yng the drama is about to end november 27 2011

8/3/2019 YNG the Drama is About to End November 27 2011

1/16

ClassicValueInvestors,LLCP.O.Box59313

Schaumburg,IL60159

www.classicvalueinvestors.com

TickerSymbolYNG(Canada)YNGFF(US)November27,2011

YukonNevadaGoldCorpTheDramaisabouttoEnd

YukonNevada Gold Corporation has broken a lot of hearts lately. Many individual and professional

investors have thrown in the towel and sold at a loss. The remaining shareholders are completely

exhausted.Newpotentialinvestorsareafraidtobuyit.Thisisexactlythekindofpessimismthatcreates

greatprices.

ManyinvestorslearnedaboutYukonNevadainthemiddleof2010andduringthattime,thestockprice

was at $0.25 per share (today it is at $0.30 per share or a market cap of $300 million). Within six

months,thestockreached$0.90pershare,andsomeoftheshareholdersfeltlikegeniusestriplingtheir

moneyinsuchashortperiodoftime.Everythingwasgreatthemanagementwassuccessfulinturning

the company around, operations showed profitability, and future growth productions targets were

stunning.Thestockpricewasonitswaytoreaching$10pershare.

Then, at the beginning of 2011, investors were shocked to learn that YukonNevada lost money on

productionduring

the

fourth

quarter

of

2010,

after

the

third

quarter

of

2010

had

showed

promising

profitability.Thisiswhenthestockpricestartedtodecline.Itbecameclearthatsomethingwasseriously

wrong with the production process and that the processing plant was in immediate need of

winterizationandrefurbishment.Untilmajorcapitalimprovementsaremadetotheplant,thecompany

willneverreachitsfullpotential.ThenewCEOtookoverin2009,hetoldtheboardofdirectorsthatthe

plant was in need of more than $100 million in capital expenditures, which would result in more

dilution. However, at that time, the controlling shareholders strongly opposed the issuance of more


2/16

shares.Withoutadditionalmoney, themanagement restartedproductionwith thehopeofproducing

enoughcashtopayforthecapitalexpenditures.Soon,itbecameobviousthatthiswasaterriblemistake

which could have been avoided from the beginning. Only when it became clear that the companys

existence was in question did the board of directors give the management the green light to raise

enoughmoneytofixthemalfunctioningplant.

The management wenton to explore options to raise enough money towinterizeand refurbish the

plantsothatitwouldproducegoldwithoutbreakingandshuttingdownconstantly.Thefirstoptionwas

toofferadiscounttooptionholdersforearlyexercise.Unfortunately,someofthemajorholders(same

peoplethatoriginallyrejecteddilution)backedoutatthelastmoment,andthecompanywasstuckina

liquiditycrisis.Consequently,theywentwithadifferentplantoengageDeutscheBanktoprovidethe

company with a total of $179 million from private placement, warrant exercises, and prepaid gold

forwardfacility.

BeforeDeutscheBankwentaheadwiththedeal,ithiredSRKConsulting,aworldclassminingconsulting

firm, to examine YukonNevadas plant to determine if its production problems were solvable. After

receiving approval from SRK, Deutsche Bank proceeded with the deal. While YukonNevadas

managementandDeutscheBankwerenegotiatingallthedetails,theexistingshareholdersweredoing

whatthey

are

best

at

screaming,

yelling

and

panicking,

making

it

more

and

more

difficult

for

the

financingagreementtobereached.DuringtheworstofthepaniconMay4,2011,thestockofYukon

Nevadaclosedat$0.39pershare.

After twentydays,whichat that time seemed likeanunendingnightmare,onMay24,2011,Yukon

Nevada reported that it had raised $59 million. However, this was only part of the $179 million in

financing. The day after the announcement, the stock price increased to $0.56 per share which


3/16

representeda40percentjumpinoneday.Theoptimismwasshortlivedbecausethestockpricestarted

todeclinethenextday.Withintwoweeks,thestockpricewasprettymuchbackatthesamelevelitwas

atbeforetheannouncement.Now,theworryshiftedtowardclosingthesecondpartofthefinancing.

