Yukon-Nevada Gold Corp – The Drama is About to End

Ticker Symbol: YNG (Canada), YNGFF (US)

Yukon-Nevada Gold Corporation has broken a lot of hearts lately. Many individual and professional investors have thrown in the towel and sold at a loss. The remaining shareholders are completely exhausted. New potential investors are afraid to buy it. This is exactly the kind of pessimism that creates great prices.

Many investors learned about Yukon-Nevada in the middle of 2010 and during that time, the stock price was at $0.25 per share (today it is at $0.30 per share or a market cap of $300 million). Within six months, the stock reached $0.90 per share, and some of the shareholders felt like geniuses tripling their money in such a short period of time. Everything was great – the management was successful in turning the company around, operations showed profitability, and future growth productions targets were stunning. The stock price was on its way to reaching $10 per share.

Then, at the beginning of 2011, investors were shocked to learn that Yukon-Nevada lost money on production during the fourth quarter of 2010, after the third quarter of 2010 had showed promising profitability. This is when the stock price started to decline. It became clear that something was seriously wrong with the production process and that the processing plant was in immediate need of winterization and refurbishment. Until major capital improvements are made to the plant, the company will never reach its full potential. The new CEO took over in 2009, he told the board of directors that the plant was in need of more than $100 million in capital expenditures, which would result in more dilution. However, at that time, the controlling shareholders strongly opposed the issuance of more shares. Without additional money, the management restarted production with the hope of producing enough cash to pay for the capital expenditures. Soon, it became obvious that this was a terrible mistake which could have been avoided from the beginning. Only when it became clear that the company’s existence was in question did the board of directors give the management the green light to raise enough money to fix the malfunctioning plant.

The management went on to explore options to raise enough money to winterize and refurbish the plant so that it would produce gold without breaking and shutting down constantly. The first option was to offer a discount to option holders for early exercise. Unfortunately, some of the major holders (same people that originally rejected dilution) backed out at the last moment, and the company was stuck in a liquidity crisis. Consequently, they went with a different plan to engage Deutsche Bank to provide the company with a total of $179 million from private placement, warrant exercises, and pre-paid gold forward facility.

Before Deutsche Bank went ahead with the deal, it hired SRK Consulting, a world class mining consulting firm, to examine Yukon-Nevada’s plant to determine if its production problems were solvable. After receiving approval from SRK, Deutsche Bank proceeded with the deal. While Yukon-Nevada’s management and Deutsche Bank were negotiating all the details, the existing shareholders were doing what they are best at – screaming, yelling and panicking, making it more and more difficult for the financing agreement to be reached. During the worst of the panic on May 4, 2011, the stock of Yukon-Nevada closed at $0.39 per share.

After twenty days, which at that time seemed like an unending nightmare, on May 24, 2011, Yukon-Nevada reported that it had raised $59 million. However, this was only part of the $179 million in financing. The day after the announcement, the stock price increased to $0.56 per share which represented a 40 percent jump in one day. The optimism was short lived because the stock price started to decline the next day. Within two weeks, the stock price was pretty much back at the same level it was at before the announcement. Now, the worry shifted toward closing the second part of the financing.

Finally, on August 15, 2011, Yukon-Nevada and Deutsche Bank closed the second part of the financing, which was for $120 million in the form of pre-paid gold forward facility. Now, the company had enough funds to winterize and refurbish the plant. You might think that after all the panicking and doubting about whether Yukon-Nevada was going to get the necessary financing, this would have been good news that would have sent the stock price higher, like it was when the first part of financing was closed. But no, the market completely ignored it. Actually, it was even worse because by October 3, 2011, the stock was trading at $0.28 per share. Yes, you read that correctly. When shareholders were panicking because Yukon-Nevada was struggling to survive due to a lack of financing, the market was pricing it at $380 million, or $0.38 per share. However, after the company raised $179 million, the market was valuing the equity portion of the company for $280 million, or $0.28 per share.

How is this possible? When you are dealing with the following shareholders or potential shareholders, anything is possible.

Before I get into why shareholders are acting so pessimistically, let me list exactly what it is that you get for the current price tag of $300 million or $0.30 per share. Yukon-Nevada has no debt, $120 million pre-paid gold forward facility and three main assets: Jerritt Canyon, a roaster facility, and Ketza River.

Jerritt Canyon

Jerritt Canyon consists of open-pit and underground mines that have been exploited over the last 30 years. Since 1981, it produced 8 million ounces of gold. As shown in the following illustration, the property produced 300k ounces of gold per year until 2002.

Jerritt Canyon has about 3.5 million ounces of gold when totaling what is in measured, indicated, inferred, and stockpiled as shown below.

What is Jerritt Canyon worth in terms of gold in the ground?

If we ignore the fact that Yukon-Nevada is a gold producer and value the ounces as if it was an exploration company, we could probably get $30 per ounce.

Value = 3.5 million ounces x $30 per ounce = $105 million or about $0.11 per share

Roasting Facility

The management claims that the roasting facility is what gives Yukon-Nevada its value. They estimate that the roasting facility has a replacement cost of $1 billion or $1 per share. For now, let’s just assume that this is what it is worth.

Ketza River

Ketza River is a property in Yukon, Canada, which historically produced 98,000 ounces of gold and by-product silver between 1988 and 1990. Currently, it has 485,000 ounces in 43-101 between measured, indicated, and inferred.

At one point, the management was going to spin off Ketza River when it was looking for options to raise money for the winterization and refurbishment project. Christopher Ecclestone of Hallgarten & Company, who covers Yukon-Nevada, believes that if Ketza River was marketed properly and spun off as a separate company, it could bring a value of $100 million or $0.10 per share. To read his report, see the following link:

http://classicvalueinvestors.com/i/2011/10/yukon-nevada-gold-coverage-update/

At this point, because the company raised money from Deutsche Bank, there are no plans to spin it off. Instead, the company will put it back into production at a rate of 70,000 of gold per year. However, this will be after Jerritt Canyon in Nevada is generating lots of cash. For now, we will just ignore the future plans and value it only at $100 million as Christopher Ecclestone advised.

Value Summary

Jerritt Canyon = $105 million or $0.11 per share

Roasting Facility = $1 billion or $1 per share

Ketza River = $100 million or $0.10 per share

Total = $1.2 billion or $1.2 per share

Considering that the market cap of Yukon-Nevada is $300 million and enterprise value of $420 million ($300 + $120 gold forward facility), the market is not valuing the company even close to $1.2 billion. If we assume that the market is pricing Jerritt Canyon’s gold in the ground at $105 million and Ketza River at $100 million, it is leaving only $215 million ($420 – $105 – $100 = $215) for the roaster facility. This means that after the management raised $179 million to winterize and refurbish the plant, the market is telling us that the plant is worth only slightly more than the money that they raised to fix it. This is ludicrous. It is equivalent to spending $10,000 to redo an entire kitchen in a single-family house while the market prices the entire house at $12,000.

