|Shares Out. (in M):||91||P/E||0.0x||11.0x|
|Market Cap (in $M):||2,550||P/FCF||0.0x||10.0x|
|Net Debt (in $M):||0||EBIT||0||0|
Allied Nevada Gold (Ticker: ANV)
Situation Type: Value / Pre M&A
Full disclosure: I am not a gold bug. I have little interest in having a debate about currency debasement, monetary easing, and the destruction of paper currencies. I believe ANV shares trade at an undemanding valuation and nearing an inflection point for the shares to re-rate and appreciate materially. I believe a sale of the company is a 2013 event, and could result in a competitive bidding situation. The shares are not difficult to hedge in the event you have a bearish view on metals.
Approximate Trading Metrics:
Shares Outstanding: ~90mm
Average 3 month Trading Volume: 700k/day
Short Interest: ~7mm shares (7.6%)
2013 Estimated CF/share: ~2.80
2014 Estimated CF/share: ~3.50
2013 Estimated EPS: ~2.50
2014 Estimate EPS: ~3.25
2014 Estimated P/E: ~8.8x
Estimated Current NAV/share: ~$39
Duration: 9 – 12 months
Probability Weighted Price Target / Return:
~$46 / ~60%+
Trade Recommendation (consider creating pure alpha trade):
ANV is a gold mining company that owns 100% of Hycroft Mine in Winnmuca, Nevada. The company recently reported disappointing results, that missed buy-side and sell-side estimates by a wide mark, and the shares have traded off. Despite the recent results, the company is well positioned in a geography will little political risk, for the shares to re-rate inline with Tier II piers, and a premium to Net Asset Value.
Disappointing quarterly results / conference call: 2012 production outlook was recently revised to the lower end of its previous stated guidance of 180k oz to 150k oz. Cash costs have recently come in higher at $527 oz, but full year remains at $475-$495 oz. CAPEX was also recently raised to $285mm from $225mm. Despite the downgrade to expectations, the company should be fully financed and funded going forwards. The opening comments from the CEO Scott Caldwell are fairly straightforward:
“Now, let’s be honest, the management’s not real happy with the performance in this quarter. It was disappointing on several metrics.”
Background on Hycroft:
Last Quarter Results / Guidance: http://www.alliednevada.com/investors/news/pdf/872012-1.pdf
Currently ANV trades at 0.7x NAV. Once production increases from 180k to 250k oz/year in 2013 the shares should re-rate to 1.25x-1.50x inline with peers. During this re-rate the company will most likely be sold to a strategic large cap miner. I believe the Hycroft mine is capable of doing at least 250k oz by 2013. At 1.5x NAV, the shares would trade for ~$55/share or ~90% higher
Risk / Reward:
Shares have recently traded down from the mid $40’s to the mid/high $20’s. If shares were to trade back to NAV, that would be a return of ~37% before any M&A premium. From a risk perspective, ANV may need to raise more capital, which ultimately could dilute the current capital structure. I view this risk as low, as ANV recently issued senior notes for $400mm at 8.375%, which closed in late May 2012. However, the capital plan could be $100-$200mm short in 2014.
Scenarios / Probabilities:
I view the management team as a key differentiator, and motivated to create value.
CEO Comments from August earnings call sum up the situation and sentiment:
“Well, in conclusion, as I mentioned at the start of this, management and the Board is certainly not ecstatic about the quarter we had. We are all stakeholders, meaning management and insiders, we still own just under 15% of the outstanding shares of the company and recognize the importance of earnings and sales or sales hence earnings, I’m talking metal sales here, and particularly gold sales.
So we recognize the need for that. We have a realistic plan, it’s an achievable plan to dramatically improve our sales of metal, both gold and silver. Steve talked about that and I talked about it, 150,000 ounces for the year and we’re working on mechanisms to close the gap to reduce that inventory.
Permitting and construction of the crusher and mill are proceeding well as Tracey mentions and I’ve mentioned quite frankly, permitting is outpacing operations/construction at this stage of the game, which is good news. and so we’re pursuing all options to accelerate mining equipment engineering/procurement to build this thing to keep pace with our permitting.
We’re focused on the short-term, but really our eye is always on the long-term and the price here is to get this mill up and running and go from a couple of hundred thousand ounce producer or in sales of gold in a million in silver to a million gold equivalent if you want to talk to and we’re really focused on that project.”
Nothing really stands out of interest other than there are a few event-driven and value investors including: Baupost (5mm), Perry Capital (2mm), Royce
Exhibit / Materials: