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8/3/2019 YNG the Drama is About to End November 27 2011
1/16
ClassicValueInvestors,LLCP.O.Box59313
Schaumburg,IL60159
www.classicvalueinvestors.com
TickerSymbolYNG(Canada)YNGFF(US)November27,2011
YukonNevadaGoldCorpTheDramaisabouttoEnd
YukonNevada 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.Newpotentialinvestorsareafraidtobuyit.Thisisexactlythekindofpessimismthatcreates
greatprices.
ManyinvestorslearnedaboutYukonNevadainthemiddleof2010andduringthattime,thestockprice
was at $0.25 per share (today it is at $0.30 per share or a market cap of $300 million). Within six
months,thestockreached$0.90pershare,andsomeoftheshareholdersfeltlikegeniusestriplingtheir
moneyinsuchashortperiodoftime.Everythingwasgreatthemanagementwassuccessfulinturning
the company around, operations showed profitability, and future growth productions targets were
stunning.Thestockpricewasonitswaytoreaching$10pershare.
Then, at the beginning of 2011, investors were shocked to learn that YukonNevada lost money on
productionduring
the
fourth
quarter
of
2010,
after
the
third
quarter
of
2010
had
showed
promising
profitability.Thisiswhenthestockpricestartedtodecline.Itbecameclearthatsomethingwasseriously
wrong with the production process and that the processing plant was in immediate need of
winterizationandrefurbishment.Untilmajorcapitalimprovementsaremadetotheplant,thecompany
willneverreachitsfullpotential.ThenewCEOtookoverin2009,hetoldtheboardofdirectorsthatthe
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
8/3/2019 YNG the Drama is About to End November 27 2011
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shares.Withoutadditionalmoney, themanagement restartedproductionwith thehopeofproducing
enoughcashtopayforthecapitalexpenditures.Soon,itbecameobviousthatthiswasaterriblemistake
which could have been avoided from the beginning. Only when it became clear that the companys
existence was in question did the board of directors give the management the green light to raise
enoughmoneytofixthemalfunctioningplant.
The management wenton to explore options to raise enough money towinterizeand refurbish the
plantsothatitwouldproducegoldwithoutbreakingandshuttingdownconstantly.Thefirstoptionwas
toofferadiscounttooptionholdersforearlyexercise.Unfortunately,someofthemajorholders(same
peoplethatoriginallyrejecteddilution)backedoutatthelastmoment,andthecompanywasstuckina
liquiditycrisis.Consequently,theywentwithadifferentplantoengageDeutscheBanktoprovidethe
company with a total of $179 million from private placement, warrant exercises, and prepaid gold
forwardfacility.
BeforeDeutscheBankwentaheadwiththedeal,ithiredSRKConsulting,aworldclassminingconsulting
firm, to examine YukonNevadas plant to determine if its production problems were solvable. After
receiving approval from SRK, Deutsche Bank proceeded with the deal. While YukonNevadas
managementandDeutscheBankwerenegotiatingallthedetails,theexistingshareholdersweredoing
whatthey
are
best
at
screaming,
yelling
and
panicking,
making
it
more
and
more
difficult
for
the
financingagreementtobereached.DuringtheworstofthepaniconMay4,2011,thestockofYukon
Nevadaclosedat$0.39pershare.
After twentydays,whichat that time seemed likeanunendingnightmare,onMay24,2011,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
8/3/2019 YNG the Drama is About to End November 27 2011
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representeda40percentjumpinoneday.Theoptimismwasshortlivedbecausethestockpricestarted
todeclinethenextday.Withintwoweeks,thestockpricewasprettymuchbackatthesamelevelitwas
atbeforetheannouncement.Now,theworryshiftedtowardclosingthesecondpartofthefinancing.
Finally,onAugust15,2011,YukonNevadaandDeutscheBankclosedthesecondpartofthefinancing,
whichwas
for
$120
million
in
the
form
of
pre
paid
gold
forward
facility.
