Veris Gold Fiasco

I was up last night working and when I got up the market was already open. I had plenty of missed calls and my mailbox was blowing up. I probably received 50 e-mails all about Veris Gold (Formerly Yukon-Nevada). About 49 of them were something like this:

“Oh my god! The sky is falling.”

“They are diluting us again.”

“I am really pissed off.”

I don’t even need to continue with this, you get the point. But there was one e-mail that said this.

“Well this should be the low in Yukon. A total round trip from $0.20 to $0.90 and now back to $0.20.”

Wow – only one guy who is thinking like this.

There reason why I am talking about these e-mails is this. 99.9 percent of investors are either pissed off or are selling. What does this tell you about the price action? This guy might be right that we’ve reached the low because everyone is trying to get out at the same time. I don’t know and only time will show.

Should you be surprised that the company is raising more money?

No, you should not be because they told you that they need more money.

Should you be angry that they are raising more money?

Sure, you should. I am angry but no one cares about how you or I feel. It is irrelevant.

One person asked “How is one supposed to guess when, if ever, the dilution will finally stop?”

It will stop when they don’t need the money anymore. Right now, they are operating at a cash flow positive level, but positive only means more than $0. It is obviously much better than losing money, but it is not good enough. What they need to do is to put Starvation Canyon into production. This mine will give them higher grade ore and allow them to fill the capacity so that the costs can come down. Until you have Starvation Canyon contributing ore to the mill, this operation will never make enough money. So this new financing that they are trying to raise is to put Starvation Canyon into production.

The way I see it is that I want them to put Starvation Canyon into production. Obviously, I would prefer if they had enough money in the bank to do it but they don’t. So what is the next alternative? Well, they need to raise money to do so. Then and only then, can we expect the company to finally generate decent cash flows.

So if you don’t want them to raise this money, you don’t want Starvation Canyon to be put into production, which means you are happy with them operating at pretty much break-even. Yes, I hear you. They promised this and that and because of this you are very angry. Get over yourself. No one cares about how you feel.

15 Comments to Veris Gold Fiasco

  1. DL's Gravatar DL
    December 5, 2012 at 12:09 pm | Permalink

    Honestly, the dilution is 10%. If that’s what it takes to get the company’s balance sheet in good order, I’m happy with that.

  2. David Landy's Gravatar David Landy
    December 5, 2012 at 12:54 pm | Permalink

    I agree.

  3. JR86's Gravatar JR86
    December 5, 2012 at 1:18 pm | Permalink

    The dilution is actually 15%.

    Sorry you feel that way, but you may be mistaken regarding FCF breakeven b/f starvation canyon. Rough estimates suggest they’re running at 3m in pre-tax free cash flow per month BEFORE starvation comes online. This is AFTER 2.5m per month in capex and the DB liability reduction. A little bit better than breakeven i’d say…

    Granted, starvation ought to significantly increase pre-tax FCF, but the fact is this company clearly turned the corner last quarter in operations and was cash flow positive EVEN with a major (3.7k) inventory accrual and under 100% utilization.

    I’m still stupified by the gold accrual. they clearly were provisioning to pay back the 3.8k august facility but they did not. Nor did they sell that gold for cash to spend on capex, so i’m left scratching my head on this one. Let’s just hope there hasn’t been another plant malfunction.

  4. Josh's Gravatar Josh
    December 5, 2012 at 1:44 pm | Permalink

    What about all these forward deals they do? The company is basically cash poor. Selling gold for the equivalent of 50% of the current price. Why not slow down exploration and unnecessary costs for a few years to get your balance sheet in order?

    On February 7, 2012, the Company entered into a Second Forward Gold Purchase Agreement with Deutsche Bank (the “Third Agreement”). Under this agreement, Queenstake received a gross prepayment of $20 million, of which net cash proceeds of $18.9 million were received on February 8, 2012, in exchange for the future delivery of 650 ounces of gold per month, over a forty-three month term commencing March 31, 2012, representing total future delivery of 27,950 ounces of gold.

  5. David Landy's Gravatar David Landy
    December 5, 2012 at 2:28 pm | Permalink

    JR86, Why don’t you call them up and ask them about it?

  6. December 5, 2012 at 10:16 pm | Permalink

    The company doesn’t sell gold at 50 pct. The forward sale is counted as deferred revenue for oz delivered times 691. The difference of 850 and 691 would be equal to the interest portion for the “loan period” ending in aug 2015. Whatever the company sells gold for above 850, they receive payment for that difference, up to a cap of 1750 on the 20 mm facility and 1950 on the 120 mm facility. So it’s like a 9 pct loan approx with Expiration in aug 2015 that is being amortized every month with principle. They still owe about 155k oz, going down by 4,980 oz per month.

