Allied Nevada ponders scale-back

Allied Nevada Gold (ANV-T, ANV-N) is considering a more modest proposal for expanding its Hycroft mill in Nevada, and that has dismayed the markets.

The company had been expected to oversee the construction of a 130,000-ton-per-day mill by early 2015, but the company may scale that back to 75,000 tons per day instead.

The new strategy is to build the smaller plant for 2015 as a phase one, and then move up to 130,000 tons per day if and when the first phase is running smoothly.

But the lack of details on the revised plan left some market watchers uneasy.

BMO Capital Markets analyst Brian Quast says the news is “potentially negative,” and expressed concern over management’s inability to offer the market definite timelines and hard estimates on the new capital expenditure (capex), or even much in the way of details about the new plan.

“Given the lack of knowledge about this revised mill plan, BMO Research continues to model the Hycroft mine at elevated production rates,” Quast writes. “Under elevated production and current spot prices, BMO Research forecasts that Allied Nevada would need to raise more capital in the future.”

BMO has a $10.50 price target and rates Allied Nevada as “underperform.” It will hold the rating until further details are disclosed on the new expansion plan.

The market echoed BMO’s concerns, as the company’s stock fell 16% to $9.97 since announcing the news with its first-quarter results.

Allied Nevada says the merits of a phased approach include reducing initial capital costs and ramping up payback, since the revised plan would process higher-grade oxide and transitional ore through the mill, while only producing sulphide concentrate as per demand.

Allied has already spent or committed to spend $723.5 million of the original estimated $1.2-billion capex, and it expects to spend $395 million on capex for all of 2013, if it does not go with the revised smaller plant.

Allied has updated the market on its heap-leach expansion, having built the lower cells of the North leach pad. This means it can load ore over the first week of May. Once fully complete, the North leach pad will have increased its total leaching space substantially.

As for first-quarter results, revenues were up 25% to $49.2 million, compared with $39.2 million for the first quarter of last year. The boost came on the back of more ounces sold, although this was mitigated by lower selling prices for gold and silver.

The lower prices didn’t help profits, which fell 27% from last year’s total to $8.8 million — or 10¢ per share — but the chief culprit in the reduction was an interest expense of $5.5 million that was connected to the debt issuance early last year.

The Hycroft mine is located in Nevada’s Sulphur Mining district, 86 km west of Winnemucca. Between 1987 and 1998, it produced over 1 million oz. gold from open-pit heap leaching.