Now,
the
company
had
enough
funds towinterizeand refurbish theplant.Youmight think thatafterall thepanickinganddoubting
about whether YukonNevada was going to get the necessary financing, this would have been good
newsthatwouldhavesentthestockpricehigher,likeitwaswhenthefirstpartoffinancingwasclosed.
Butno,themarketcompletely ignored it.Actually, itwasevenworsebecausebyOctober3,2011,the
stockwastradingat$0.28pershare.Yes,youreadthatcorrectly.Whenshareholderswerepanicking
becauseYukonNevadawasstrugglingtosurviveduetoalackoffinancing,themarketwaspricingitat
$380 million, or $0.38 per share. However, after the company raised $179 million, the market was
valuingtheequityportionofthecompanyfor$280million,or$0.28pershare.
Howis
this
possible?
When
you
are
dealing
with
the
following
shareholders
or
potential
shareholders,
anythingispossible.
BeforeIgetintowhyshareholdersareactingsopessimistically,letmelistexactlywhatitisthatyouget
forthecurrentpricetagof$300millionor$0.30pershare.YukonNevadahasnodebt,$120millionpre
paidgoldforwardfacilityandthreemainassets:JerrittCanyon,aroasterfacility,andKetzaRiver.
8/3/2019 YNG the Drama is About to End November 27 2011
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JerrittCanyonJerrittCanyonconsistsofopenpitandundergroundmines thathavebeenexploitedover the last30
years. Since 1981, it produced 8 million ounces of gold. As shown in the following illustration, the
propertyproduced300kouncesofgoldperyearuntil2002.
JerrittCanyonhasabout3.5millionouncesofgoldwhentotalingwhatisinmeasured,indicated,
inferred,andstockpiledasshownbelow.
WhatisJerrittCanyonworthintermsofgoldintheground?
If we ignore the fact that YukonNevada is a gold producer and value the ounces as if it was an
explorationcompany,wecouldprobablyget$30perounce.
Value=3.5millionouncesx$30perounce=$105millionorabout$0.11pershare
8/3/2019 YNG the Drama is About to End November 27 2011
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RoastingFacility
Themanagementclaims that the roasting facility iswhatgivesYukonNevada itsvalue.Theyestimate
thattheroastingfacilityisworth$1billionor$1pershare.Fornow,letsjustassumethatthisvaluation
isaccurate.
KetzaRiverKetzaRiver isaproperty inYukon,Canada,whichhistoricallyproduced98,000ouncesofgoldandby
productsilverbetween1988and1990.Currently,ithas485,000ounces in43101betweenmeasured,
indicated,andinferred.
Atonepoint,themanagementwasgoingtospinoffKetzaRiverwhenitwaslookingforoptionstoraise
money for the winterization and refurbishment project. Christopher Ecclestone of Hallgarten &
8/3/2019 YNG the Drama is About to End November 27 2011
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Company,whocoversYukonNevada,believesthatifKetzaRiverwasmarketedproperlyandspunoffas
aseparatecompany,itcouldbringavalueof$100millionor$0.10pershare.Toreadhisreport,seethe
followinglink:
http://classicvalueinvestors.com/i/2011/10/yukonnevadagoldcoverageupdate/
Atthispoint,becausethecompanyraisedmoneyfromDeutscheBank,therearenoplanstospinitoff.
Instead,thecompanywillputitbackintoproductionatarateof70,000ofgoldperyear.However,this
willbeafterJerrittCanyon inNevada isgenerating lotsofcash.Fornow,wewilljust ignorethefuture
plansandvalueitonlyat$100millionasChristopherEcclestoneadvised.
