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Nevada Gold & Casinos (NYSEMKT:UWN)

F2Q08 Earnings Call

December 10, 2007 9:00 am ET

Executives

Robert B. Sturges - Chief Executive Officer, Director

John Arnesen - President, Chief Operating Officer

James J. Kohn - Chief Financial Officer, Senior VicePresident, Treasurer

Analysts

Michael Friedman - Noble Financial

Evan Greenberg - Meadowbrook Capital Management

Lawrence Klatzkin - Jefferies & Company

Nelson Obis - Winfield Capital

Operator

Good day, everyone and welcome to the Nevada Gold & Casinos Incorporatedsecond quarter 2008 conference call. Today’s call is being recorded. Foropening remarks and introductions, I would like to turn the call over to JimKohn, President and Chief Executive Officer. Please go ahead, Mr. Kohn.

James J. Kohn

Okay. First off, I’d like to correct my title -- I am theChief Financial Officer unless the Operator wants to give me a promotion, whichI would gladly accept. Anyway, thank you, Operator. Good morning, everyone andwelcome to the company’s second quarter 2008 conference call. With me today isBob Sturges, our Chief Executive Officer; and John Arnesen, our President andChief Operating Officer.

A webcast of today’s call will be archived on the company’swebsite at nevadagold.com. If you have not already received a copy of our pressrelease, which was released Friday, you can review it on our website,www.nevadagold.com.

Before we begin, I would like to remind everyone that partof today’s call will include forward-looking statements. These statements arenot guarantees of the future performance and therefore undue reliance shouldnot be placed on them. We refer all of you to the company’s filings with the SECfor a more detailed discussion of the risks that can impact the company’sfuture operating results and financial condition.

With that, I would like to turn the call over to BobSturges.

Robert B. Sturges

Good morning, everyone, and thank you, Jim. Thank you verymuch for joining us today. We are happy to have the opportunity to speak withyou about our second quarter results and our ongoing efforts to best positionthe company for the future.

We are speaking to you today from our new corporate officeshere in Houston that we moved to on November 15th and we are happy to reportthat we can now begin saving approximately $20,000 per month on our officerental expense.

We are pleased with our financial performance in the secondquarter, which Jim Kohn will detail in a few moments and which benefited fromimprovement at both Isle of Capri-Black Hawk and Cripple Creek, as well as fromongoing diligence on the expense front. That said, several of the most excitingdevelopments with respect to our strategic efforts occurred after the quarterended. These events include the announced sale of our 43% interest in Isle ofCapri-Black Hawk for $64.6 million; the restructuring of our credit facility;and our agreement to acquire the Horizon Casino Hotel in Vicksburg,Mississippi.

Given that we hosted an intra-quarter call to discuss thesesignificant events, I’ll not take a lot of time to recap each one here but I dothink it’s worthwhile to reiterate that taken together, these steps leaveNevada Gold exceptionally well-positioned for the future, with a portfolio ofprojects that’s much more closely aligned with our growth and operatingstrategy.

We recognize that there are still other assets that need tobe sold and we are working diligently to dispose of these assets and moveforward with a portfolio that will return value to our shareholders. In thatregard, we are still following up with some of the potential bidders that wehad for our 260 acres in Black Hawk, our Pizza Hut interest we hope to disposeof this quarter, and we are negotiating the possible sale of our Sunriseinvestment with our partner.

As far as our other, our most important assets, we remainvery excited about our agreement to purchase the Horizon Casino Hotel fromTropicana Entertainment for $35 million. This is slightly less than a six timestrailing 12 month EBITDA multiple which, by the way, compares very favorably tothe approximately eight times multiple we are selling our Isle interest for.

In addition to the purchase price, we intend to spendanother $10 million for capital improvements, operating cash, and transactioncosts.

As a reminder, this property is a 36,000 square footriverboat permanently moored in a coffer dam in Vicksburg, Mississippi. It’sattached to a 117-room hotel with meeting space, a buffet restaurant, a finedining restaurant, and a sports bar. We believe that this boat is veryadvantageously positioned in the market geographically and also that we’ll beable to bring our operating expertise to bear on improving the property’sperformance, particularly since this will be our largest and most importantoperating property. We look forward to keeping you apprised on this front.

I would now like to turn the call over John Arnesen tobriefly review the performance of our existing projects in the second quarter.

