Allied Nevada Corp. (ANV) is on the riskier end of the gold mining company spectrum. At the time of this writing, only the Hycroft mine generated significant ores and revenues. Other exploratory properties in Nevada include Hasbrouck, Three Hills, Maverick Springs and quite a few more. In this respect, investing in ANV stock is much more of a classical property play than it is a stake in existing operations and earnings.
Investors should not jump into ANV simply because of its "growth" label and the recent gold price slump. Allied Nevada faces the following risks:
- Excessive debt liabilities
- Poor exploration results
- Persistently low gold and silver prices
- "Human factors" uncertainties such as:
- Failure to retain key employees or contractors
- Mismanagement, especially in regards to company expansion operations
Of these four major risks, gold and silver prices will mitigate or exasperate other problems more than anything else. Since Allied Nevada is on the small-cap side of the company valuation scale, its short-term prospects are most directly amplified by gold and silver price swings.
Between 2010 and 2012, Hycroft gold production increased 32 percent to a total of 136,930 ounces. Most of that production gain happened in 2012, with the 2011 gold production increase a meager 0.27 percent from 2010 levels. Silver production recorded a much more dramatic production increase: just shy of 240 percent in 2012 relative to 2010 levels. The following shows the amount of gold and silver sold compared to what was produced at a given year. All numbers are in ounces.
Ounces gold produced and relative percentage sold. 2010-2012
ANV has scaled down gold sales but still maintains increasing production. This is a wise move. Gold prices have been in a downtrend. It seems better to keep gold in inventory and wait for higher prices before selling. Silver production increased by a large amount, with sales at relatively stable levels. Though silver price movements generally match that of gold, fact is that the company does need income for operations and future plans. Financing such operations with debt, over and above Allied Nevada's already substantial debt holdings, seem unnecessarily risky.
Since sales and production are not independent year-to-year, the 101.82% silver sold is not an error. Unsold silver from previous year(s) made up the ounces sold over and above production values in 2010.
Financial Metrics - Debt and Goodwill
Recently, Allied Nevada took on substantial long-term debt. This is an ambitious move for a relatively small, young company. Considering the kinds of growth prospects ANV could experience, the debt burden may end up being little more than a bug on the windshield. Of course, that is if its other exploratory properties and any future joint ventures are, at least on average, successful.
Allied Nevada's balance sheet shows a growth spurt in Goodwill and Intangibles (GI) starting in FY 2011. I take this as a very bullish sign. As everywhere, established businesses and clients can be reluctant to deal with someone new and without much experience or reputation to their name. Thus, I find it rather bold and significant that ANV apparently feels confident enough to claim intangible assets to the tune of nearly $96M in FY 2012. Not bad for a young small-cap.
Investors might see some of the GI value justified through Allied Nevada's Jan. 9 news release stating that the company is ready to expand its operations to other exploratory properties. Generally, smaller companies are not in a position to put out hot air. By contrast, an established industry leader could claim everything is either going well, or is a bargain opportunity. Regardless of the truth of the matter, a blue-chip would typically have enough brand credibility to get away with such claims, at least in the short term. By contrast, companies like Allied Nevada have to manage their public relations and their claims of record more carefully. Of course, this is not to imply that whatever ANV management says should be taken as 100% reliable. Nevertheless, clear and verifiable statements like the press release referenced above should carry some weight.
Expansion is good news for stockholders only when it is done well. Financial liabilities, technical snags, poor exploration results and unexpectedly low gold/silver prices could substantially derail the company's prospects. Nevertheless, all things considered, I would rank ANV a Buy for three reasons:
- Rise of Goodwill and Intangibles
- Hints at Allied Nevada's increased prominence in the precious metals mining industry
- ANV's inherent volatility could make short-term trading profitable