ValueSummaryJerrittCanyon=$105millionor$0.11pershare
RoastingFacility=$1billionor$1pershare
KetzaRiver
=$100
million
or
$0.10
per
share
Total=$1.2billionor$1.2pershare
ConsideringthatthemarketcapofYukonNevada is$300millionandenterprisevalueof$420million
($300+$120goldforwardfacility),themarket isnotvaluingthecompanyevencloseto$1.2billion.If
weassumethatthemarketispricingJerrittCanyonsgoldinthegroundat$105millionandKetzaRiver
at$100million, it is leavingonly$215million($420 $105 $100=$215)fortheroasterfacility.This
meansthatafterthemanagementraised$179milliontowinterizeandrefurbishtheplant,themarketis
tellingus that theplant isworthonly slightlymore than themoney that they raised to fix it.This is
ludicrous. It isequivalenttospending$10,000toredoanentirekitchen inasinglefamilyhousewhile
themarketpricestheentirehouseat$12,000.
Becausethere issuchadisconnect, itwouldbeusefultounderstandhow theplantcouldpossiblybe
worth$1billion.Therearemanywayoflookingatit.Onewayitistofigureouthowmuchitwouldcost
tobuild it.This isexactlyhow themanagement cameupwith theirestimateofvalue.However,you
couldntbuilda roaster like this in the regionbecauseyoucouldntget itpermitted,andeven ifyou
could,itwouldtakeyou8to10yearstocompletetheconstruction.
YukonNevadasroaster isoneofonlythreeroasters inNevadaandthesurroundingregion.Theother
two roasters are owned by Newmont and Barrick and both are running at full capacity. Roasting is
currentlytheonlyeconomicmethodofprocessingrefractorysulfideore,whichisprolificintheregion.
ObtainingapermitfornewroastercapacityinNevadaandthesurroundingregionisextremelydifficult
andtimeconsumingduetoenvironmentalconcerns.Nonewroastershavebeenpermittedinthepast
12years,andnonearecurrentlyproposedorinthefeasibilitystage.
8/3/2019 YNG the Drama is About to End November 27 2011
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Onecanarguethatitdoesntmatterwhatitcoststobuildtheroaster.Whatmattersiswhetherthereis
abuyer for itandhowmuchsuchabuyercouldafford topay for it.The twomost logicalbuyersare
NewmontandBarrick.
Newmont and Barrickmaybe interested in the facilitybecauseof the reasons that I listed before
YukonNevadas
roaster
is
one
of
only
three
roasters
in
Nevada
with
spare
capacity.
Because
the
permittingofnewroastercapacityinNevadaandthesurroundingregionisextremelydifficultandtime
consuming,bothof these companiesareusing their roasters toprocessonly the highestqualityore
(0.40to0.50ouncesperton)andarestockpilingthelowerqualityore. Forexample,Newmonthas53
milliontonsoforewithagradeoflessthan0.10ouncespertonsittingidle.Thisisequivalenttoabout5
millionouncesofgold.Atthecurrentpriceofgold,thistranslatesintomorethan$8billion.IfNewmont
acquiredYukonNevadasroaster,theycouldprobablyprocesstheir53milliontonsfor$40pertonor$2
billion,pocketingtheremaining$6billion.
CouldNewmont afford topay$1billion forYukonNevada? I thinkeven if theypaid$2 billion, they
wouldmake
out
like
bandits.
Not
only
would
they
be
able
to
process
their
53
million
tons
of
ore
and
pocket$6billion,theywouldalsogetaccessto3.5millionouncesofYukonNevadasgoldintheground.
InthehandsofaproducerlikeNewmont,theseounceswouldprobablybeworth$700million,or$200
perounce,insteadofmyestimateof$105million,or$30perounce.Then,theywouldputKetzaRiver
into production much more quickly because they have big pockets. At a production rate of 70,000
ouncesofgoldperyear,theycouldgetKetzaRivercashflowingatnearly$90millionperyear(70,000x
($1,650goldprice $400cashcost)=$88million).Tothem,KetzaRiver,producingatthisrate,wouldbe
worth about $500 million. Likewise, when YukonNevadaputs Ketza River into production, it will be
worthalmosttwiceasthecurrentmarketcap.
IfthevalueofYukonNevadasroasterissogreat,whywonttheytrytodoahostiletakeoversincethe
companyissellingforasong?