John Arnesen

Thanks, Bob. I would like to begin by reviewing the Isle ofCapri performance. As you know, we are very pleased to see continuedimprovement at this property during the second quarter, which enables us torecord $2 million in earnings from Isle of Capri-Black Hawk compared to $0.5million in the second quarter of last year.

EBITDA of the property was $12.2 million versus $8.3 millionlast year, a 47% year-over-year improvement. Although net revenues were flat,operating expenses pertaining to payroll and marketing were significantlyreduced due to technological enhancements and focused database markets.

Turning to Cripple Creek, we saw improvements in thisproperty’s performance. As well, for the second quarter we recorded EBITDA of288 compared to $118,000 in the second quarter of last year, a 144% increaseyear over year and year-to-date of $754,000 versus $278,000, 171% year-to-dateEBITDA improvement. And I must say, all indicators show improvements, includingdrop, win, and operating costs.

The new management team continues to implement theirmarketing and operational strategies and we are very pleased with the results,resulting in improved revenues, operating efficiencies, overall customerexperience, and the return of a significant number of former customers.

And with that, I’d like to turn it over to Jim for ourfinancial review.

James J. Kohn

Thank you, John. Looking at the second quarter results, ournet revenues came in at $1.9 million compared to $4.1 million a year ago. Thischange is largely impacted by the elimination of credit enhancement fees in thesecond quarter as a result of the River Rock Entertainment Authority buy-out offuture credit enhancement fees from Dry Creek Casino LLC, of which we owned 69%last year.

Operating expenses decreased to $3.6 million from $7.2million. The decrease is primarily the result of $3.5 million write-off ofnotes receivable and project development costs related to Native Americangaming projects during the three months ended October 29, 2006.

With regard to the items below the operating line, earningsfrom unconsolidated stated affiliates, including our equity earnings from Isleof Capri-Black Hawk and our share of American Racing operating expenses, werecorded $2 million in the second quarter of fiscal 2008 as our share of theIsle joint venture earnings compared to $0.5 million in the second quarter offiscal 2007.

As a reminder, the sale of American Racing was completed thispast June and therefore, we did not report any results pertaining to AmericanRacing during our second quarter this year, whereas last year’s resultsincluded a loss of $2.1 million from American Racing.

We will continue to report our equity and earnings of ourIsle of Capri-Black Hawk interest until such time as our shareholders approvethe transaction and we close with Isle. We anticipate the transaction to closeno later than the end of our fiscal year.

Our interest expense continues to decline as we pay off ournotes payable to the Isle of Capri for our 2005 acquisition of our CrippleCreek Colorado Grand property. In addition, this month we will pay off our debtpertaining to the furniture, fixture, and equipment at the Cripple Creekproperty, thus further reducing our debt and related interest expense. Thiswill leave us with our senior credit facility of $34.5 million, which maturitydate will be extended to June 30, 2010, once we close the Isle of Capritransaction. And once that transaction is completed, we will pay downapproximately $39 million of that debt, leaving us with a balance ofapproximately $15.5 million.

With that, I would like to turn the conversation back tobob.

Robert B. Sturges

Before we open it up to questions, I would just like toreiterate that we are very encouraged by our progress and in particular by ourexciting recent developments. Our financial and operating initiatives continueto bear fruit and we are excited to be moving forward with a portfolio ofprojects that’s better aligned with our strategic focus. We look forward toreporting to you on the Horizon Casino Hotel and we are pleased to have thefinancial flexibility we need not only to complete this acquisition but also topursue similarly compelling acquisition opportunities in the future.

I would like to add that since we announced our Vicksburgagreement, we have seen significant increase in our pipeline of potentialprojects. I have always felt that the first acquisition would be the mostchallenging and that it would create very positive momentum for us as we lookat additional acquisitions.

With that, I would like to now open the floor to questionsand ask if you could limit your questions to one area and then remain, returnto the queue so that everyone will have an opportunity to answer theirquestions in a timely manner. I’ll ask the operator to start the questions.Thank you very much.

Question-and-AnswerSession

Operator

(Operator Instructions) We will take our first question from MichaelFriedman at Noble Financial.

Michael Friedman -Noble Financial

Good morning. I wanted to focus in a little bit on the NewYork race tracks. You mentioned it earlier in your comments. It seems to besome of your former partners are publicly talking about some problems with theNew York race tracks. What obligations, if any, on the guarantees does NevadaGold currently have related to those race tracks?

