Nevada Gold & Casinos, Inc. (UWN, $5.70 on the AMEX) is an emerging owner and operator of Casinos that is trading at almost a 60% discount to its sum of the parts valuation, which I believe is about $13.00 per share. The company has recently hired two senior management professionals from Mohegan Sun, arguably one of the best run Indian Casinos in the United States.  The Company is in talks to divest and acquire properties that will present a clearer picture to Wall Street and help eliminate the discount associated with the company’s old business model as a financing centric company versus today’s operator model.  Since its financing days, the Company has accumulated numerous gaming investments which it now operates.  It also has several non-core investments which it is in the process of divesting. The valuation table below helps to detail my interest in the stock.

 

 

 

 

Below is a list of its principal investments, each of which will be discussed in detail later in this note.

 

Blackhawk: UWN owns 43% of a partnership, and receives its respective share of the net income, that is operated by Isle of Capri (ISLE) in Blackhawk, Colorado, which is the closest gaming facility to Denver, Colorado.

American Racing: UWN owns 40% of and operates this partnership, which controls two racinos in upstate New York.  They are Tioga Downs (Binghamton/Elmira) and Vernon Downs (Syracuse). 

Colorado Grande Casino in Cripple Creek, Colorado is 100% owned and operated by UWN

 

River Rock in Sonoma, California, currently contributes to earnings (about $1.9 million per quarter) and is the closest (about 1.5 hour drive) gaming facility to San Francisco.

La Jolla (San Diego) due to open July of ‘07

Buena Vista (Sacramento) due to open summer of ‘08

Route 66 casino was an Indian project in which UWN had a financial dispute with its development partner. Following years of litigation, UWN has a jury award of $8.3MM from this dispute.  The judge is expected to rule on this award in the very near future.

 

30% of a Pizza Hut franchisee in Brazil (worth about $2.5MM)

50% of Sunrise Land and Mineral (300 acres of mining land in California and 16,300 acres of leased mining land in Nevada)

Goldfield Resources (9,000 acres of mining land in Nevada)

Gold Mountain Development (240 acres of land near Black Hawk, Colorado)

Muskogee Creek (Tulsa) due to open late ‘07

Legal judgment of $8.3 MM on Route 66 Casino development

 

 

 

The Company has come out publicly and said that it plans to clean up this complicated structure by selling off non-core assets, and by finding a tax-advantaged way of monetizing their investment in Isle of Capri Black Hawk.  I believe that this will un-complicate the story and get people to focus on the underlying value and growth potential in the remaining assets.

 

UWN has also disclosed that it intends to sign management contracts under a consulting format with some of the various 400 Indian gaming operators to help them improve their casinos’ performance.  I believe that while this new concept is untested, it represents additional upside to the story that is unquantifiable, but very likely due to new management’s success operating the most successful Indian gaming property ever, Mohegan Sun.  The following write up will detail each asset and my rationale for its valuation.  I will also detail the inherent risks and opportunities for each asset as I see them.

 

 

ISLE OF CAPRI BLACKHAWK – (recently expanded parking capacity)  Is a partnership run by Isle of Capri (ISLE) that operates the Black Hawk and Central Station casinos.  These properties are the closest gaming facilities to Denver, Colorado.  During calendar 2005 the property suffered from huge disruption due two factors.  First, the properties were expanded to provide substantial additional parking (now at approximately 3,000 total spaces).  Historically, the properties had to turn away potential customers due to the lack of parking.  They added an additional 350 slots (2,432 total gaming positions), 160 hotel rooms (404 total rooms), 8,500 square foot restaurant and a covered walkway between the two properties.  Unfortunately, just as the new road and additions opened there was a rock slide (Blackhawk is a canyon town in the mountains of Colorado) that closed the main road to the market.  The state of Colorado cleared the road and the property is operating normally.  The properties are now starting to show the results of these improvements.  The chart below shows the revenues and EBITDA for the last eight quarters and my projections for the next four quarters.

