Description

Yukon-Nevada Gold (YNG)

Recommendation

I recommend buying shares of Yukon-Nevada Gold today as the company's recently completed recapitalization funds the company's significant production growth over the next four years. Yukon-Nevada is one of the cheapest producing junior gold miners creating an extremely attractive risk/reward.

Yukon-Nevada trades at $104/oz for the 3.8 million ounces at Jerritt Canyon and Ketza, significantly below comparable peers. New drilling could add as much as 3 million ounces to measured and indicated gold reserves by year end. YNG is ramping production over the next four years to 160k oz, 290k oz, 430k oz, 840k oz from 2011 to 2014, respectively vs. 2010 production of 65k oz. Cash cost per ounce of gold will be cut in half to approximately $500/oz in the next 12-18 months ultimately doubling cash flows on existing production. At current gold prices, YNG will have EBITDA in excess of $275 million in 2012. Moreover, YNG's Jarrett Canyon roasting facility (one of only 3 in the state of Nevada) has a replacement value in excess of $1bln.

The early exercise of 199 million of the company's warrants (especially the 140mm Orifer warrants) removes a significant overhang on the stock. The company's recent $59 million equity capital raise (through the early exercise of the Orifer warrants and the private placement with Deustche Bank) and the new $120 million gold forward sale facility with Deutsche Bank take all of the financing risk involved with the company's up-grade of the Jerritt Canyon Gold Project in Nevada.

With its financing issues fully resolved, the company's massive production ramp, increasing reserves, and significant cash flows could push the share price north of C$2.75/share within the next two years.

Description

YNG is a North American gold company focusing on exploration and developing assets located in Nevada, Yukon Territory and British Columbia. YNG's principal asset is the Jarrett Canyon mine located in Nevada.

Recapitalization

In March 2011, the company lowered the strike prices on its outstanding warrants in order to induce conversion and raise capital for the company's Jerritt Canyon up-grade project. Through mid-April 59 million warrant holders exercised their warrants raising $12.5 million. However, Orifer - the company's largest warrant holder - elected not to exercise its warrants due to liquidity issues on its part. YNG negociated an agreement with Orifer that allowed it to sell Orifer's 140.4 million warrants to third parties for nominal consideration contingent on the third party immediately exercizing the warrant. On May 24^th, the company announced that it had successfully placed all of those warrants with institutional shareholders (Deutsche Bank purchased 80 million warrants) raising $44.9 million. In addition, YNG announced a new $14.4 million private placement with Deutsche Bank (at C$0.43/unit consisting of one share and a C$0.55/share strike price warrant) and a letter of intent with Deutsche Bank for a $120 million Gold Forward sale facility. The ~$72 million in proceeds raised in the equity transactions fully funds the company's production ramp and removes any liquidity risk at the company.  

Valuation

At the moment, YNG trades at a significant discount to its peer group on the two principal evaluation tools used in the metal space. YNG trades at 1.4x my estimate of 2012 EBITDA vs. the gold company average of 10.2x. If YNG were to trade in line with their comp group, its share price would sextuple to roughly $2.75/share.   Moreover, on an enterprise value to ounce in the ground basis, YNG trades at C$104/oz a 50% discount to the comp group average. Note the acquisition of Fronteer by Newmont (latest Nevada gold transaction) transacted at over 5x where Yukon-Nevada Gold trades today. However, what isn't caught by the traditional $/oz of Au or cash flow models with gold companies is the $1bln roaster facility that YNG wholly owns. There are only 3 that exist within the region and due to new environmental laws, the probability of one being permitted and built today is slim to none. Large miners like Newmont and Barrick ship their low grade tonnage to YNG's roaster today due to the significant constraints on roasting capacity in the region. YNG's roaster makes it an attractive takeover target for the various different gold miners in Nevada.

Production

In 2010, Jerritt Canyon processed approximately 65k ounces from stockpiles, purchased ore, and mining operations. This year, the company plans to hit 160k ounces which is divided between 40k ounces of additional tons acquired from Newmont and increasing production on the underground portion of Jerritt Canyon.  However, 2012 is the turning point for Yukon-Nevada. They're ramping production to 290k ounces/yr (81% YoY increase) while increasing cash flows to north of C$275MM/yr at the current forward gold curve.  Put another way, the operating leverage on the business will decrease the cash cost by $500/oz on all production.

Ketza River production is forecasted to come on line in 2013.  YNG will spend exploration capital to grow the open-ended resource to north of 1mm ounces.

Resource and Reserves

Today the company has approximately 3.2mm oz of Reserves & Resources at Jerritt Canyon and Ketza River has a Resources estimate of approximately .7mm oz. Reserves estimates were calculated off of a $580 gold price by Messrs and the NI 43-101 Technical Report was prepared by SRK Consulting on April 16, 2008. Today Jerritt Canyon Reserves and Resources of 3.2mm only account for the gold that will be mined through the current mining operation.  By year end, Management has indicated that they plan on compiling the historic drilling data in addition to infill drilling  today's uncalculated resource for an additional mine. They potentially have a resource similar in size if not larger than the 3.2mm sitting at the underground operation today. Remodeling historical data with new infill drill results should double the size of the Jerritt Canyon gold deposit by year end. 

 Roasting Facility

YNG owns one of three (Newmont and Barrick own the other two) roasting facilities in Nevada which is the only economic method of processing refractory sulfide ore in the region.  Due to environmental concerns, a new roaster has not been permitted in 12 years.  However, YNG has the only permitted and operational roaster with spare capacity and they have used this asset as an additional revenue stream for the company. The quantity of low cost refractory sulfide ore in Nevada coupled with only three roasters that can process the ore, make for grand opportunities in acquiring accretive assets ready for production or a natural takeover candidate for Newmont or Barrick. 

Note: I'm happy to go into further detail on any of the topics discussed above

Catalyst