Because there is such disconnect, it would be useful to understand how the plant could possibly be worth $1 billion. There are many way of looking at it. One way it is to figure out how much it would cost to build it. This is exactly how the management came up with their replacement cost. However, you couldn’t build a roaster like this in the region because you couldn’t get it permitted, and even if you could, it would take you 8 to 10 years to complete the construction.

Yukon-Nevada’s roaster is one of only three roasters in Nevada and the surrounding region. The other two roasters are owned by Newmont and Barrick and both are running at full capacity. Roasting is currently the only economic method of processing refractory sulfide ore, which is prolific in the region. Obtaining a permit for new roaster capacity in Nevada and the surrounding region is extremely difficult and time-consuming due to environmental concerns. No new roasters have been permitted in the past 12 years, and none are currently proposed or in the feasibility stage.

One can argue that it doesn’t matter what it costs to build the roaster. What matters is whether there is a buyer for it and how much such a buyer could afford to pay for it. The two most logical buyers are Newmont and Barrick.

Newmont and Barrick may be interested in the facility because of the reasons that I listed before – Yukon-Nevada’s roaster is one of only three roasters in Nevada with spare capacity. Because the permitting of new roaster capacity in Nevada and the surrounding region is extremely difficult and time-consuming, both of these companies are using their roasters to process only the highest quality ore (0.40 to 0.50 ounces per ton) and are stockpiling the lower quality ore.  For example, Newmont has 53 million tons of ore with a grade of less than 0.10 ounces per ton sitting idle. This is equivalent to about 5 million ounces of gold. At the current price of gold, this translates into more than $8 billion. If Newmont acquired Yukon-Nevada’s roaster, they could probably process their 53 million tons for $40 per ton or $2 billion, pocketing the remaining $6 billion. This would be spread over many years.

Could Newmont afford to pay $1 billion for Yukon-Nevada? I think even if they paid $2 billion, they would make out like bandits. Not only would they be able to process their 53 million tons of ore and pocket $6 billion over many years, they would also get access to 3.5 million ounces of Yukon-Nevada’s gold in the ground. In the hands of a producer like Newmont, these ounces would probably be worth $700 million, or $200 per ounce, instead of my estimate of $105 million, or $30 per ounce. Then, they would put Ketza River into production much more quickly because they have big pockets. At a production rate of 70,000 ounces of gold per year, they could get Ketza River cash flowing at nearly $90 million per year (70,000 x ($1,650 gold price – $400 cash cost) = $88 million). To them, Ketza River, producing at this rate, would be worth about $500 million. Likewise, when Yukon-Nevada puts Ketza River into production, it will be worth almost twice as the current market cap.

If the value of Yukon-Nevada’s roaster is so great, why won’t they try to do a hostile takeover since the company is selling for a song?

That’s a good question, and both the management and Christopher Ecclestone were surprised that they didn’t try. Because the board of directors foresaw the potential threat of a hostile takeover, on October 4, 2011 they approved a poison pill to prevent it from happening. As a result, it would now be difficult for Newmont or Barrick to attempt a hostile takeover. Christopher Ecclestone said that it is not unusual for the big mining companies to miss on incredible deals. He comically states – “Why buy now if you can pay more later?”

Considering that Newmont and Barrick already missed the chance for a hostile takeover, why don’t they just try to offer a reasonable price for Yukon-Nevada now?

They would probably not be able to convince Yukon-Nevada to sell for $500 million or less, especially now that Deutsche Bank funded the company with $179 million. Maybe before the financing, they would have had a chance of getting it for such a steal. My speculation is that they would probably need to offer $1.5 billion or $1.50 per share to be taken seriously. But, this is unlikely because how in the world would they explain to their shareholders that they are buying an unknown publicly traded company for five times the price of the stock when the roasting facility is not even working properly? They are more likely to wait for Yukon-Nevada to complete the winterization and refurbishment project. Of course, they will have to pay much more for it after it is working properly but as Christopher Ecclestone put it – “Why buy now if you can pay more later?” As silly as this may sound, if the stock price of Yukon-Nevada were at $2.50 per share, they would be more interested because it is much easier to explain to shareholders why they are buying something for $3 per share when it is trading for $2.5 per share than buying something for $1.50 per share when it is trading for $0.30 per share.

Now that you know how and why Yukon-Nevada’s roaster could be worth $1 billion, the only question that remains is whether the company will be able to fix the plant so that it operates properly and doesn’t shut down all the time, thus reaching its full value. Obviously, the market does not believe that Yukon-Nevada will fix the plant even after raising $179 million from Deutsche Bank to accomplish this exact task. In other words, the market believes that after throwing serious money at the plant, nothing good is going to come out of it.

It appears that some insiders are not agreeing with the market and are taking advantage of the situation by buying shares on the cheap. Between November 21, 2011 and November 23, 2011, the following transactions took place.

For some investors, Reichert’s purchase of 100,000 shares, Heinrichs’ of 30,000, and de Trentinian’s purchase of 260,000 may not be enough. Some investors are not one hundred percent convinced until they see the insiders mortgaging their homes and borrowing against their kids’ college funds to buy shares. For me, seeing insiders’ buys is good, but not a requirement.

Why is the stock price as low as it is?

Investors are exhausted from the roller coaster and a constant flow of disappointments. In the middle of 2010, there was not supposed to be any financing. The funds necessary for the winterization and refurbishment of the plant were supposed to come from already restarted operations. After Yukon-Nevada reached a steady state of production at a rate of 150,000 ounces of gold per year, production was supposed to increase. Also, after the third quarter of 2010 was profitable, everyone expected profitability to continue and to increase.

Well, the plant breakdowns created all sort of problems. Profitability disappeared. The hope for increased production was crushed. Liquidity problems arose. Then, the lack of cash was going to be solved by enticing warrant holders to exercise early. This fell through. When Deutsche Bank came into the picture, new hope was born, but as the lawyers on both sides were dragging their feet, investors kept getting more impatient, sending the stock price lower by the day. Deutsche Bank, seeing the stock price plunge, renegotiated the price on the private placement to milk a better deal out of desperate Yukon-Nevada. By the time the deal actually closed, everyone was so exhausted that the stock price didn’t even react. Plus, recently there were rumors that a hedge fund faced redemptions needing to get out quickly.

