Allied Nevada advances US$1.4B Hycroft plan

VANCOUVER — It’s been a tough year for producer Allied Nevada Gold (TSX: ANV; NYSE-MKT: ANV) as it has moved through lower-grade areas at its flagship Hycroft mine, 87 km west of Winnemucca, Nev. The company is hoping an ambitious US$1.4-billion expansion plan at the project can help boost its bottom line, but high debt and struggling equity markets will make a capital raise challenging.

On Oct. 15 Allied Nevada tabled a feasibility study of Hycroft that models two phases of  construction plan for the mill expansion. The plan is based on a 109,000-tonne-per-day mill for oxide, transition and sulphide ore, and heap leaching for lower-grade oxides and transition material. Mill construction would be achieved over phases of 54,400 tonnes per day.

Projected capital costs have jumped US$66 million since a prefeasibility study completed in May, with the increase largely attributed to a 345-kilovolt line to ensure reliable power availability; additional conveyors and crushed ore storage for the crushing, pre-crush and pebble crushing circuits; and increased sizing for the thickener tanks.

The process flow sheet has stayed the same through engineering advancements, and considers a plant capable of processing three streams: whole ore; atmospheric alkaline oxidation (AAO); and AAO with tails leach. A number of oxidation pre-treatment technologies were evaluated before AAO was picked based on the reactive sulphide minerals in the Hycroft concentrate, the insensitivity of gold recovery to the pre-treatment oxidation process and the cost of the neutralizing agent.

Hycroft holds proven and probable reserves of 951 million tonnes grading 0.38 gram gold per tonne and 16.8 grams silver per tonne. The reserve is comprised of oxidized, transitional and sulphidic ore. The current heap-leach process at Hycroft is designed for oxides, while the expanded mine would accomodate all three ore types.

According to president and CEO Randy Buffington, the biggest change in the feasibility study involves optimizing the flow sheet for the expansion, which he says is “dynamic,” since it allows Allied Nevada to adjust feed rates through the three streams. The company reports that any increase in operating costs from the adjusted flow sheet should be offset by more gold sales and revenue.

“The Hycroft deposit offers the opportunity because of its domains and geometry to reblend ore types in terms of softer and harder ore,” Buffington noted during a conference call. “We’ve now optimized the mill throughput, and on a long-life project like this, that’s quite significant, and most of the economic improvements stem from superior ore flow through the process plant. The improved results are a testament to the strengths at Hycroft, specifically in terms of the sulphide deposit.”

Despite the higher capital requirements, Allied Nevada has marginally improved the economics for the development. Assuming a US$1,300 per oz. gold price and US$21.67 per oz. silver price, the Hycroft expansion carries a US$1.8-billion after-tax net present value (NPV) at a 5% discount rate, along with a 28.6% internal rate of return (IRR). That compares to a US$1.7-billion NPV and 26.5% IRR under the PFS.

Other improvements include a 4% increase in total life-of-mine gold production to 7.43 million oz. and a 4% increase in life-of-mine silver production to 340 million oz. By-product cash costs have also dropped by 1% to US$464 per oz. gold.

One area where Allied Nevada is looking for cost savings is the first phase of Hycroft’s expansion. The prefeasibility study foresaw a capital-intensive initial build that would cost US$900 million due to the need to build a rail spur and power line. The company is exploring ways to stage the development so that it can defer those upfront costs.

“As we went through the process we identified a potential opportunity to lower the capital requirements for the first phase without impacting the overall plan,” Buffington said. “We believe we could reduce the requirements for that phase by 10–20% percent by delaying some of the process components that aren’t required until later in the project. We’re looking to release an economic study on that plan before year-end, and we expect to see improved capital and operating metrics as a result of that work.”

The company expects better grades and higher production during the fourth quarter. Over the past three months Hycroft has cranked out 50,000 oz. gold and 525,942 oz. silver, which compares to 52,200 oz. gold and 184,070 oz. silver over the same period in 2013.

Allied Nevada has set its annual production guidance at 220,000 to 230,000 oz. gold and 1.9 million to 2 million oz. silver, which would indicate a strong finish to the year. Management expects average gold grades during the fourth quarter to be materially higher at 0.58 gram gold. By comparison, reported grades averaged 0.28 gram gold during the second quarter, while third-quarter grades were not available at press time.

Allied Nevada reported cash and equivalents of US$13.6 million at the end of June, and increased a revolving credit facility to US$75 million in May. The company reported net income of US$4.4 million — or US4¢ per share — during the second quarter, and has 104 million shares outstanding for a $307-million press-time market capitalization.

BMO Capital Markets analyst Brian Quast — who has an “underperform” rating on Allied Nevada shares — wrote on Oct. 15 that “BMO Research sees Hycroft as a heap leach-only operation given initial capex is beyond the company’s financial capacity, and lack of confidence in the efficacy of the AAO process and its associated costs.”

Quast added that BMO Research projects the company’s cash balance at US$10 million after the third quarter, and noted that “$400 million in senior unsecured notes due in June 2019 would be troublesome for Allied Nevada,” with “cash flow from the heap leach alone [insufficient] to repay this debt.”

Shares have traded within a 52-week range of $2.58 and $7.42, and jumped 7% after the the Hycroft expansion feasibility study news, en route to a $3 close at press time.

“While BMO Research is firmly of the belief that this is not possible in the current market, if a financing package could be procured that would fund the construction of the mill expansion at Hycroft, it seems clear that current equity holders would be left with little of the economics of this additional production,” Quast concluded.