 

 

 

 

 

 

Nevada Gold owns a 43% minority stake in this property.  The most likely buyer is ISLE, since they operate the property and have a right of first refusal.  ISLE’s stock trades at approximately 8x run rate EBITDA.  Assuming that ISLE is willing to pay its own multiple for this property, which is growing at above average rates for a casino, than UWN’s stake is worth about $117 million ((($60 MM EBITDA X 8) - $208 MM Net Debt) X 43%) or $8.83 per share on a pretax basis.  This is inline with analyst estimates of its value.  Since UWN has publicly stated that it would use these proceeds to buy another casino, it can defer the capital gain indefinitely under section 1031 of the tax code.

 

AMERICAN RACING – Is a 40% owned partnership with racing entrepreneur Jeff Gural (20%), Trackpower (20%) and the Oneida Indian Tribe (20%).  It operates the Tioga Downs and Vernon Downs racetracks in upstate New York.  Tioga’s market encompasses 400,000 people with little opportunity to spend their entertainment dollars elsewhere in the immediate area.  It opened its slot parlor with 750 VLT’s in early July 2006.  Win per slot per day is currently running at over $190 (management’s projection was for $174), even though they haven’t begun any marketing programs.  The property also has a restaurant and racing book.  This property and its sister track are being operated by the person who ran Wheeling Island in West Virginia, which did over $220 win/day and over $200 million in revenue with poorer demographics.  I have recently visited this property and came away impressed by the build-out. 

 

Vernon Downs is located east of Syracuse, New York (Syracuse/Utica/Rome markets) and will be competing with the Indian casino known as Turning Stone.  It will start racing in September and slot gaming in October/November of this year.  It will have about 800 slots at an estimated win per day of $165 (management’s stated guess), 175 hotel rooms and dining and entertainment facilities.  I have heard estimates that Turning Stone generates over $230 win per day on their slots.  One competitive advantage of this property is that it serves alcohol, while its competitor (Turning Stone) does not.  Vernon’s market also encompasses approximately 400,000 people.  Another potential source of customers are the over 1,000 Turning Stone employees who are forbidden from gaming at their employer’s property.

 

New York State taxes gross VLT (Video Lottery Terminal) revenues at 68% and rebates 8% back in the form of marketing dollars.  The deal with the Horsemen’s Association requires 8% - 9% of gross revenues, thus leaving 23% of gross revenues to take care of all non-marketing expenses.  However, the deal with New York State requires the state to pay for all slot related capital expenditures and operating expenses.  I believe based on management’s recent conference call that the EBITDA margin for these properties should run at about 10% to 12% of gross slot revenues plus whatever other margin can be earned on harness racing, dining, entertainment and its race book.

 

For the sake of projecting results, I have assumed that all other operations other than slots are breakeven.  I believe that this is conservative based on the ability to offer multiple forms of entertainment (concerts and dining) and the possibility of drawing customers to the race book both on-site and on-line.  I have also loaded the senior management expense for both properties into Tioga Downs for convenience.

 

 

Valuing UWN’s investment is relatively easy if you are comfortable with the EBITDA projections, since there are a number of publicly traded Racinos.  The two closest comp’s would be Dover Downs (DDE, 10.2x EBITDA) and MTR Gaming (MNTG, 8.3x EBITDA).  Using MNTG due to its smaller size yields a value of $9.1 million for UWN’s management fee and $36.0 million (40% X $11.2 MM EBITDA X 8) for UWN’s pro-rata share of the EBITDA post management fee.  Deducting UWN’s $14 million pro-rata share of the partnership’s $70 million in debt yields a net value of $22.0 million, which is more than twice what UWN paid for the investment late last year.  See table below:

 

 

 

RIVER ROCK - Is an Indian Casino, which is located in Sonoma, California. It is the closest gaming property to San Francisco and UWN receives a 20% share of EBITDA until May 31, 2008.  The property has been star crossed since it opened in June of 2003.  It has never received its liquor license even though it sits in the heart of wine country.  The partnership has won every court battle, but the license still has not been granted.  The projected numbers assume that the license remains un-granted.  The second and more vexing problem occurred when a bridge into the property was damaged during a storm.  I assume that the bridge reopens in February of 2007, but don’t give the partnership much additional credit for it.  Based on the assumed revenue stream of $17.1 million (shown below), I value UWN’s investment at $15.9 million using a 6% discount rate due to the relative certainty of the cash flow stream.