Once the financing closed, the management made another promise – to complete the winterization and refurbishment of the plant in September 2011. By looking at the date of when the second part of the financing closed (August 15, 2011), it doesn’t take much imagination to see that such a huge capex would probably take more than six weeks to complete even though they had already started some work right after the first part of the financing for $59 million closed on May 31, 2011. My attitude is that things always take three times as long as originally anticipated.

Here we are today on November 27, 2011, and the work is still not complete. However, when you listen to the conference call http://podcast.newswire.ca/media/yukonnevadagold20111116.mp3

that took place on November 16, 2011, you will learn that the work is pretty much done. What was slowing everything down was a delay in the manufacturing of the dryer, which is a very important component. The dryer was shipped in two parts. One part already arrived and is being installed as I am writing, and the second part is in transit. Because it is coming from Mexico, it could be held up at the border, but it will arrive very soon if it has not already arrived. Once it finally gets there, the management will shut down the mill for 10 days to install it, and the winterization and refurbishment will be pretty much complete.

The revised completion date is scheduled for mid-December 2011. Whether they will hit the new deadline exactly on time is hard to say. It is always possible that something else can go wrong. It is construction – what do you expect? If you ever remodeled a house, you know that something always goes wrong. I can totally see more investors sitting in warm offices staring at their computer screens having a fit if it is not completed by December and saying how incompetent the management is.

What happens after the mill is working properly?

Shortly before the company encountered all the recent problems with the plant malfunctioning, it reached a point where it was operating at a run rate of 150,000 ounces of gold. After the winterization and refurbishment is complete, this is the number that the management is shooting for, right out of the gate. Then, for 2012, they are anticipating a total production level of 175,000 ounces of gold. Assuming the price of gold is $1,650 per ounce and the cash cost is $789 (I will address how I came up with this number later), this translates into cash flows from mining operations of $150 million. After all the other expenses, you are looking at $108 million in operating income.

How are they going to get to 150,000 ounces of gold?

The Smith Mine is currently contributing 1,000 tons per day to the mill at an average grade of 0.235 ounces per ton. The SSX/Steer Mine Complex was restarted recently per a press release on October 3, 2011.

http://www.yukon-nevadagold.com/s/NewsReleases.asp?ReportID=483004&_Type=News-Releases&_Title=Yukon-Nevada-Gold-Corp.-Starts-Mining-at-SSX-Steer-Mine-Complex

At the beginning, SSX/Steer Mine Complex is only contributing 300 tons per day and will ramp up to 800 tons per day by the end of 2011 when additional equipment is delivered to the site. By the end of the first quarter of 2012, it will be contributing 1,200 tons per day. The grade is 0.189 ounces per ton.

Smith                    1,000 tpd x 0.235 = 235 ounces per day x 365 days = 85,775 ounces per year

SSX/Steer            800 tpd x 0.189 = 151 ounces per day x 365 days = 55,188 ounces per year

Total                      85,775 + 55,188 = 140,963 ounces per year

Between the Smith and SSX/Steer mines, the company can produce approximately 141,000 ounces of gold. However, as of January 2011, the company stockpiled 902,000 tons of ore at an average grade of 0.073 ounces per ton which equates to 65,900 ounces of gold. Adding this to the ounces produced from the Smith and SSX/Steer Mines, I arrive at 206,863 (140,963 + 65,900 = 206,863). You can easily how they can reach 150,000 ounces of gold right after the mill is completely fixed or 175,000 ounces of gold for the entire year in 2012. The management’s projection of 175,000 for 2012 might be on the conservative side.

By 2013, the company is planning to produce at a run rate of 300,000 ounces of gold per year. This is not some unrealistic number pulled out of thin air. The production rate of 300,000 ounces of gold per year was achieved before, from 1987 to 2002. There is no reason why they cannot achieve it again with the renovated roaster and 3.5 million ounces of gold in the ground. Plus, they are currently updating their 43-101 and believe that they will have an additional 1 million ounces.

To arrive at the run rate of 300,000 ounces of gold per year, the company will need to open more mines to in addition to the Smith and SSX/Steer mines. Starvation Canyon, the third underground mine, will be opened, contributing 600 tons per day at an average grade per ton of 0.22 ounces. The company will also reopen Burn Basin (open pit operation) in the fourth quarter of 2012, contributing 2,000 tons per day at an average grade of 0.104. SSX/Steer, instead of contributing 800 tons per day, will contribute 1,200 tons per day.

Smith                    1,000 tpd x 0.235 = 235 x 365 = 85,775

SSX/Steer            1,200 tpd x 0.189 = 227 x 365 = 82,782

Starvation           600 tpd x 0.220 = 132 x 365 = 48,180

Burn Basin           2,000 tpd x 0.104 = 208 x 365 = 75,920

Total                      85,775 + 82,782 + 48,180 + 75,920 = 292,657 ounces per year (this is close to the management’s estimate of 300,000)

To sustain this kind of production profile for many years, the company will need to reopen additional mines and/or explore more at Starvation Canyon and Burn Basin because these two only have about two to three more years of gold in the ground before they will be depleted. Smith and SSX/Steer mines have enough in the ground to last for more than 10 years of production.

Costs to Produce Gold

Yukon-Nevada’s profitability or any miner’s profitability is the function of the price of gold, the cash costs of mining and processing, and the costs of running the entire company. During the last seven quarters, Yukon-Nevada generated a positive gross profit only once, and some investors are confused why the company is not able to generate profit when the price of gold is as high as it is today. The following is the summary of the last seven quarters:

As you can see, the only positive quarter in terms of gross profit was achieved in the third quarter of 2010. In order to understand why the company has been losing money and is about to turn the corner, it is useful to break the cost of sales into two components – the cost of mining and the cost of processing as shown below. The cost of mining is what it costs the company to get ore from the Smith and SSX/Steer Mines or from other sources such as buying ore from a third party. The cost of processing ore is the cost of running it through the roaster.

The following is the same chart but displayed in costs per ounce sold.

I calculated this breakdown by using partial information provided by the company. It is by no means totally accurate, but it is better than nothing. For example, during the first quarter of 2010, 18,786 tons or 4,200 ounces were delivered from Smith Mine, which indicates that the grade was 0.22357 ounces per ton. The cost per ton was approximately $95 which translates into $425 per ounce ($95/0.22357). This is where the $425 cost of mining per ounce comes from. Because the total cost of sales was $13,743,000 and the number of ounces sold was 9,105, the total cost per ounce was $1,480 ($13,743,000/9,105). We can conclude that the difference between $1,480 and $425 or $1,055 was the cost of processing ore.

