Allied Nevada disappoints with news from Hycroft

Shares of Allied Nevada Gold (TSX: ANV; NYSE-MKT: ANV) took a tumble after the company announced a construction delay and unremarkable earnings. 

Investors’ concern is over Allied’s chief asset, the Hycroft gold mine west of Winnemucca in Nevada, where the company is putting off plans to build a processing facility.

That news, along with word that second-quarter profits fell by nearly US$2 million, had the company’s stock falling by 26% on Aug. 6, and another 14% on Aug. 7. The sell-off left the company’s shares briefly trading at just $3.67 on Aug. 9 before rebounding to $4.50 at press time — a far cry from the $30 share price it enjoyed to start the year.

Back in May the Reno, Nev.-based company disappointed markets when it said it was considering a more modest facility at Hycroft. While the plant was intended to handle 130,000 tons per day (118,000 tonnes) by early 2015, it said in the first half that it would likely scale back to a 75,000-ton-per-day operation.

Now Allied says it will defer construction altogether until it completes a new feasibility study that could make the project more economic. The company has not offered guidance on how long the process could take, or what a re-envisioned mill might cost.

Allied has already spent or committed to spend $723.5 million of the estimated $1.2-billion capex.

“While BMO Research had a low opinion of the economics of the mill at Hycroft, shareholders generally attributed the bulk of Allied Nevada’s valuation to this mill,” BMO Capital Markets analyst Brian Quast commented in a research note. “Now that mill construction has been deferred indefinitely, only the heap leach will remain for the foreseeable future.”

If investors were hoping the heap leach would boost second-quarter results, they were disappointed. Net income fell to just US$4.23 million, or 4¢ per share, from US$6.1 million a year earlier.

Those dwindling profits were tied to issues with the leach pad, and with gold prices remaining soft, the company is under pressure to improve the leaching process.

Until it does, margins will be squeezed, with the company managing a 75% increase in revenues to US$59 million, although this couldn’t translate into more profits. Allied says problems at the leach pad drove up cash costs to US$775 per oz.

The higher revenues were mainly attributed to a 134% increase in gold ounces sold. The Hycroft mine produced 39,195 oz. gold and 132,841 oz. silver for the quarter. Allied says production should increase over the second half of the year, as more tonnage finds its way to the leach pad and more capacity comes online at the plant. Still, it had to lower its output guidance to between 175,000 oz. and 200 000 oz. gold, and 900,000 oz. and 1.1 million oz. silver.

The whole situation had Quast sounding rather ominous in his research note.

“At current gold and silver prices, Hycroft cannot generate enough cash flow to repay the outstanding debt, regardless of whether the mill is built or not,” he wrote.