There is something eternal, beautiful and innate to the human psyche when it comes to gold and silver. It’s been a store of wealth forever and with the massive manipulation of the monetary system by central bankers, you have to wonder when that bill is coming due. No doubt gold and silver will hold some value but like everyone else, I have no precise idea of what that is. As I sit staring at the 10 oz .999 silver bar paperweight in front of me, I was thinking about how much it has declined in value. In fact I started to order another one as it is quite gorgeous and quite cheap now. I was even thinking about ordering a gold one but I thought better about spending $14,000 on a paperweight. 10 ounces of pure gold would cost roughly about that at $1400 per ounce. That’s just too much money to trust lying around on my desk. Besides, I think gold could go lower. Somewhere in my head I have a vision of gold cracking $1000 and silver bouncing around at $15-18 per ounce. Who knows if it will ever get there? I certainly don’t.
But then I noticed some large insider buys in a couple of companies that mine the metals. As I looked into it the drop of the miners’ stocks has been more precipitous than even the underlying precious metals. Perhaps they are already reflecting these prices floating around in my head. There is no way to know but based on the 10K’s I read they can both make money even at those draconian price points. And they have pretty darn good financials.
Allied Nevada Gold Corp., a gold and silver producer, focuses on the mining, development, and exploration of properties in Nevada . The companys principal products include unrefined gold and silver bars. It operates the Hycroft Mine, an open pit gold and silver heap leach operation located to the west of Winnemucca, Nevada. The company also has six properties, which include Maverick Springs, Mountain View, Hasbrouck, Three Hills, Wildcat, and Pony Creek/Elliot Dome. In addition, the company has approximately 90 other exploration properties. Allied Nevada Gold Corp. was incorporated in 2006 and is headquartered in Reno, Nevada.
ANV recently completed a secondary offering in which it sold $150 million worth of stock at $10.75 per share. ANV Allied Nevada CEO Buchan bought $2.2 million dollars worth at an average price of $10.75 on 5-17-13. That increased his holdings by 9%. The stock closed at $7.70 today so that was not a lot of fun for those bag holders. The Company expects the net proceeds of this offering will be approximately $141,700,000after deducting underwriting commissions and estimated expenses of the offering payable by us. They intend to use the net proceeds of this offering to fund capital expenditures for our Hycroft Mine expansion project and for general corporate purposes. to the prospectus their adjusted cash cost of gold sold was $638 ounce. ANV expects to sell approximately 225,000 to 250,000 ounces of gold and 1.5 million to 1.8 million ounces of silver.
The number of shares outstanding after this deal will be 103,887,966. At todays price of $7.75 it puts the Company’s market cap at $895.13 million. As of March 31, the Company had total liabilities of $689 million. That puts its enterprise value at $976 million. As of December 31, 2012, ANV had reported a proven and probable mineral reserve at the Hycroft Mine of 11.9 million ounces of gold and 509.6 million ounces of silver. In 2012, the Hycroft Mine produced 136,930 ounces of gold and 794,097 ounces of silver. Just doing the back of the napkin math with $1400 gold and $20 silver around $16.6 billion in gold and $15.8 million in silver. Based on their costs of $628 per ounce gold, that makes the value of the gold worth more than $9 billion. That’s more than nine times what the stock is trading for.
Hecla Mining HL is the other name we have seen some buying in. Hecla Mining Company, together with its subsidiaries, discovers, acquires, develops, produces, and markets precious and base metals worldwide. he company owns 100% interests in the Greens Creek unit located on Admiralty Island, near Juneau, Alaska; and the Lucky Friday unit located in northern Idaho. Hecla Mining Company was founded in 1891 and is based in Coeur dAlene, Idaho. This is a more complicated situation. The CEO Phillips Baker purchased 150,000 shares at $3.19 on 5-14-13. HL has had some issues for some time due to its problems with the Lucky Friday silver mine in Idaho which has been shut down since 2010. When other mining stocks rallied or held their own, HL did not participate. It appears though that the Lucky Friday problems are behind it now. It offers unrefined gold and silver bullion bars to precious metals traders; and lead, zinc, and bulk concentrates to custom smelters.