James J. Kohn

Our responsibilities are very limited, if any at all. Atthis juncture, we still are supporting them from a general ledger accountingsystem. They are scheduled to wean themselves off of that at the end of thismonth. It will remain open for a few months as they close their audit year.

From an operational standpoint, that is all that we have froman involvement standpoint. From a financial standpoint, we do have a guaranteeof $11 million to vest in, which is fully guaranteed or indemnified by both ofthe partners that currently bought our interest.

So from that perspective, we believe we are fully coveredboth operationally and financially and have no responsibilities related to thatparticular property.

Michael Friedman -Noble Financial

Great. Thanks. I’ll jump back in the queue.

Operator

We’ll take our next question from Evan Greenberg atMeadowbrook Capital Management.

Evan Greenberg -Meadowbrook Capital Management

A couple of things; number one, I wanted to know if youbroke out the Cripple Creek performance in the quarterly report. It didn’t looklike it.

James J. Kohn

We do not segregate that information out, although one couldeasily identify it, since it is our only operating property at this point intime. All of the revenues down to the net revenue line are Cripple Creek andthe first four expense lines, which would be casino, food and beverage,marketing and advertising, and facility are all specifically related to theCripple Creek property.

Evan Greenberg -Meadowbrook Capital Management

Okay. All right, great. Number two question had to do withthe one-time write-down you took and it had to do with operating cash flow andEBITDA. It seemed like you pretty much -- the operating cash was about anegative $500,000 this quarter, somewhere around there. Is that the correctnumber?

James J. Kohn

I’m looking at the income statement. We did not have anywrite-offs this quarter. There were write-offs last year same quarter of $3.5million related to a Native American project, but there were none this year. Infact, this quarter we had a slight gain of just short of $19,000 on the sale ofour gold field resources, non-core asset.

As far as a cash flow standpoint, the cash flow foroperating activities actually show a negative $2 million this year versus lastyear, a -- I shouldn’t say a loss but a use of $2 million versus last year ause of $568,000.

The main differences in that particular section are -- I’llhave to go to the back but mainly related to -- bear with me a second. It’s inour Q. It’s just operating use of cash, be it related to the Isle of Capritransaction and our changes in the receivables and accounts payables. We’retrying to pay down our debt. We’re trying to pay down our operating expensesand get everything in order.

Operator

We’ll take our next question from Larry Klatzkin at Jefferies.

Lawrence Klatzkin -Jefferies & Company

A question about Vicksburg; just your acquisition, in lightof what’s going on there, I guess Ameristar is the dominant player in themarket. It’s doing a major acquisition. I guess the place next to it, the oldIsle of Capri, which is Diamond Jack’s, has now been renovated with newmanagers and there’s a new casino getting built on the other side of Vicksburg.I’m just wondering, in an increasingly competitive market, what do you guysplan to do with this property?

Robert B. Sturges

Well, we feel that this property has a geographic niche thatis significant, in that most of the market in Vicksburg comes from the Jacksonarea. Our calculations show that about 70% of the existing market, we have ageographic advantage in the sense of the traffic flowing down interstate 20.People pass by and are apparently passing by at a greater rate than we expectthem to be passing by once we take control of the property, but they pass byour exit, have another almost five miles to go to get to the competingproperties.

It’s the only downtown located property and at this point,our calculations show that on a fair share basis -- that is, if you take thetotal revenues and divide it by the number of gaming positions, the fair sharethat Vicksburg should have, they are only performing at 55% of their fair shareand I think that speaks to an opportunity to really grow that business in spiteof the fact that there’s going to be increasing competition and that the marketmay not be growing that rapidly. We see a real opportunity there to add.

And you know, it’s similar to the situation we findourselves in Cripple Creek, where we’ve been able to grow our market share,dramatically improve EBITDA results significantly year over year in a market that’sessentially been flat. So we are not -- we are not at all concerned. We thinkwe are going to perform quite significantly well at the Vicksburg property andimprove that EBITDA.

Lawrence Klatzkin -Jefferies & Company

Even with all the increasing competition that’s going on?