As you can see, the cost of mining per ounce was the same $425 for the first, second, and third quarters of 2010. The cost of processing per ounce declined over the same three quarters. This happened because the company increased production over these three quarters. This makes sense because as you run more ore through the roaster, the cost per ounce declines because the majority of the processing costs are fixed. Therefore, by the third quarter, the company was able to achieve a total cost of $1,161 per ounce which was lower than the average price per ounce of $1,252. This is why the company achieved a positive gross profit.

Unfortunately, during the fourth quarter 2010, both the cost of mining and the cost of processing per ounce increased to $733 and $1,018 respectively. This drove the total cost per ounce to $1,751 which was higher than the average price of gold of $1,366 per ounce. In order to understand why the cost of mining increased from $425 to $733 (a 72 percent increase) from the prior quarter, it is useful to investigate where the ore to feed the plant came from. The total of 71,173 tons or 14,919 ounces (grade 0.20962 ounces per ton) came from the Smith Mine. By using the cost of $95 per ton, this is equivalent to $453 per ounce ($95/0.20962). Because the cost of mining for fourth quarter of 2010 was $733 per ounce, and we just calculated that it cost the company $453 per ounce to get the ore from the Smith Mine, there had to be some other source of ore that was more expensive to drive the cost higher. The company bought ore from Newmont for $198.53 per ton. Because the grade was 0.19598, this is equivalent to $1,013 per ounce. For simplicity’s sake, if we just average the two numbers, $453 and $1,013, we arrive at $733 per ounce, which is the combined cost of mining per ounce.

From this calculation, we learn that buying ore from Newmont increases the cost of mining per ounce. Because the company continued to buy ore from Newmont in 2011, the cost of mining per ounce continued to be high at $671 in the first quarter of 2011, $821 in the second quarter of 2011, and $857 in the third quarter of 2011. The reason why these costs trended higher from quarter to quarter is because Newmont charges Yukon-Nevada more per ounce as the price of gold continues to increase. What a terrible deal!

This situation is about to change. Starting in January of 2012, Yukon-Nevada will no longer be buying ore from Newmont. Instead, it will be getting its own ore from the Smith Mine, the recently opened SSX/Steer Mine Complex, and stockpiles. In the most recent investor presentation, the management stated that the cost of bringing ore from Smith Mine is currently around $140 per ton (this will come down to $80 to $90 per ton after Yukon-Nevada stops utilizing a third party mining company – the contract expires in the middle of 2012). For now, I will keep using $140 per ton, which translates into $596 per ounce. The cost of brining ore from SSX/Steer Mine Complex is approximately $85 per ton, which translates into $450 per ounce. Based on this information, I estimate that after the Newmont ore-buying deal is eliminated and more ore is brought from the SSX/Steer Mine Complex, the cost of mining per ounce will decline to $523 per ounce.

If buying ore from Newmont is such a bad deal for Yukon-Nevada, why do it in the first place? The management always treated it as a temporary solution until the company’s own ore could replace it. In the short term, they were hoping that the increase in production would lower the processing cost per ounce because as mentioned before, the more ore that is run through roaster, the cheaper it is to process per ounce. Let’s see how successful this strategy was.

In the fourth quarter of 2010, after getting additional ore from Newmont, the processing costs per ounce increased to $1,018. Then, by the first quarter of 2011, they shot up to $1,739, sending the entire cost per ounce to $2,410. You can’t possibly make money when it costs you $2,410 to produce an ounce of gold while the price of gold is below $2,000 per ounce. Obviously, the strategy to get more ore to decrease the processing costs per ounce failed. Actually, both the processing cost per ounce and mining cost per ounce increased, which is the worst situation you can be in.

The reason why the processing costs were up was because the current roaster is old, breaks down all the time, and eats up tremendous amounts of energy. The only way to address this is to fix it which is exactly what the company has been working on after raising $179 million from Deutsche Bank.

Now, let’s look at my estimate of the processing costs per ounce after all the work is complete. During the fourth quarter of 2010, when the mill was operating at a rate of 1,000 tons per day and wasn’t breaking down as much, the processing costs per ounce were $736. If I was totally ridiculous and assumed that the newly refurbished roaster will not improve efficiency at all from this level, and I use the $736 per ounce as the processing cost per ounce, Yukon-Nevada will be profitable. After adding my previously calculated mining costs of $523 per ounce to the processing costs of $736 per ounce, we get a total cost per ounce of $1,259. Considering that the price of gold is $1,650 per ounce, Yukon-Nevada will be making $391 per ounce. At a production rate of 150,000 ounces of gold, this translates into $58 million in gross profit.

However, the roaster will be running at a rate of 4,000 tons per day, not 1,000 tons per day, which means that the processing costs will be lower than $736 per ounce. Also, after spending money to improve the plant, its performance is sure to improve. I was told that the roaster will be able to process ore for $40 per ton. If we use a grade of 0.15 ounces per ton, this translates into $266 per ounce, which is much cheaper than $736 per ounce.

Based on my estimates, the combination of mining and processing costs per ounce will equal $789 per ounce ($523 + $266). The management estimates $785 per ounce, so I am close. How will this all translate into earnings?

Considering the current market capitalization is $300 million, you are buying Yukon-Nevada for three times the projected 2012 earnings. Bringing production to 175,000 ounces of gold per year is just the first step. By the end of 2012, the management is planning to increase the production to 300,000 ounces of gold, which is what it historically produced between 1987 and 2002. I used the cost of $789 per ounce even though by 2013, the management is planning to lower these costs even further by opening more mines and taking the mining at Smith Mine in-house. If and when they lower the costs, it will be a nice bonus. For now, I will stick with $789.


Conclusion

Assuming that Yukon-Nevada achieves a production goal of 300,000 ounces of gold by the beginning of 2013, it will be set to generate more than $216 million in opearing income. Applying a conservative multiple of 7 gets you to $1.50 per share, which is a five bagger from now.

Risks

I believe that the majority of risk has been lifted after the company raised $179 million from Deutsche Bank for the winterization and refurbishment of the facility. Obviously, there still remains more execution risk. However, Yukon-Nevada’s problems came from the malfunctioning plant, not from metallurgy or a lack of resources in the ground. Malfunctioning plant is fixable with money. There also is a risk that the money raised will not be enough. Considering that they are almost done, I doubt that they will need to raise more money for the winterization and refurbishment of the plant. But if they do, it shouldn’t be much.