At December 31, 2012, the book value of HL’s property, plant, equipment and mineral interests, net of accumulated depreciation, was approximately $996.7 million . Their market cap and enterprise value as of March 31, 2013 are listed are $963 million and $758 million respectively. On April 16, 2008, Hecla completed the acquisition of all of the equity of two Rio Tinto subsidiaries holding a 70.3% interest in the Greens Creek mine for approximately $758.5 million. Mostly a silver mine, Green Creek has 94 million proved ounces of silver reserve or at today’s prices about $1.9 billion dollars with silver at $20 ounce. Considering the cost of getting it out of the ground and the fact that silver is higher in price today than in 2008, it looks like a reasonable price but nothing like the discount seen in Allied Nevada’s stock.
HL might be more about returning the Lucky Friday mine to full production during 2013 than the price of silver dropping to three-year lows. Limited production recommenced at Lucky Friday in the first quarter of 2013 after the temporary suspension of operations in December 2011. Full production levels by are expected to return by approximately mid-2013. Lucky Silver is estimated to have 54.4 million ounces of proved silver reserves.
The financial terms of settlement of the Coeur d’Alene Basin environmental litigation and other claims may materially impact their cash resources and our access to additional financing. The bulk of this payment, approximately $55.5 million by August 2014, appears to be coming from in the money exercise of warrants. If the warrants are not exercised the Company could use a lot of its cash up making good on the obligation.
These are two large mining companies that we own. We purchased ANV today and will probably buy more. We initiated a position in HL a few days ago and added to it today. There is a certain herd-like feeling about the sell-off in gold and silver. I’ve been around long enough to know margin liquidation when I see it. I expect both metals to rally soon although longer term, who knows, except that I can say with certainty that gold and silver will capture eyeballs long after Google and Apple are forgotten. It might just be time for the miners to glisten.
I talked to the CFO of ANV yesterday to try and improve on my back of the napkin calculations. According to Steve Jones, ANV’s all in cost of gold is about $850-900. Silver is basically a by product of mining gold so there is some upside there to my calculations. 509 million of proven silver at $20 silver is close to $10 billion just in silver.
Apparently the cost of mining the silver is zero as long as they are mining for gold. So let’s assume that the long term price of gold is $1200 not $1400 as there seems to be too much marginal new production available and since gold never gets consumed, i expect the price to drop.
At 900 cost and $1200 selling price and 11.9 million ounces of proved reserves yield $3.57 billion. Add to that the by product of silver $10 billion gets you to $13.57 billion.
Just discounting that by 10% required ROR gets us to a NPV with a 7 yr. life of a $6.96 billion. Basically I took the potential profit of the reserves (difference between cost of getting the precious metals out of the ground and $1200 gold and $20 long term selling price. Of course you are not going to get it out all at once but let’s say that’s the value of what you get after 7 years of work just piling it up. Then take the rate of return required of 10% and discount that $13.57 billion into today’s dollars and you come up with $6.96 billion. As of 3-31-13 ANV had an enterprise value Market cap plus debt, preferred, less cash of $384.8 million post offering puts an enterprise value of about $970 million. This is what in theory someone could buy the company for at today’s market price. Given that the NPV is 7 times that, it’s hard to imagine ANV staying public for long. My recommendation is to arbitrage the whole company. If possible sell the entire proven reserves in the future market, then sit back and mine the rock. Once you have proven that you can more or less run the mine as you say you can, just flip the company. If you don’t want to sell it or can’t, just sit back and watch your dividends flow in.
So Tracy at ANV and Steve helped me better understand my calculations and I have overstated the case. The future profits of silver are already factored into the all in cost of $850-900. Even so ANV is worth quite a bit more than it’s enterprise value. How much more? That number is probably closer to an enterprise value of $2.1 billion. I think ANV can double this year in price to around $14-15 if they can show the market they can execute on the mine and gold prices stabilize. Longer term out it might be worth a lot more as they have good leverage to the price of gold. Their break even price of production is $968 per ounce.