Robert B. Sturges

See, where the competition is coming is, as I said, down theroad and we think we’re going to give people a reason to turn off at the exitthat brings you to downtown Vicksburg, which is five miles earlier on theinterstate than the other places, and think that we will -- if we give them areason, and we’re going to improve that product. We’ve got $5 million to $6million that we expect to be spending on capital improvements and thisoperation, unlike Columbia Sussex, it’s going to have our full focus andattention.

Lawrence Klatzkin -Jefferies & Company

All right. Just sometimes downtown casinos are a littletougher because people tend to go home to the suburbs at the end of the day.

John Arnesen

You know, one of the things that we were excited aboutthere, we’ve had meetings with the mayor and he’s got a whole revitalizationprogram. We’ve walked the streets down there and we’re going to work on thelighting, the synchronization of the traffic lights to really make an impact onthat exit way.

But you’ve got a really vibrant convention center,relatively new; you have new theme parks -- I mean new parks going in, themilitary park there. That’s about 10 minutes from the property. You have two orthree other museums that are coming into the area so I think there’s a lot ofsynergy there and opportunities to create synergy between the property and theregion and as an entertainment venue that has a lot of other amenities anddrawing cards beside the property that are not really being utilized now thatwe think it’s an opportunity for us. We’re already setting the groundwork tocreate that synergy and we’ve got some plans in place to do so.

So we think there’s a significant opportunity if you pooleverything together.

Lawrence Klatzkin -Jefferies & Company

All right. Thank you, guys.

Operator

(Operator Instructions) We’ll go next to Dennis Forst atKeybanc.

Dennis Forst -Keybanc Capital Markets

Good morning. Can you just detail the math you did with yoursale of the Black Hawk minority interest at eight times cash flow? You got $65million for 43% and the cash flow on that property is about $50 million. Isthat -- are those numbers generally correct?

James J. Kohn

No, the EBITDA on that property is in the 40s -- mid-40s.And when you start going through the enterprise value calculation, you have tokeep in mind that there was about $198 million worth of debt on the property.So based upon the EBITDA that had -- actually was a little bit less than thaton the trailing 12-month period and with the debt that was involved in it, wehad a little bit over an eight times multiple based on a specific -- theinformation that we had at that point through September 2007.

Now as far as cash flow on it, I mean, that’s not how wecalculated it. We based it upon the EBITDA and an enterprise value.

Dennis Forst -Keybanc Capital Markets

Okay. All right. I’ll redo my math. Thanks.

Operator

We’ll take our next question from Nelson Obis at WinfieldCapital.

Nelson Obis -Winfield Capital

I’m just curious what the pro forma book value is ongoodwill after the sale.

James J. Kohn

Well, the goodwill on our books right now is related to theCripple Creek property. We have $5.4 million on our books as goodwill, almost5.5. That will remain on our books because it’s related to Cripple Creek but this will just be a sale transaction. Ifyou’re talking about the goodwill related to the acquisition of the horizon --

Nelson Obis -Winfield Capital

No, no, that -- I just wondered where the goodwill, thegoodwill associated with Black Hawk. So what would be the pro forma book valuethen assuming you --

James J. Kohn

After Vicksburg? After the Vicksburg acquisition, Nelson?

Nelson Obis -Winfield Capital

I don’t know if you can look that far ahead, but just afterthe sale.

James J. Kohn

After the sale of Isle of Capri?

Nelson Obis -Winfield Capital

Yeah.

James J. Kohn

As far as goodwill on our books?

Nelson Obis -Winfield Capital

The book value.

James J. Kohn

The book value of the company? Approximately $65 million,rather than -- we currently are running at $74 million, if that’s what youmean, total assets.

Nelson Obis -Winfield Capital

No, no, book value.

James J. Kohn

The net book value? The net book value will be -- well,we’ll have approximately $64.5 million of assets and about $15.5 million worthof debt, so the book value will net out to approximately $49 million.

Nelson Obis -Winfield Capital

As compared to where is it right now?

James J. Kohn

Right now it’s sitting at 16.

Nelson Obis -Winfield Capital

All right. Well, you got another shot, it looks like.Thanks.

Operator

At this time, we have no further questions. I would like toturn the conference back over to Bob Sturges for any additional or closingremarks.

Robert B. Sturges

Thanks everyone for participating in today’s call. We’ll belooking forward to providing all of you with continuing updates as we moveforward with our progress in growing our business. Thanks again to everyone forparticipating. Bye-bye.

Operator

Thank you. That does conclude today’s conference. You maydisconnect at this time.

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