Agnico Eagle Mines (NYSE:AEM) and Yamana Gold (NYSE:AUY) agreed to purchase Osisko Mining Corporation on April 16th, 2014 valuing the Canadian miner at US$3.6 billion, or a little over 2x book value of $1.6 billion, or ~20% above the $3.1 billion after tax (5% discount rate) NPV of it's flag ship mine, Canadian Malartic. Goldcorp was outbid by Agnico Eagle and Yamana on the Osisko deal and is likely looking for another acquisition with similar characteristics. Allied Nevada Gold (NYSEMKT:ANV) is a bargain and will likely be purchased this year by either Goldcorp or another major gold producer.
Source: Hycroft Prefeasibility Study
Like Osisko, Allied Nevada has a single large operating property with large reserves (~20 million gold equivalent ounces). Allied Nevada's Hycroft mine has an after tax net present value of $1.7 billion (5% discount rate) at $1,300 gold and $21.66 silver, whereas Osisko's NPV was based on $1,350 gold. The biggest difference between Allied Nevada and Osisko is that most of Osisko's capital expenditures are behind it, whereas Allied Nevada still needs to spend $1.3 billion on capex before production reaches ~800,000 gold equivalent ounces a year. Currently with heap leach operations in place, Allied Nevada produces ~240,000 ounces of gold each year and generates ~100M cash from operations, but free cash flow is limited as interest payments and capital leases obligations eat away most of the cash. With such huge production and reserves, Allied Nevada is highly leveraged to gold prices.
Source: Hycroft Prefeasibility Study
Applying the same 2x book value metric in the Osisko deal to Allied Nevada's book value of $781M values the company at ~$15.6 a share, while applying the same premium to NPV values the company at ~$19.70 a share. These projections aren't exactly 1:1 comparisons, as Allied Nevada cannot complete it's planned mill expansion on its own, which is why it must either seek out a partner or be acquired. The Hycroft project also has more risk than the Osisko deal because potential cost overruns during construction are still possible, as everyone still remembers Barrick Gold's (NYSE:ABX) Pascua Lama disaster. Even if we discount these projections at 50% for potential cost overruns and risks involved, the share price today ($3.08 on May 08, 2014) is still deeply undervalued. Upon completion of the mill though Allied Nevada will become a low cost producer with adjusted cash costs of $404 throughout the life of the project and $550 throughout the life of the mine. The adjusted cash cost per ounce includes a silver credit assuming a $21.67 silver price for the life of the project. The recently released pre-feasibility study clears the path to reaching 800,000/oz annual production.
Why is Allied Nevada such a great takeover target? Like Osisko it has a single large operating mine with huge reserves and potential production. It's already producing 240,000 ounces of gold a year, but can scale to 800,000 oz after expansion. Like Canadian Malartic, Hycroft is located in a low political risk jurisdiction. It's a lot cheaper for majors to buy rather than build their own mines in the current environment, which is why Goldcorp tried to purchase Osisko mining in the first place. They still have the funds available for an acquisition and Allied Nevada looks like a great target. Allied Nevada absolutely needs a well capitalized partner to help them as they simply cannot fund the expansion on their own. Allied Nevada may not remain cheap long though.
With the company's stock trading at near $3, Allied appears "too good to be true", but just look at Detour Gold Corporation (OTCPK:DRGDF), the company's stock price ran up from a low of $2.75 to $12.00 in a matter of months (Jan 2014 -March 2014). Detour Gold was in the same boat as Allied Nevada. They had a huge operating mine with enormous resources and an undiscounted after tax NPV of $4.6B and remained unappreciated by the market. Detour Gold today has a market cap of ~$1.6B, and if Allied Nevada's Hycroft Mine was valued at the same undiscounted NPV to market cap ratio as Detour Gold, ANV would be $10.80 today. Why did Detour Gold dip so low before bouncing back up? Who knows. The market is a mystery sometimes. Detour Gold is also quite cheap relative to the Osisko deal and Allied Nevada is incredibly cheap compared to both Osisko and Detour Gold. As soon as sentiment changes or Allied Nevada finds a partner, things should start looking up.
So who would be Allied Nevada's most likely partner or acquirer? Goldcorp (NYSE:GG). Simply because they're the best capitalized major gold miner and already have a $2.0B undrawn revolving credit facility and a $1.25b acquisition facility. Allied Nevada isn't exactly a small pill to swallow, as an acquirer would assume ~$700M in liabilities, which rules out a lot of smaller miners. Agnico Eagle Mines and Yamana just bought Osisko Mining, so they're out. Barrick Gold may be a potential buyer, as Barrick needs to replace depleting reserves, especially if they decide to abandon their Pascua Lama project altogether. Barrick's massive Pascua Lama project has a NPV of $1.77B according to TD Securities and total capital expenditures of $9.5 billion. That's a lot of cash to dish out for a measly $2.8B return (at current gold prices), which is a 10.7% internal rate of return. Hycroft seems like a much better bet with a NPV of 1.7B and an internal rate of return of 26.5%. Newmont (NYSE:NEM) could afford to swallow up Allied Nevada as well, but the most likely suitor seems to be Goldcorp. Allied Nevada already started the process of finding a partner on Apr 22, 2014 by retaining Credit Suisse (USA) to contact interest parties, so it's just a matter of time until interested parties fight over this prized asset.
Disclosure: I am long ANV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long June and Sept calls as well as stock.
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