    • Josh's Gravatar Josh
      December 7, 2012 at 10:23 pm | Permalink

      If you look at page 3 (of the latest report, linked below) the lowest selling price of gold is 1252. Will they be able to use the difference to ‘pay off’ the forward sales early? Or will they get a huge cash pile at the end of 2015 for the difference? Using even the lowest number at 400 x 155,000 oz is 62MM, not a small chunk of change. Using 600 would be over 100MM.

      With the financing costs of 1.1MM (net proceeds of 18.9M) I get an interest rate closer to 13%. A 5% commission is a lot.

      (Note 11&12 starting on page 50 of the document) Why has the company not settled some contracts, taking a penalty of 2.25% per month? Some of transactions not settled are with related parties.

  7. December 5, 2012 at 10:41 pm | Permalink

    You are confusing fcf with cash from operations. You have a lot of capes and operational expenditure that has been done and being finished so that they can finish all items under the consent decree and getting starvation up and running.
    If you can get all three mines working and produce 200k oz per year, assuming they can bring costs down to 800 per oz at that production rate, then the math is the following for 2013. 200 k oz, minus 60 k delivered to DB, you get 140k at 800 cost. If gold avg is 1700, then you have cash from operations of 126mm. Maintenance capes plus 10 mm allowance to keep drilling etc should be around 40mm. That gives you 86 of FCF. Good news as that to produce 200k oz they only need 3000 ton per day. That leaves 2400 for toll milling, now that they have 100 pct capacity, and assume 90 pct utilization. If they can add contracts for 1500-2000 tpd, at a good price or net margin above 125 per tone, then you add 6-8mm of cash per month, or 72-96 to your 86. That makes you a 150 mm plus fcf company. As all these things happen you can see this thing perform. The multiple will be a question of what the reserves look like going forward etc, but 7 is not a crazy number, remember, it’s FCF, not EBiTDA. 7 on FCF is probably conservative. That’s 1.050 billion valuation. Shares outstanding plus warrants and options is 137mm approx. So with those numbers you have a stock at 7.66, if the warrants are exercised, the company gets an additional 60-70 mm in cash so add 50 cents to that number.
    That’s nearly 4 x from today’s close. You want to make that kind of money and not suffer in the process?, the stock will not go up on expectations any more. This is a show me stock and these are the things you should look for.

    • aagold's Gravatar aagold
      December 5, 2012 at 11:54 pm | Permalink


      I didn’t go through all your numbers and verify them, but I have a conceptual problem with one part of what you wrote.

      I think the 60k oz that needs to be delivered to DB should be treated just like repayment of principal. In other words, let’s imagine that the $140M (I think) financing from DB was implemented as just plain debt, rather than a forward gold delivery contract. In that case, only interest would be deducted to calculate cash flow from operations, not principal repayment. Same goes for FCF. So doesn’t your analysis underestimate FCF, at least conceptually?

      – aagold

      • December 6, 2012 at 8:12 am | Permalink

        you recognize 691 x oz delivered as deferred revenue. This is a non cash sale because you received that money already. The 850-691 that is not paid or recognized is the “interest”. Then you get paid 1700 minus 850 for the oz delivered, that is your cost of production. So the deferred revenue is non cash and the cash you receive for the difference between sale price and 850 covers what it cost to produce. Therefore, the effect on cash is nearly zero. So take production, subtract the deliveries to DB, multiply that number by sale price minus production cost and that is you cash flow from OPERATIONS. after that, take out capex and you get to FCF.

      • December 6, 2012 at 9:35 am | Permalink

        I get your point. What you ae thinking about is normalizing cash flow for gold deliveries. if it were just straight debt, then normally you would pay interest and that’s it. you are paying down principle so you could argue that part of the FCF generated was used to retire debt.

        that gives you an idea of potential FCF generation after they are done paying. but you have to think that the reason they can produce at current rates is because they sunk that money into the plant, mining, etc. All that is capex that was “brought forward”. the reality is that cash available for dividends, buy backs and/or acquisitions will be the one I gave you.

        • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
          December 6, 2012 at 10:00 am | Permalink


          You analysis is very good. Thank you for posting.

  8. aagold's Gravatar aagold
    December 6, 2012 at 10:20 am | Permalink

    You said, “but you have to think that the reason they can produce at current rates is because they sunk that money into the plant, mining, etc. “.

    I think that argument would good if we were talking about ROIC, or something like that, but we’re not. For example, let’s (again) pretend that the $140M was debt instead of a gold forward contract. What you said would still apply – i.e., they wouldn’t have been able to produce all that gold without the debt capital – but that doesn’t change the fact that only interest should be subtracted from Cash Flow and FCF, not principal.


    • aagold's Gravatar aagold
      December 6, 2012 at 10:29 am | Permalink


      One more thing – even if you don’t fully buy my argument, how would that change your valuation of the company? How would you compute the imputed interest charge?


  9. MJ's Gravatar MJ
    December 7, 2012 at 10:39 am | Permalink

    The stock is still in free fall.

Leave a Reply

You can use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>