Thatsagoodquestion,andboththemanagementandChristopherEcclestoneweresurprisedthatthey
didnttry.Becausetheboardofdirectorsforesawthepotentialthreatofahostiletakeover,onOctober
4,2011theyapprovedapoisonpilltopreventitfromhappening.Asaresult,itwouldnowbedifficult
forNewmontorBarricktoattemptahostiletakeover.ChristopherEcclestonesaidthatitisnotunusual
forthebigminingcompaniestomissonincredibledeals.HecomicallystatesWhybuynowifyoucan
paymorelater?
ConsideringthatNewmontandBarrickalreadymissedthechanceforahostiletakeover,whydontthey
justtrytoofferareasonablepriceforYukonNevadanow?
Theywouldprobablynotbeable toconvinceYukonNevadatosell for$500millionor less,especially
now that Deutsche Bank funded the company with $179 million. Maybe before the financing, they
wouldhavehadachanceofgettingitforsuchasteal.Myspeculationisthattheywouldprobablyneed
tooffer$1.5billionor$1.50per share tobe taken seriously.But, this isunlikelybecausehow in the
8/3/2019 YNG the Drama is About to End November 27 2011
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world would they explain to their shareholders that they are buying an unknown publicly traded
company for fivetimesthepriceofthestockwhentheroasting facility isnotevenworkingproperly?
TheyaremorelikelytowaitforYukonNevadatocompletethewinterizationandrefurbishmentproject.
Of course, they will have to pay much more for it after it is working properly but as Christopher
Ecclestoneput itWhybuynow ifyoucanpaymore later?Assillyas thismaysound, if thestock
priceof
Yukon
Nevada
were
at
$2.50
per
share,
they
would
be
more
interested
because
it
is
much
easiertoexplaintoshareholderswhytheyarebuyingsomethingfor$3persharewhenitistradingfor
$2.5persharethanbuyingsomethingfor$1.50persharewhenitistradingfor$0.30pershare.
NowthatyouknowhowandwhyYukonNevadasroastercouldbeworth$1billion,theonlyquestion
that remains is whether the company will be able to fix the plant so that it operates properly and
doesntshutdownallthetime,thusreachingitsfullvalue.Obviously,themarketdoesnotbelievethat
YukonNevadawill fixtheplantevenafterraising$179million fromDeutscheBanktoaccomplishthis
exacttask.Inotherwords,themarketbelievesthatafterthrowingseriousmoneyattheplant,nothing
goodisgoingtocomeoutofit.
Itappearsthatsomeinsidersarenotagreeingwiththemarketandaretakingadvantageofthesituation
bybuying shareson the cheap.BetweenNovember21,2011andNovember23,2011, the following
transactionstookplace.
Forsome
investors,
Reicherts
purchase
of
100,000
shares,
Heinrichs
of
30,000,
and
de
Trentinians
purchaseof260,000maynotbeenough.Someinvestorsarenotonehundredpercentconvinceduntil
they see the insidersmortgaging theirhomesandborrowingagainst their kids college funds tobuy
shares.Forme,seeinginsidersbuysisgood,butnotarequirement.
Whyisthestockpriceaslowasitis?
8/3/2019 YNG the Drama is About to End November 27 2011
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Investorsareexhaustedfromtherollercoasterandaconstantflowofdisappointments.Inthemiddleof
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
Nevadareachedasteadystateofproductionatarateof150,000ouncesofgoldperyear,production
was supposed to increase. Also, after the third quarter of 2010 was profitable, everyone expected
profitabilityto
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
solvedbyenticingwarrantholderstoexerciseearly.Thisfellthrough.WhenDeutscheBankcame into
thepicture,newhopewasborn,butas the lawyersonbothsidesweredragging their feet, investors
keptgettingmoreimpatient,sendingthestockpricelowerbytheday.DeutscheBank,seeingthestock
priceplunge, renegotiated thepriceon theprivateplacement tomilkabetterdealoutofdesperate
YukonNevada.By the time thedealactually closed,everyonewas soexhausted that the stockprice
didntevenreact.Plus,recentlytwohedgefundsfacedredemptionsneededtogetoutquickly.
