believe is not the best way of doing it. However, different opinions make up the market.

  28. anton's Gravatar anton
    July 21, 2011 at 2:45 am | Permalink

    On your website you explain the relationship between earnings per share and share price. Therefore I did the calculations about the annual gold production….

  29. anton's Gravatar anton
    July 28, 2011 at 2:25 am | Permalink

    Hello Mariusz,
    is evering on track? Did you recently speak with the management?
    Kind regards
    Anton

  30. July 28, 2011 at 8:15 am | Permalink

    The deadline for the second part of financing was set. I was not told the date. Then because some of the people at the bank were on vacation it got moved by a week or something like this. It does not surprise me at all. I expect it to take much longer than originally planned. It will happen but I don’t know exactly when.

  1. By on January 13, 2012 at 2:25 pm

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