Also, another risk is the price of gold. I can’t really help you here. If you think that the price of gold is about to crash, then you should obviously stay away from this company.

I think that the biggest risk of all  is other investors. So far, they have acted impatiently and as if they know very little about the company. There is nothing that will stop them from continuing to act foolishly. Therefore, if you choose to invest in this company, just know that you will need to buckle up or you will be thrown off the horse by the insane volatility created by other investors.

Video with the CEO

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.

53 Comments to Yukon-Nevada Gold Corp – The Drama is About to End

  1. paras's Gravatar paras
    November 28, 2011 at 12:47 am | Permalink

    well said. amazing this is selling at current prices. it is priced as if management will fail in getting the expected production run rate, then company will be forced to sell its roaster capacity at huge discount, and equity holders will be left w/ almost nothing. very compelling at this price. infact, at current price it is a much better deal than when it originally came into investors’ sight in 2010.

  2. Anon's Gravatar Anon
    November 28, 2011 at 6:55 am | Permalink

    Investors have been acting “foolishly” as you say, because management has consistently miscommunicated with them. Instead of just explaining the problems as they are, management chooses to keep investors in the dark for extended periods of time. As you well know, this is a problem at Monument Mining as well.

    This is a good writeup of the bull case on YNG, but you should also mention that managements recent record of dealing with shareholders is horrible. They are about to give away Monument mining. How do you know they will not do the same with YNG?

  3. Flip's Gravatar Flip
    November 28, 2011 at 7:20 am | Permalink

    Interesting! but DB will keep about 1/4th of the production for the next 4 yrs, which brings the multiple down a bit and also messes with the revenue side no?

    despite this really interesting story

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      November 28, 2011 at 9:58 am | Permalink

      Yes. If the stock price was at $0.90 then it would matter but at $0.30 it doesn’t.

  4. David Landy's Gravatar David Landy
    November 28, 2011 at 12:41 pm | Permalink

    This is fantastic writeup. I was wondering why it has been so long since the last post – now I know why!

  5. Elliot's Gravatar Elliot
    November 28, 2011 at 5:44 pm | Permalink

    I like this write-up and my comment is probably only adding in a minimal way. I have a problem with the integrity issue for management. If they really told the BOD that there were serious problems and new capital was essential while they were telling you and me that the future was rosey, then credibility is a major and ongoing issue.
    The value of a man’s word is easily damaged and not so easily rehabilitated. The share price reflects the low esteem the market has in this management team. I hope your confidence in them is well placed.
    I am one of those who bought in mid 2010 and who thought he was very smart with more than a triple at 90 cents and who now feels like a sucker having been on a roller coaster ride. I am not getting off just now, but it is hard to be as enthusiastic when it is clear I was lied to.
    Thanks you for posting all of your hard work with this company.

  6. paras's Gravatar paras
    November 28, 2011 at 10:35 pm | Permalink

    I think the biggest problem w/ YNG is the initial run up to 90 cents. Once it got to 90 cents, people stopped getting patient w/ the investment. Investing is all about patience. All investments take time to work out.

    If you had invested in YNG in 2010 at 30 cents w/ the thesis that in 3 years this company will be doing 250k-300k of production, then today’s price would mean nothing to you. Instead you would spend time looking at what management has done and if we are still on track for the 250K-300K production target.

    The move from 30 cents to 90 cents in months has given investors a weird sense of time frame. Instead of looking at investments as multi-year process, people now view the YNG investment in months.

    In the end it comes back to your initial investment thesis. If you had a multi-year view then you don’t get phased by daily stock movement. Instead you look at what the company is doing and if it will validate your thesis. If you investment approach was today the stock is 30 cents and then in months it will get to 90 cents, then you are setting yourself up for disappointment.

  7. aagold's Gravatar aagold
    November 29, 2011 at 7:21 am | Permalink

    Mariusz,

    I’m confused about YNG’s expected cash costs. According to the latest company presentation, the “mine plan” assumes a cash cost of $785/Oz in 2012 and 2013, which is consistent with your calculation. But the presentation also states that *current* company estimates for cash costs are $545/Oz for 2012 and $485/Oz for 2013.

    1) Do you understand what the difference is between the assumptions used for the mine plan estimates versus the current estimates?

    2) Do you believe the current company estimates, given how much lower they are than your own calculations?

    I’ve also got a question about your new valuation method. It looks like you’re now basing your valuation on a P/E multiple, which includes large depreciation charges, whereas in the past you (and many others, I believe) have used a P/CF (price/cash flow) multiple instead. Why the change?

    Thanks,
    aagold

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      November 29, 2011 at 9:32 am | Permalink

      My estimate is based on ore from Smith, SSX/Steer, and no more ore from Newmont. The managements states that they will get this cost even lower after they take Smith in-house and open Burn Basin and starvation.

      Do you believe the current estimate, given how much lower they are than your own calculations?

      I don’t have enough info yet exactly to see how they came up with this. Or maybe I didn’t look hard enough to find it. At this point I just don’t know so it is not a matter of believing or not. I want to know if it is realistic.

      As far as my valuation don’t look into too deeply. I felt like using a different method just because. I don’t really have a reason. I could have used cash flows instead.

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      November 29, 2011 at 6:07 pm | Permalink

      So I ran some number to answer your question about the cash cost.

      Smith $85 per ton/0.235 = $362 per ounce x 24 percent of total ore = $86.88
      SSX/Steer $85 per ton/0.189 = $450 per ounce x 24 percent of total ore = $108
      Starvation $95 (estimate based on my conversation with Randy) per ton/0.26 = $365 per ounce x 12 percent of total ore = $11.40
      Burn Basin $50 (estimate based on my conversation with Randy. He doesn’t know 100% yet) per ton/0.104 = $481 per ounce x 40 percent of total ore = $192.4
      Total mining cost = $86.88 + $108 + $11.40 + $192.4 = $398.68

      Smith 1,200 tpd (will get to this level) 24 percent of total
      SSX/Steer 1,200 tpd = 24 percent of total
      Starvation 600 tpd = 12 percent of total
      Burn Basin 2,000 tpd = 40 percent of total
      Total = 5,000 tpd

      Now we need processing costs. I used $40 per ton on my analysis but after I talked to Randy, he told me that they might get it down to $31 per ton. Considering the average grade per ton is 0.17456, this is equivalent to $178 which is lower than my $266.

      So you have $399 + $178 = $577 which is a bit higher than management’s $545 for 2012 target per presentation. If they are able to do everything that I outlined, then yes they will hit this number.