Oncethefinancingclosed,themanagementmadeanotherpromisetocompletethewinterizationand
refurbishmentoftheplant inSeptember2011.By lookingatthedateofwhenthesecondpartofthe
financing closed (August 15, 2011), it doesnt take much imagination to see that such ahuge capex
wouldprobablytakemorethansixweekstocompleteeventhoughtheyhadalreadystartedsomework
rightafter the firstpartof the financing for$59million closedonMay31,2011.Myattitude is that
thingsalwaystakethreetimesaslongasoriginallyanticipated.
HerewearetodayonNovember27,2011,andtheworkisstillnotcomplete.However,whenyoulisten
totheconferencecall(http://podcast.newswire.ca/media/yukonnevadagold20111116.mp3
)thattookplaceonNovember16,2011,youwill learnthatthework isprettymuchdone.Whatwas
slowing everything down was a delay in the manufacturing of the dryer, which is a very important
component.Thedryerwasshippedintwoparts.OnepartalreadyarrivedandisbeinginstalledasIam
writing,andthesecondpart is intransit.Because it iscomingfromMexico, itcouldbeheldupatthe
border, but it will arrive very soon if it has not already arrived. Once it finally gets there, the
managementwillshutdownthemill for10daysto install it,andthewinterizationandrefurbishment
willbeprettymuchcomplete.
The revised completion date is scheduled for midDecember 2011. Whether they will hit the new
deadlineexactlyon time ishard to say. It is alwayspossible that somethingelse can gowrong. It is
constructionwhatdoyouexpect? Ifyoueverremodeledahouse,youknow thatsomethingalways
goeswrong. Ican totally seemore investors sitting inwarmofficesstaringat theircomputer screens
havingafitifitisnotcompletedbyDecemberandsayinghowincompetentthemanagementis.
Whathappensafterthemillisworkingproperly?
8/3/2019 YNG the Drama is About to End November 27 2011
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Shortly before the company encountered all the recent problems with the plant malfunctioning, it
reachedapointwhereitwasoperatingatarunrateof150,000ouncesofgold.Afterthewinterization
andrefurbishmentiscomplete,thisisthenumberthatthemanagementisshootingfor,rightoutofthe
gate.Then,for2012,theyareanticipatingatotalproductionlevelof175,000ouncesofgold.Assuming
thepriceofgold is$1,650perounceandthecashcost is$789(Iwilladdresshow Icameupwiththis
numberlater),
this
translates
into
cash
flows
from
mining
operations
of
$150
million.
After
all
the
other
expenses,youarelookingat$108millioninoperatingincome.
Howaretheygoingtogetto150,000ouncesofgold?TheSmithMine iscurrentlycontributing1,000 tonsperday to themillatanaveragegradeof0.235
ouncesperton.TheSSX/SteerMineComplexwasrestartedrecentlyperapressreleaseonOctober3,
2011.
http://www.yukonnevadagold.com/s/NewsReleases.asp?ReportID=483004&_Type=News
Releases&_Title=YukonNevadaGoldCorp.StartsMiningatSSXSteerMineComplex
Atthebeginning,SSX/SteerMineComplexisonlycontributing300tonsperdayandwillrampupto800
tonsperdaybytheendof2011whenadditionalequipment isdeliveredtothesite.Bytheendofthe
firstquarterof2012,itwillbecontributing1,200tonsperday.Thegradeis0.189ouncesperton.
Smith 1,000tpdx0.235=235ouncesperdayx365days=85,775ouncesperyear
SSX/Steer 800tpdx0.189=151ouncesperdayx365days=55,188ouncesperyear
Total 85,775+55,188=140,963ouncesperyear
BetweentheSmithandSSX/Steermines,thecompanycanproduceapproximately141,000ouncesof
gold.However,asofJanuary2011,thecompanystockpiled902,000tonsoforeatanaveragegradeof
8/3/2019 YNG the Drama is About to End November 27 2011
11/16
0.073ouncespertonwhichequatesto65,900ouncesofgold.Addingthistotheouncesproducedfrom
theSmithandSSX/SteerMines, Iarriveat206,863 (140,963+65,900=206,863).Youcaneasilyhow
theycanreach150,000ouncesofgoldrightafterthemilliscompletelyfixedor175,000ouncesofgold
for the entire year in 2012. The managements projection of 175,000 for 2012 might be on the
conservativeside.