Finally,onAugust15,2011,YukonNevadaandDeutscheBankclosedthesecondpartofthefinancing,

whichwas

for

$120

million

in

the

form

of

pre

paid

gold

forward

facility.

Now,

the

company

had

enough

funds towinterizeand refurbish theplant.Youmight think thatafterall thepanickinganddoubting

about whether YukonNevada was going to get the necessary financing, this would have been good

newsthatwouldhavesentthestockpricehigher,likeitwaswhenthefirstpartoffinancingwasclosed.

Butno,themarketcompletely ignored it.Actually, itwasevenworsebecausebyOctober3,2011,the

stockwastradingat$0.28pershare.Yes,youreadthatcorrectly.Whenshareholderswerepanicking

becauseYukonNevadawasstrugglingtosurviveduetoalackoffinancing,themarketwaspricingitat

$380 million, or $0.38 per share. However, after the company raised $179 million, the market was

valuingtheequityportionofthecompanyfor$280million,or$0.28pershare.

Howis

this

possible?

When

you

are

dealing

with

the

following

shareholders

or

potential

shareholders,

anythingispossible.

BeforeIgetintowhyshareholdersareactingsopessimistically,letmelistexactlywhatitisthatyouget

forthecurrentpricetagof$300millionor$0.30pershare.YukonNevadahasnodebt,$120millionpre

paidgoldforwardfacilityandthreemainassets:JerrittCanyon,aroasterfacility,andKetzaRiver.


4/16

JerrittCanyonJerrittCanyonconsistsofopenpitandundergroundmines thathavebeenexploitedover the last30

years. Since 1981, it produced 8 million ounces of gold. As shown in the following illustration, the

propertyproduced300kouncesofgoldperyearuntil2002.

JerrittCanyonhasabout3.5millionouncesofgoldwhentotalingwhatisinmeasured,indicated,

inferred,andstockpiledasshownbelow.

WhatisJerrittCanyonworthintermsofgoldintheground?

If we ignore the fact that YukonNevada is a gold producer and value the ounces as if it was an

explorationcompany,wecouldprobablyget$30perounce.

Value=3.5millionouncesx$30perounce=$105millionorabout$0.11pershare


5/16

RoastingFacility

Themanagementclaims that the roasting facility iswhatgivesYukonNevada itsvalue.Theyestimate

thattheroastingfacilityisworth$1billionor$1pershare.Fornow,letsjustassumethatthisvaluation

isaccurate.

KetzaRiverKetzaRiver isaproperty inYukon,Canada,whichhistoricallyproduced98,000ouncesofgoldandby

productsilverbetween1988and1990.Currently,ithas485,000ounces in43101betweenmeasured,

indicated,andinferred.

Atonepoint,themanagementwasgoingtospinoffKetzaRiverwhenitwaslookingforoptionstoraise

money for the winterization and refurbishment project. Christopher Ecclestone of Hallgarten &


6/16

Company,whocoversYukonNevada,believesthatifKetzaRiverwasmarketedproperlyandspunoffas

aseparatecompany,itcouldbringavalueof$100millionor$0.10pershare.Toreadhisreport,seethe

followinglink:

http://classicvalueinvestors.com/i/2011/10/yukonnevadagoldcoverageupdate/

Atthispoint,becausethecompanyraisedmoneyfromDeutscheBank,therearenoplanstospinitoff.

Instead,thecompanywillputitbackintoproductionatarateof70,000ofgoldperyear.However,this

willbeafterJerrittCanyon inNevada isgenerating lotsofcash.Fornow,wewilljust ignorethefuture

plansandvalueitonlyat$100millionasChristopherEcclestoneadvised.