      For 2013, they are targeting $485. The only way to get it to this level is to mine higher grade ore (above 0.17456) which would require reopening other mines. At this time I don’t know which mines are next to reopen. Time will show if they will achieve this. I would be extremely happy to see anything below $600 per ounce.

      • November 30, 2011 at 10:35 am | Permalink

        At YNG presentation today, Bob Baldock estimated a reduction to $750 per ounce if using only YNG ore (that is buying no more Newmont ore). Further, if they get permit approval next year from Nevada for open pit mining in Burns Basin, their overall cost would decline further to about $600 per ounce.

  8. Mariusz Skonieczny's Gravatar Mariusz Skonieczny
    November 29, 2011 at 9:35 am | Permalink

    The most important thing is gross profit. Once they have this under control, everything will fall in place.

  9. anon's Gravatar anon
    December 1, 2011 at 4:10 am | Permalink

    Did anyone at the conference ask Baldock about his MMY financing fiasco? Why he is doing it, etc? Two months after the announcement, he still has not given his MMY shareholders any answers .

    This goes much further than management communication issues. He is giving away 2/3 of MMY – permanently reducing the value of the shares. And he refused to even discuss the issue with his shareholders – choosing to play MIA. What if he pulls a similar stunt at YNG?

  10. bob's Gravatar bob
    December 1, 2011 at 6:53 am | Permalink

    mariusz, did you hear anything about yng being $60 million short on cash in case you were at the conference and any conjecture on whether deutsche bank would actually step up? thanks in advance. good news that the dryer part has arrived.

  11. Mariusz Skonieczny's Gravatar Mariusz Skonieczny
    December 1, 2011 at 7:16 pm | Permalink

    I have been gone for one day and when I came back, I see another full blown panic and crisis from investors of Yukon-Nevada. Before I responded to any comments I needed to speak with Richard Moritz and Bob Baldock so that I could write intelligently without jumping to conclusions.

    Investors are pretty much saying:
    -The management has no credibility
    -They are liars
    -Baldock overpromises and underdelivers and he is doing it again
    -They said on the conference call that they won’t need additional money and now they are saying they need between $20 and $60 million

    I am tired of hearing investors complain about Baldock and I am saying this not because he is my friend but because I like to step back and see what he has accomplished with Yukon-Nevada already. The company was shut down facing all kinds of regulatory problems. He restarted production, raised money to winterize and reburbish the plant, and is on the way to bringing the company towards profitability.

    However, the process of getting from point A to point B is extremely painful. It is worse than a root canal. Yes he missed targets and projections. I promise you that he will miss more targets and projections. This is mining. Not only that, this is a mining turnaround. When I first came to US, I remodeled probably four houses because my family was moving from one place to another. I did work on everything from rebuilding electricity to doing the drywall. If you listened to my time and money estimates and made your investment decisions based on them, you would have hated my guts. It always took more time and money. But you know what – I finally got it done and everything was working. During the remodeling process, I was an idiot but after I was done, everybody thought I was a genius. I only did work on single family homes and I can’t even imagine what kind of problems you can get from rebuilding $1 billion roaster. But I am sure that the critics know much more than me and this is why they are so sure that Baldock is this or that.

    Investors say that on the conference call, the CFO said that they will need no more money. He was answering my question because I am mostly the only person submitting questions. Everybody else is complaining. I know what I asked and I know the answer that I got. I asked whether they will need more money for the WINTERIZATION and REFURBISHMENT project. The CFO said that they have enough money for the 2011 capital budget requirements. He also said that they have contingencies in place to ensure that they have enough money to bring production to 150k ounces of gold. This means that they may need more money for working capital. This is why I said this in my report, “Considering that they are almost done, I doubt that they will need to raise more money for the winterization and refurbishment of the plant. But if they do, it shouldn’t be much.” I said nothing about working capital requirements because I simply didn’t have a clue at that point. I should have said, “I have no clue about whether they will need more money for working capital.”

    Now Baldock is saying that they will be raising $20 million for working capital. How is this a lie? This $20 million or more is not for the winterization and refurbishment. It is to operate the company. On the phone about 30 minutes ago, he told me that because the DB financing took so long to close they burned through more money than originally anticipated. When your plant is not producing money for long enough, you will run out of money. So now they need more so that they can actually get to the finish line.

    People who are invested in Yukon-Nevada are in it to get 5 bagger returns. Unfortunately, they are unwilling to take the pain. It is like trying to lose weight without eating right and exercising. Why do you think Yukon-Nevada is available at this price? Because most of investors gave up. They are tired of problems. They are tired of guidance. Some people here bought this stock only 2 weeks ago and they are already tired. Imagine the people who are in it for 4 weeks. They already sold and moved on.

    Between everything that I wrote and all the comments that I made there is one common denominator – malfunctioning plant. When this thing is fixed, 99 percent of the problems go away. Until this happens, nothing matters. Production targets will be missed. Revenue projections will be missed. Gross profit margins will disappoint.

    The last part of the winterization and refurbishment project is the installation of the dryer which is being delayed due to manufacturing. The company sent people to the manufacturing to speed up the process which means they are working their butts off to get things done. Originally, only one part arrived. Then, the second part finally arrived. But as you know bolt holes did not fit. They will not be sending the dryer back but it will cost them time and money to fix it and this is why the installation is delayed until January. It will cost them about $2 million. Yes you read it right, $2 million for such a stupid problem.

    While investors are complaining, insiders are buying stock on the cheap. Since I wrote the article, another insider bought stock. I know that Richard Moritz, Investor Relations, is also buying but because he is not part of the management team, his buys are not going to be shown to the public. Also Bob Baldock should also be buying shares. We’ll see if this actually happens.

  12. aagold's Gravatar aagold
    December 2, 2011 at 11:49 am | Permalink

    Oh man…. is this company cursed or what? :-)

    What is this business all of the sudden with the MSHA violation? Does this have anything to do with all of those environmental problems they’ve been having to deal with, or is this something entirely different? I wonder if this has anything to do with why need to raise more money now…

    Ugh. I don’t know how to handicap this one. Looks like the price dropped over 13% as a result of this. Is that rational? I have no clue… anybody know how much it costs to fix problems like these?

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      December 2, 2011 at 12:34 pm | Permalink

      Aagold,

      Thanks for your question. I didn’t know what to think when I first saw it but I was not going to panic until I found all the details. As you know, the stock is selling off. I guess it is a perfect opportunity for Bob Baldock to acquire shares. He told me yesterday that he was going to do it now that he was back in the office. Anyway this is what is happening.