By2013,thecompanyisplanningtoproduceatarunrateof300,000ouncesofgoldperyear.Thisisnot
someunrealisticnumberpulledoutofthinair.Theproductionrateof300,000ouncesofgoldperyear
wasachievedbefore,from1987to2002.Thereisnoreasonwhytheycannotachieveitagainwiththe
renovatedroasterand3.5millionouncesofgold intheground.Plus,theyarecurrentlyupdatingtheir
43101andbelievethattheywillhaveanadditional3millionounces.
Toarriveattherunrateof300,000ouncesofgoldperyear,thecompanywillneedtoopenmoremines
toinadditiontotheSmithandSSX/Steermines.StarvationCanyon,thethirdundergroundmine,willbe
opened,contributing600 tonsperdayatanaveragegradepertonof0.22ounces.Thecompanywill
alsoreopenBurnBasin(openpitoperation) inthefourthquarterof2012,contributing2,000tonsper
day
at
an
average
grade
of
0.104.
SSX/Steer,
instead
of
contributing
800
tons
per
day,
will
contribute
1,200tonsperday.
Smith 1,000tpdx0.235=235x365=85,775
SSX/Steer 1,200tpdx0.189=227x365=82,782
Starvation 600tpdx0.220=132x365=48,180
BurnBasin 2,000tpdx0.104=208x365=75,920
Total 85,775 + 82,782 + 48,180 + 75,920 = 292,657 ounces per year (this is close to the
managementsestimateof300,000)
Tosustain
this
kind
of
production
profile
for
many
years,
the
company
will
need
to
reopen
additional
minesand/orexploremoreatStarvationCanyonandBurnBasinbecause these twoonlyhaveabout
twotothreemoreyearsofgoldinthegroundbeforetheywillbedepleted.SmithandSSX/Steermines
haveenoughinthegroundtolastformorethan10yearsofproduction.
CoststoProduceGold
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YukonNevadasprofitabilityoranyminersprofitability is the functionof thepriceof gold, the cash
costs of mining and processing, and the costs of running the entire company. During the last seven
quarters,YukonNevadageneratedapositivegrossprofitonlyonce,andsome investorsareconfused
why the company isnotable to generateprofitwhen thepriceof gold isashighas it is today.The
followingisthesummaryofthelastsevenquarters:
Asyoucansee,theonlypositivequarter in termsofgrossprofitwasachieved in the thirdquarterof
2010.Inordertounderstandwhythecompanyhasbeenlosingmoneyandisabouttoturnthecorner,it
isuseful
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/SteerMinesorfromothersourcessuchasbuyingorefromathirdparty.Thecostofprocessingore
isthecostofrunningitthroughtheroaster.
Thefollowingisthesamechartbutdisplayedincostsperouncesold.
I calculated thisbreakdownbyusingpartial informationprovidedby the company. It isbynomeans
totallyaccurate,butitisbetterthannothing.Forexample,duringthefirstquarterof2010,18,786tons
or4,200
ounces
were
delivered
from
Smith
Mine,
which
indicates
that
the
grade
was
0.22357
ounces
perton.Thecostpertonwasapproximately$95whichtranslates into$425perounce($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).Wecanconcludethatthedifferencebetween$1,480and$425or$1,055wasthe
costofprocessingore.
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Asyoucansee,thecostofminingperouncewasthesame$425forthefirst,second,andthirdquarters
of 2010. The cost of processing per ounce declined over the same three quarters. This happened
becausethecompanyincreasedproductionoverthesethreequarters.Thismakessensebecauseasyou
runmoreorethroughtheroaster,thecostperouncedeclinesbecausethemajorityoftheprocessing
costsarefixed.Therefore,bythethirdquarter,thecompanywasabletoachieveatotalcostof$1,161
perounce
which
was
lower
than
the
average
price
per
ounce
of
$1,252.
