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ANV -- a firm "buy" for the patient speculator

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December 11, 2013 – Comments (0) | RELATED TICKERS: ANV , GLD

Company Overview
Allied Nevada Gold Corp (NASDAQ: ANV) is a small-cap company that specializes in gold and silver mine exploration and development in Nevada.


Hycroft and Hasbrouck Mines
Among other properties, the company has an especially large investment in the Hycroft mine, located in rural northern Nevada. ANV's goals, investments and operations focus on developing the necessary processes for full-scale profitable development of existing mining territories. The company's site specifies likely production in 2013. Conservatives estimates specify that the Hycroft mine will yield at least 180k ounces of gold and roughly 1M ounces of silver.

Other gold and silver properties, such as the Hasbrouck operation, are in various stages of exploration and development. Allied Nevada's evaluation of the Hasbrouck mine gives an estimated annual production of 135k ounces of gold over the next five years. Hasbrouck's silver potential is roughly 540k ounces/year, also for five years.

Using the above gold and silver production numbers as raw material for a revenue estimation, the Hycroft and Hasbrouck mines will generate 315k ounces of gold and 1.54M ounces of silver in 2013. For simplicity, we assume a constant average selling price that incorporates short-term gold and silver price fluctuations. At this point, some price background is useful.


Estimated Revenue Limit

In the last five years, gold peaked to almost $1900/oz in 2011. Since then, prices have decreased. So far in 2013, gold fell from an early high of nearly $1700/oz to as low as almost $1200/oz. This trend seems to be persistent. It is the deflation of the gold bubble that grew between 2000 and 2011. In the interest of prudence, assume this downward trend continues. Gold is likely to be priced at approximately $1000/oz when ANV can sell what it mines from Hycroft and Hasbrouck in 2013. Thus, gold revenues should be about $315M.

Silver price trends are similar. Silver peaked at around $48/oz in 2011, and has been falling -- albeit choppily -- since then. As with gold, assume the downward price trend continues. A rough estimate of $15.75/oz silver seems reasonable. Selling at that price, Allied Nevada would bring in $24.255M from silver in its operations in 2013.

Total Hasbrouck-Hycroft projected revenues of $339.255M should be used as an upper-limit estimate of near-future revenues. To see why, consider that in the last twelve months, gold and silver prices were higher than the values used in the above estimates. However, Allied Nevada Gold Corp ttm revenue was only $261.77M. The above estimate assumes virtually perfect production efficiency and sales of all mined assets for the year. Since such “ideal” operations are not wildly optimistic, this $339.255M estimate is best used as an upper limit on likely near-term operating revenues.


Technical Perspective
What's most revealing about ANV's price behavior is that, on average, ANV stock behavior is an amplified version of SPDR Gold Shares (GLD). Consider that in the past year, GLD decreased by nearly 30%. ANV mirrored that behavior by dropping about 90%. In the past two years, this behavior repeats between Aug 2012 and Dec 2012. GLD increased by almost 10% by December 2012, with a prominent price bump in September and October with a peak at roughly 12% gain in early October. In the same time, ANV jumped over 50%, landing to net capital gains of about 27% from August to December 2012. Overall, this "amplification” of GLD price movement repeats nearly back to the Allied Nevada's beginnings.

Though short-term price fluctuations of ANV and GLD are often out of sync, medium and long-term trends point to ANV's prospects as an investments being a direct, magnified reflection of GLD price movement. Of course such a correlation makes intuitive sense -- selling the same material (mostly gold) on the market for a much higher price results in proportionately higher profit margins since continuing mining costs do not directly correlate to gold prices. As long as Allied Nevada Gold Corp. management does not diversity its target commodities, it will remain a medium and long-term amplifier of gold price movement. 


Summary

Gold demand is driven primarily by jewelry, most of it in the developing world. With continued globalization benefitting formerly underdeveloped regions such as China, India, Nigeria and much of Latin America, these economies will generate an emergent middle class that will start to have disposable income. Humans’ perpetual quest for status and distinction being what it is, jewelry demand will go up substantially.

On the supply side, the fraction of gold dependent on South African mines continues to decrease. A more diversified supply base makes gold prices less susceptible to socioeconomic supply shocks such as worker strikes or political instability. The third factor to consider is the Federal Reserve’s apparent insistence on an “easy money” policy as well as heavy government spending.

Gold has skyrocketed since about 2000 after a long stretch of relatively stable price levels. After the current gold bubble deflates, loose monetary policy and increased global demand will very likely drive up gold prices again. When this happens, ANV’s stock will appreciate handsomely. Despite near-term stock price fluctuations, ANV is an enticing – though volatile – long-term investment.




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