      The MSHA issue is trivial. There 68 violations out of which 10 have already been resolved. All of these violations were made a year ago. According to the COO, most of them will take 5 to 10 minutes to fix. This is how minor they are. For example, they read some of the violations to me:

      -Footprint in the mud
      -Junction box is kept closed with a wire instead of a screw
      -Dust is collecting in the dust dryer

      Here is a letter from MSHA.

      http://www.msha.gov/POV/November2011Letters/JerrittCanyonMill.pdf

      Yukon-Nevada is going to take Newmont and Barricks approach and to involve lawyers to get these regulators off their backs.

      Per the letter that I linked to, the regulators just want them to correct these things. There are not shutting them down.

      As far as the update on the second part of the dryer. They will be shutting down on January 3 for 15 days to install it. As we both know this date will probably be changed 10 times more.

      • aagold's Gravatar aagold
        December 2, 2011 at 1:33 pm | Permalink

        Mariusz,

        There must be some violations in there that are more serious and would cost them a lot of money to fix, right? Otherwise, why else would YNG spend money on lawyers to contest these charges? Things like footprints in the mud and dust collecting in the dryer aren’t worth contesting? I hope this is as much of a non-issue as you’re saying (since I’m a shareholder), but I’d be surprised if it’s really so trivial.

        – aagold

  13. Turniptruck's Gravatar Turniptruck
    December 2, 2011 at 12:13 pm | Permalink

    More bad news: http://www.reuters.com/article/2011/12/02/yukonnevada-idUSL4E7N21UJ20111202

    “The company said it received a letter from the Federal Mine Safety and Health Administration (MSHA) saying it had found the mill, located 50 miles north of Elko, Nevada, to be in violation of the Federal Mine Safety and Health Act, 1977.”
    “The regulator’s pattern of violatons program requires companies shut down areas affected by violations until the mine receives a clean MSHA inspection.”

    Mariusz – do you know: Does the letter only concern the dry mill which is already being upgraded? Thus, not problem.

  14. December 2, 2011 at 1:08 pm | Permalink

    I smell a rat.
    When I read this news, the first thing that I’m wondering is to what extent Barrick and Newmont have influence with the MSHA? In other words, do you think the big players are flexing their muscles via MSHA in order to try to prevent a new competitor (the upstart Yukon Nevada) from commencing larger-scale production? Also, with the newly refurbished roaster, YNG would no longer need to purchase Newmont’s ore, but would process only their own Yukon Nevada ore. I hope my fears in this regard are misplaced, but Federal regulators sometimes play favorites — to the detriment of free-market competition. Time will tell.

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      December 2, 2011 at 1:14 pm | Permalink

      There appears to be indications that Newmont is doing things to hurt Yukon-Nevada. For example, they could have given them bad ore to sink them. They could also be influencing the MSHA, but there is no way to know it. This is pure speculation.

  15. johnson's Gravatar johnson
    December 6, 2011 at 10:31 am | Permalink

    Still no report of any purchases by Baldock or anyone else since 11/25. It seems very likely they will have to raise capital in the next 15-30 days to tie them over until they can get cash flow positive next year. Hopefully Baldock and others will buy stock before the next round of capital raising or we could be diluted at a bad price.

  16. Mariusz Skonieczny's Gravatar Mariusz Skonieczny
    December 6, 2011 at 3:19 pm | Permalink

    I just realized that I misunderstood you. You were talking about Yukon, not Monument.

  17. Mariusz Skonieczny's Gravatar Mariusz Skonieczny
    December 6, 2011 at 3:24 pm | Permalink

    They will be raising more money as they indicated in the investment conference in Boston. Based on what I know, it is not supposed to be equity, but you never know until it is closed. I hope to see Baldock buys too.

  18. JR86's Gravatar JR86
    December 14, 2011 at 4:02 pm | Permalink

    Mariusz,

    Three brief questions:

    1) With gold on the ropes (for now), do you think it’s plausible that a transaction can get done here? Why?

    2) Do we have any idea what happens if the company can’t sell more gold forward to DB? Keep in mind DB and other banks, especially of the European variety, are having a really tough time with access to dollar liquidity.

    3) Do you know what portion of the original gold facility is already funded?

    It’d suck if a hedge against massive monetary largesse (owning gold exposure through extremely cheap YNG!) turned out to be inextricably linked to a European demise.

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      December 14, 2011 at 4:23 pm | Permalink

      1) Yes I think the transaction can get done here. It is probably a matter of price.
      2) I don’t believe that they are getting gold forward to DB.
      3) I believe they got the majority of funds.

  19. Floris's Gravatar Floris
    December 18, 2011 at 4:31 am | Permalink

    Hey Marius,

    It looks like he is starting to buy himself (aside from numerous other insiders)

    Dec 16/11 Dec 1/11 Baldock, Robert Frederick Direct Ownership Common Shares 10 – Acquisition in the public market 60,000 $0.310

    I just want to applaud you for continuing to persever despite all the outside scrutiny. You have no obligation to do so, and yet you do. I bought in at 50c and added at 34c, and don’t see any real negative long term issues (despite the short term setbacks). I see the same downward trend in prices for a number of my other holdings, that are being hit by short term issues. Whenever you pay 40c-50c to the dollar, there is no saying it can not get cheaper still.

    Anyway, thanks a lot for the great write-ups. Let’s see where YNG will be 2 years from now.

    Regards,

    Floris

  20. Mariusz Skonieczny's Gravatar Mariusz Skonieczny
    December 18, 2011 at 9:46 am | Permalink

    Floris,

    Yes many insiders stepped up to the table and bought shares. It would have been nice to see them buy more shares but it is what it is. When I talked to the CFO (Shaun Heinrichs), he told me that he should not even be buying stock because he is in the middle of closing on a house. You see these guys are just like everybody else – they are not independently wealthy.

    I am still amazed, but I shouldn’t be, about how investors act. A year ago, when there was much more risk, they were jumping over one another to buy the stock sending it to $0.90 per share. Now when the entire company trades for almost as much as this winterization project costs, they are nowhere to be found. And they call themselves value investors. I think they are a joke.

  21. johnson's Gravatar johnson
    December 19, 2011 at 1:47 pm | Permalink

    Mariusz,

    The market cap may be at about the cost of the winterization project, but the winterization project was not funded with mostly equity. It was funded maintly by the DB forward contract. This is a liability of the company and is equivalent to debt. It needs to be added to the market cap to get the true enterprise value.