This
is
why
the
company
achievedapositivegrossprofit.
Unfortunately,duringthe fourthquarter2010,boththecostofminingandthecostofprocessingper
ounce increasedto$733and$1,018respectively.Thisdrovethetotalcostperounceto$1,751which
washigherthantheaveragepriceofgoldof$1,366perounce.Inordertounderstandwhythecostof
mining increased from $425 to $733 (a 72 percent increase) from the prior quarter, it is useful to
investigatewheretheoretofeedtheplantcamefrom.Thetotalof71,173tonsor14,919ounces(grade
0.20962ouncesperton)camefromtheSmithMine.Byusingthecostof$95perton,thisisequivalent
to$453perounce($95/0.20962).Becausethecostofminingforfourthquarterof2010was$733per
ounce,and
we
just
calculated
that
it
cost
the
company
$453
per
ounce
to
get
the
ore
from
the
Smith
Mine,therehadtobesomeothersourceoforethatwasmoreexpensivetodrivethecosthigher.The
company bought ore from Newmont for $198.53 per ton. Because the grade was 0.19598, this is
equivalent to$1,013perounce.For simplicitys sake, ifwejustaverage the twonumbers,$453and
$1,013,wearriveat$733perounce,whichisthecombinedcostofminingperounce.
Fromthiscalculation,we learnthatbuyingorefromNewmont increasesthecostofminingperounce.
Because the company continued to buy ore from Newmont in 2011, the cost of mining per ounce
continuedtobehighat$671inthefirstquarterof2011,$821inthesecondquarterof2011,and$857
in the third quarter of 2011. The reason why these costs trended higher from quarter to quarter is
becauseNewmontchargesYukonNevadamoreperounceas thepriceofgoldcontinues to increase.
Whataterribledeal!
Thissituationisabouttochange.StartinginJanuaryof2012,YukonNevadawillnolongerbebuyingore
from Newmont. Instead, it will be getting its own ore from the Smith Mine, the recently opened
SSX/Steer MineComplex, and stockpiles. In themost recent investorpresentation, the management
stated that thecostofbringingore fromSmithMine iscurrentlyaround$140per ton (thiswillcome
down to $80 to $90 per ton after YukonNevada stops utilizing a third party mining company the
contractexpires inthemiddleof2012).Fornow, Iwillkeepusing$140perton,whichtranslates into
$596perounce.Thecostofbriningore fromSSX/SteerMineComplex isapproximately$85per ton,
whichtranslatesinto$450perounce.Basedonthisinformation,IestimatethataftertheNewmontore
buyingdealiseliminatedandmoreoreisbroughtfromtheSSX/SteerMineComplex,thecostofmining
perouncewilldeclineto$523perounce.
If buying ore fromNewmont is such abad deal for YukonNevada,why do it in the first place? The
managementalwaystreateditasatemporarysolutionuntilthecompanysownorecouldreplaceit.In
theshortterm,theywerehopingthatthe increase inproductionwould lowertheprocessingcostper
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ounce because as mentioned before, the more ore that is run through roaster, the cheaper it is to
processperounce.Letsseehowsuccessfulthisstrategywas.
In the fourth quarter of 2010, after getting additional ore from Newmont, the processing costs per
ounceincreasedto$1,018.Then,bythefirstquarterof2011,theyshotupto$1,739,sendingtheentire
costperounceto$2,410.Youcantpossiblymakemoneywhenitcostsyou$2,410toproduceanounce
ofgoldwhile thepriceofgold isbelow$2,000perounce.Obviously, thestrategy togetmoreore to
decreasetheprocessingcostsperouncefailed.Actually,boththeprocessingcostperounceandmining
costperounceincreased,whichistheworstsituationyoucanbein.
