Allied Nevada Gold (NYSEMKT:ANV) recently reported strong Q2 production data. The company increased its gold production by 51%, which is in line with the company's expansion plans at its Hycroft Mine. Specifically, the company reported gold production of 117,000 ounces in the first half versus 77,000 ounces in the same period of 2013. Silver production more than doubled to nearly 900,000 ounces, although the company's silver production contributes little to its revenue.
Since I last wrote about the company in November, the shares are essentially flat, while the gold price is up nearly 4%. However more importantly, the company has made progress in response to my concern. Recall that while I felt the company's Hycroft project was extremely valuable, the company's effective production costs were elevated due to its large debt position. It meant that the company couldn't make money at $1,300/oz. gold, and we saw that in the company's Q1 income data, which came in flat. This production growth is good, because it means the company has more cash-flow versus its interest obligations. The company has also paid down about $50 million worth of debt, which means that this is less of a burden on the company. With this being the case, and with the gold price higher and trending higher, I think the risk/reward is substantially more favorable now than it was in November.
However regardless of the company's production increase, keep in mind that its debt load continues to hurt the company's net income. Furthermore, a sizable decline in the gold price could put the company in the red, and if we see the $1,200/oz. support level broken, I think Allied Nevada could be in serious trouble. While I don't think it will go bankrupt, it will likely be forced to sell a stake in its Hycroft Project in a depressed market.
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