YUKON-NEVADA GOLD CORP YNG
October 13, 2010 - 4:20pm EST by
cgnlm995
2010 2011
Price: 0.74 EPS $0.00 $0.09
Shares Out. (in M): 978 P/E 0.0x 8.2x
Market Cap (in $M): 724 P/FCF 0.0x 0.0x
Net Debt (in $M): 25 EBIT 0 117
TEV ($): 749 TEV/EBIT 0.0x 6.4x

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Description

Thesis

Yukon Nevada presents an opportunity to own a gold company at <8x 2011 earnings and a substantial discount to NAV at $1,300/oz gold prices due to misplaced concerns regarding historical and temporary events that occurred under the prior management team.  The new management team has successfully taken Yukon from the brink of bankruptcy to a profitable and producing business with no material liabilities.  Yukon is now >60% of the way through its turnaround and is finally positioned to capitalize on its high quality asset base.  With one of just three refining/milling/roasting facilities in Nevada operating at <25% capacity, any type of M&A or JVs should result in significant upside to earnings and the share price. 

 

Description

Yukon Nevada is a gold miner with assets in Jerritt Canyon, NV and the Yukon, BC.  The Jerritt Canyon assets are just coming back online after the EPA shut down the mines due to excessive mercury emissions in 2008.  In addition to violating EPA mandates, the Company was fraudulently misstating emissions testing.  The new CEO, Bob Baldock, found a letter from former senior management instructing employees not to ever contact the EPA again.  The relationship with the EPA became so soured that prior to new management's entrance, an actual fistfight broke out between an EPA official and a Yukon employee in the Company's parking lot.  The Company nearly went belly-up as a result of the EPA license revocation.  After 6 months of diligence, Bob Baldock, a 70 year-old CPA and liquidator by trade, with decades of experience executing turnarounds and asset workouts, agreed to attempt a turnaround at the invitation of large shareholders Francois Marland and well-known investor, Eric Sprott.  First, Bob raised $50mm from Sprott and immediately refurbished the milling facility, paid his EPA fines and settled outstanding lawsuits.  Within five months, YNG went from having no contact with the EPA to getting its operating permit back.  By late summer 2010, the Smith Mine was producing at an annual rate of 150,000oz per year with the milling facility running at more than 90% under the allowable mercury limit.   The milling facility has capacity of >600,000 ounces or 4x current production rates.  The assets themselves appear to have a much longer life than expected (3mm total resources and 700k oz of reserves, but these assets have been producing for decades and reserves have historically grown at a rate faster than production).  The resource numbers will be updated in the coming months.  Senior management owns 4mm shares and nearly 40mm options.  CEO Baldock is independently wealthy, and at the youthful age of 70, decided to accept the opportunity, because turning around mining businesses is oddly enough his life passion.  He says this is the most straight forward opportunity he has seen during his extensive career.

 

Market Misperception

There is one small Canadian shop that covers this $750mm market cap business, Byron Securities.  Most investors are not aware of the story, and investors focused on buying producing companies cannot yet see the production coming through the financials (started in Q3).  Additionally, few appreciate the value of the milling facility.  There are just three of these facilities in Nevada, owned by Newmont, Barrick and Yukon Nevada.  Both Newmont and Barrick are operating at full capacity.  There are several small E&Ps that have valuable ore and require crushing, milling and roasting capacity.  From speaking with industry experts and the EPA, there will not be another milling facility permit granted in Nevada.  Thus, if you own gold in the ground in Nevada, the only way to monetize your asset is to either sell to Yukon Nevada or form a JV.  We believe that an ore acquisition and/or JV will happen soon as management appears extremely focused on increasing utilization of this valuable core asset now that it is permitted to operate.  The earnings accretion from these deals could lead to a multiple of the current earnings power (just 8x 2011 at $1,300/oz gold BEFORE any accretive deals and likely a low single digit multiple of earnings post-deals). 

 

Catalysts

  • JV ore deal and/or acquisition
  • Q3 earnings reveal that the Company is actually producing gold and generating revenues
  • Resource update
  • Coverage initiation

 

Catalyst

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