Thereasonwhytheprocessingcostswereupwasbecausethecurrentroaster isold,breaksdownall
thetime,andeatsuptremendousamountsofenergy.Theonlywaytoaddressthisistofix itwhich is
exactlywhatthecompanyhasbeenworkingonafterraising$179millionfromDeutscheBank.
Now,letslookatmyestimateoftheprocessingcostsperounceafteralltheworkiscomplete.During
the fourthquarterof2010,when themillwasoperatingata rateof1,000 tonsperdayandwasnt
breaking down as much, the processing costs per ounce were $736. If I was totally ridiculous and
assumedthatthenewlyrefurbishedroasterwillnot improveefficiencyatallfromthis level,and Iuse
the$736perounceastheprocessingcostperounce,YukonNevadawillbeprofitable.Afteraddingmy
previouslycalculated
mining
costs
of
$523
per
ounce
to
the
processing
costs
of
$736
per
ounce,
we
get
atotalcostperounceof$1,259.Consideringthatthepriceofgoldis$1,650perounce,YukonNevada
willbemaking$391perounce.Ataproductionrateof150,000ouncesofgold,thistranslatesinto$58
millioningrossprofit.
However, the roasterwillbe runningata rateof4,000 tonsperday,not1,000 tonsperday,which
means that the processing costs will be lower than $736 per ounce. Also, after spending money to
improvetheplant,itsperformanceissuretoimprove.Iwastoldthattheroasterwillbeabletoprocess
orefor$40perton.Ifweuseagradeof0.15ouncesperton,thistranslatesinto$266perounce,which
ismuchcheaperthan$736perounce.
Basedonmyestimates,thecombinationofminingandprocessingcostsperouncewillequal$789per
ounce ($523 + $266). The management estimates $785 per ounce, so I am close. How will this all
translateintoearnings?
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Considering
the
current
market
capitalization
is
$300
million,
you
are
buying
Yukon
Nevada
for
three
times theprojected2012earnings.Bringingproductionto175,000ouncesofgoldperyear isjustthe
firststep.Bytheendof2013,themanagementisplanningtoincreasetheproductionto300,000ounces
ofgold,whichiswhatithistoricallyproducedbetween1987and2002.Iusedthecostof$789perounce
eventhoughby2013,themanagement isplanningto lowerthesecostsevenfurtherbyopeningmore
minesandtakingtheminingatSmithMineinhouse.Ifandwhentheylowerthecosts,itwillbeanice
bonus.Fornow,Iwillstickwith$789.
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ConclusionAssumingthatYukonNevadaachievesaproductiongoalof300,000ouncesofgoldbythebeginningof
2013, itwillbe set to generatemore than$216million inopearing income.Applyinga conservative
multipleof7getsyouto$1.50pershare,whichisafivebaggerfromnow.
RisksIbelievethatthemajorityofriskhasbeen liftedafterthecompanyraised$179millionfromDeutsche
Bank for the winterization and refurbishment of the facility. Obviously, there still remains more
execution risk. However, YukonNevadas problems came from the malfunctioning plant, not from
metallurgyoralackofresourcesintheground.Malfunctioningplantisfixablewithmoney.Therealsois
ariskthatthemoneyraisedwillnotbeenough.Consideringthattheyarealmostdone,Idoubtthatthey
willneedto raisemoremoney for thewinterizationandrefurbishmentof theplant.But iftheydo, it
shouldntbemuch.
Also,anotherrisk isthepriceofgold. Icantreallyhelpyouhere.Ifyouthinkthatthepriceofgold is
abouttocrash,thenyoushouldobviouslystayawayfromthiscompany.
Ithinkthatthebiggestriskofall isother investors.Sofar,theyhaveacted impatientlyandas ifthey
know very little about the company. There is nothing that will stop them from continuing to act
foolishly.Therefore,ifyouchoosetoinvestinthiscompany,justknowthatyouwillneedtobuckleupor
youwillbethrownoffthehorsebytheinsanevolatilitycreatedbyotherinvestors.
VideowiththeCEO
http://www.youtube.com/watch?v=E5ohtXv9pvM