 

 

 

THE COLORADO GRANDE – CRIPPLE CREEK – In April of 2005, UWN acquired this property from its partnership with Isle of Capri.  The property was bought for $6.5 million and $2 million was spent to improve its facilities and gaming equipment.  UWN has begun to market the property and within the next 12 months the property should start to show what it is capable of.  I believe there is about $3.5 million of debt associated with this property.   The Colorado Grande services the Colorado Springs market with approximately 200 slot machines in an “intimate” setting.  The property has what is considered a fine restaurant for that market.  UWN paid approximately 6x EBITDA for a property that was on its way down.  Based on current trends management has come out publicly and said they expect the property to generate EBITDA of $1.6 million for this fiscal year.  Using this estimate with a 6x multiple yields a value of $9.6 million.  The property has about $3 million of debt by my estimate and thus is worth $6.6 of net equity value.

LA JOLLA BAND OF LUISENO INDIANS - In July of 2007 this Indian Gaming property is expected to open and service the San Diego market.  It will have 349 slots, 8 table games and restaurant facilities.  UWN will receive 23% of Net Operating Income (EBIT) for a five year period.  Management has said that this property will do roughly $13 million in EBIT once it is up an running in a normal fashion, thus yielding an ultimate fee of $3MM per year.  For valuation purposes I use a 15% discount rate for valuing the cash flow streams due to their somewhat uncertain nature.  This yields a net value of $7.4 million as shown below for the calendar year cash flows.

 

 

BUENA VISTA DEVELOPMENT COMPANY - This company is developing a Sacramento area Indian Casino and will receive 25% of net income from the operation of this property.  UWN currently will receive 30% of this Company, however it has options to go up to 40% if the development is further delayed.  I believe the actual percentage will be 35% based on current estimates for its opening.  This property will have 2,000 slots and 80 table games to service the Sacramento/Stockton market.  Normal win per day per slot is well north of $300 in this area and should help the company generate $300 million revenue per year once it is up and fully running.  There is a $14.8 million receivable from this partnership that UWN has said may be repaid by FYE 2007.   The property is scheduled to go live in the summer of 2008.  Using a 15% discount rate yields a present value for the fee to UWN of $21.4 million.  See the table below:

 

OTHER ASSETS - UWN has two other assets that have no connection to gaming.  The first consists of land held mostly in Nevada that is being assessed for its potential to produce gold.  The Company is currently evaluating its potential.  I value this land at zero, but it does have option value if gold is discovered.  UWN also owns a 34% interest in a chain of Pizza Huts in Brazil.  The Company has publicly said it is looking sell the stake.  I think if they could receive a few million dollars for it they would be happy.  I use a $2.5 million value, but it is inconsequential to the valuation.

 

UWN has said publicly that it expects to win contracts from some of the over 400 Indian gaming facilities to help manage and improve their properties.  They believe that their background running the largest and most successful Indian property, Mohegan Sun, will enable them to sell this service.  It is not possible to quantify the value of this potential cash flow stream at this date, however it should offset any inaccuracies in forecasting future cash flows from the Indian properties under contract.

 

UWN has won a legal judgment against a former partner in the financing of the Route 66 casino in New Mexico.  A judge is due to rule on this award in the very near future.  The judgment was in UWN’s favor to the tune of $8.3 million.  The losing party, the Gillmann Group, should be able to pay the judgment, since it has sold its stake in this Company for $12 million. 

 

Finally, UWN has a contract to develop and manage the Muscogee Creek Tribe’s new Tulsa, Oklahoma property.  It is due to open sometime in late 2007; however UWN’s status with respect to this project is tenuous due to the Creek Tribe’s May 25, 2006 letter declaring that UWN had breached the agreement.  I have therefore used a value of $0 for this investment.  This property will have approximately 3,000 slots, 30 table games and multiple food and retail outlets.  If UWN’s contract is voided they will take a small non-cash write-off.