  22. NL's Gravatar NL
    December 20, 2011 at 2:22 am | Permalink

    Mariusz,
    Excellent due diligence and thanks for sharing it. Assuming that gold prices continue to drop, at what price point is gold too cheap for YNG to start generating a profit i

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      December 20, 2011 at 8:36 am | Permalink

      It all comes down to the winterization project. Without it no price of gold is high enough. With it complete and I am talking about 4 to 6 weeks, they should still make a profit when gold is at $800 per ounce.

  23. January 6, 2012 at 4:42 pm | Permalink

    Announced after the bell tonight…..

    Jerritt Canyon’s measured and indicated mineral resource has increased by 428.8 koz of gold, representing a 21% increase over year-end 2007 levels. The updated mineral resource estimate incorporates a new 3-D geological model which includes additional drill hole results from January 1, 2008, to January 1, 2011.

    The new mineral resource now comprises a measured resource of 1.07 million ounces, an indicated resource of 1.32 million ounces, and an inferred resource of 0.75 million ounces. This new model significantly increases the potential of the property and gives the Jerritt Canyon Geology team additional areas to explore and develop. The updated mineral resources completed to date include the primary work areas: Smith, SSX-Steer, Saval, West Mahala and Starvation Canyon.

    Furthermore, I exchanged emails with the Director of Investor Relations today and he confirmed that they are shutting down the plant for the final parts of winterization as of tomorrow. They expect to have the mill back up and running by the 20th of Jan (let’s just say Mid Feb given their track record!!) and from that day they expect to be able to produce 10,000 ounces a month which will increase overtime as other projects come online.

    A really big couple of weeks for the stock coming up. I increased my position this morning, which was fortuitously timed given tonight’s announcement!

  24. January 10, 2012 at 8:03 pm | Permalink

    I greatly enjoyed your write-up Mariusz and share your favorable view towards the company at these prices. I think a simple but powerful aspect that many are overlooking is that a great company can make a terrible investment at the wrong price and a terrible company can make a great investment at the right price. I think Yukon falls perhaps in the middle but at its current price represents compelling value.

    Cheers

  25. aagold's Gravatar aagold
    January 12, 2012 at 5:05 pm | Permalink

    Mariusz,

    Since you follow YNG closely, I was wondering if you’ve had a chance to analyze the recent press releases to determine whether or not the increase in mineral resources will be what you were expecting in the updated NI 43-101. As I recall, you were expecting a significant increase in resources; I don’t remember where you estimated that, but I thought it was something on the order of doubling their current resources. Any thoughts?

    Thanks,
    aagold

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      January 12, 2012 at 5:37 pm | Permalink

      This was not an updated 43-101. The story with press release is that it is a regulatory requirement that has been served on nearly all companies that filed a 43-101 report lately requiring them to re-do the current 43-101 report in a new format. The updated 43-101 is still coming.

  26. aagold's Gravatar aagold
    January 12, 2012 at 5:55 pm | Permalink

    No, I’m talking about yesterday’s press release that started with,

    “VANCOUVER , Jan. 11, 2012 /CNW/ – Yukon-Nevada Gold Corp. (TSX: YNG.TO – News) ( Frankfurt Xetra Exchange: NG6) is pleased to announce results from its 2011 Surface drilling program at the Mahala Project which is located in its wholly-owned Jerritt Canyon gold operation in Nevada, USA.

    HIGHLIGHTS

    MAH-457 intersected, in the West Mahala Zone, 64.05 meters at 6.38 g/t gold, including 24.4 meters at 3.43 g/t gold, and 22.87 meters at 8.37 g/t gold, and 13.42 meters at 12.28 g/t gold;
    EM-121 intersected, in the East Mahala Zone, 15.25 meters at 4.77 g/t gold, including 3.05m at 8.88 g/t gold, and 4.88 meters 8.64 g/t gold; and
    MAH-454 intersected, in the Mahala Zone, 32.02 meters at 4.63 g/t gold, including 15.24 meters at 6.24 g/t gold, and 3.05 meters at 8.37 g/t gold. ”

    There’s a huge amount of detail in that release, most of which I didn’t really understand. I realize this isn’t the updated 43-101, but it seems to be some kind of pre-cursor to it. I’m just trying to figure out if there’s some way to predict what the new gold resources will be.

    – aagold

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      January 12, 2012 at 7:02 pm | Permalink

      Oh I see what you are saying. These are pretty good results. I don’t know how they are going to translate into the new 43-101.

  27. January 13, 2012 at 4:16 pm | Permalink
  28. David Landy's Gravatar David Landy
    January 15, 2012 at 5:58 am | Permalink

    Infographic on historic gold production and consumption: http://www.numbersleuth.org/worlds-gold/

  29. aagold's Gravatar aagold
    January 16, 2012 at 7:59 am | Permalink

    Mariusz,

    I’m working on a DCF-based valuation model for YNG (it’s very simple – don’t worry), but there are two items I don’t fully understand and I was hoping you could help.

    1) Maintenance Capex. You’ve listed $29M as the annual depreciation for the roasting facility, but that’s probably not indicative of how much cash is required each year to keep the plant in working order. Do you have any estimate for how much cash will need to be spent each year on maintenance capital expenditures for the plant? Let’s assume the mining operations will need to be maintained for a long time – 15 or 20 years, for example.

    2) Conversion of Mineral Resources into Reserves. You’ve listed $2M as “exploration expense”, but I’m not quite sure what that means. If I’m not mistaken, I think it means finding new Mineral Resources. But what about the development activities required to convert the ~2,539 kOz of Measured+Indicated Resources into Reserves? I’m not real clear on what the difference is between the two, but as I recall YNG has only about 700 kOz of Proved+Probable Reserves right now.

    Thanks,
    aagold

    P.S. If you check out the comments section of the recent GuruFocus article from “KelpieCapital” you’ll see how my DCF-based valuation works, but I think it’s incomplete due to the above two issues. I also neglected to include the effects of stock-based compensation. Strictly speaking, stock-based comp. doesn’t really belong in a DCF analysis since by definition it’s non-cash, but its effect does need to be taken into account somehow.

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      January 16, 2012 at 8:14 am | Permalink

      Aagold,

      I can’t really help you now. I am swamped. As I mentioned to you before, I am trying to close the year and calculate performance.

  30. February 6, 2012 at 7:33 am | Permalink
  1. By on January 13, 2012 at 2:02 pm
  2. By on January 13, 2012 at 2:24 pm
  3. By on February 6, 2012 at 3:06 pm
  4. By on February 7, 2012 at 2:58 am

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