ValueSummaryJerrittCanyon=$105millionor$0.11pershare

RoastingFacility=$1billionor$1pershare

KetzaRiver

=$100

million

or

$0.10

per

share

Total=$1.2billionor$1.2pershare

ConsideringthatthemarketcapofYukonNevada is$300millionandenterprisevalueof$420million

($300+$120goldforwardfacility),themarket isnotvaluingthecompanyevencloseto$1.2billion.If

weassumethatthemarketispricingJerrittCanyonsgoldinthegroundat$105millionandKetzaRiver

at$100million, it is leavingonly$215million($420 $105 $100=$215)fortheroasterfacility.This

meansthatafterthemanagementraised$179milliontowinterizeandrefurbishtheplant,themarketis

tellingus that theplant isworthonly slightlymore than themoney that they raised to fix it.This is

ludicrous. It isequivalenttospending$10,000toredoanentirekitchen inasinglefamilyhousewhile

themarketpricestheentirehouseat$12,000.

Becausethere issuchadisconnect, itwouldbeusefultounderstandhow theplantcouldpossiblybe

worth$1billion.Therearemanywayoflookingatit.Onewayitistofigureouthowmuchitwouldcost

tobuild it.This isexactlyhow themanagement cameupwith theirestimateofvalue.However,you

couldntbuilda roaster like this in the regionbecauseyoucouldntget itpermitted,andeven ifyou

could,itwouldtakeyou8to10yearstocompletetheconstruction.

YukonNevadasroaster isoneofonlythreeroasters inNevadaandthesurroundingregion.Theother

two roasters are owned by Newmont and Barrick and both are running at full capacity. Roasting is

currentlytheonlyeconomicmethodofprocessingrefractorysulfideore,whichisprolificintheregion.

ObtainingapermitfornewroastercapacityinNevadaandthesurroundingregionisextremelydifficult

andtimeconsumingduetoenvironmentalconcerns.Nonewroastershavebeenpermittedinthepast

12years,andnonearecurrentlyproposedorinthefeasibilitystage.


7/16

Onecanarguethatitdoesntmatterwhatitcoststobuildtheroaster.Whatmattersiswhetherthereis

abuyer for itandhowmuchsuchabuyercouldafford topay for it.The twomost logicalbuyersare

NewmontandBarrick.

Newmont and Barrickmaybe interested in the facilitybecauseof the reasons that I listed before

YukonNevadas

roaster

is

one

of

only

three

roasters

in

Nevada

with

spare

capacity.

Because

the

permittingofnewroastercapacityinNevadaandthesurroundingregionisextremelydifficultandtime

consuming,bothof these companiesareusing their roasters toprocessonly the highestqualityore

(0.40to0.50ouncesperton)andarestockpilingthelowerqualityore. Forexample,Newmonthas53

milliontonsoforewithagradeoflessthan0.10ouncespertonsittingidle.Thisisequivalenttoabout5

millionouncesofgold.Atthecurrentpriceofgold,thistranslatesintomorethan$8billion.IfNewmont

acquiredYukonNevadasroaster,theycouldprobablyprocesstheir53milliontonsfor$40pertonor$2

billion,pocketingtheremaining$6billion.

CouldNewmont afford topay$1billion forYukonNevada? I thinkeven if theypaid$2 billion, they

wouldmake

out

like

bandits.

Not

only

would

they

be

able

to

process

their

53

million

tons

of

ore

and

pocket$6billion,theywouldalsogetaccessto3.5millionouncesofYukonNevadasgoldintheground.

InthehandsofaproducerlikeNewmont,theseounceswouldprobablybeworth$700million,or$200

perounce,insteadofmyestimateof$105million,or$30perounce.Then,theywouldputKetzaRiver

into production much more quickly because they have big pockets. At a production rate of 70,000

ouncesofgoldperyear,theycouldgetKetzaRivercashflowingatnearly$90millionperyear(70,000x

($1,650goldprice $400cashcost)=$88million).Tothem,KetzaRiver,producingatthisrate,wouldbe

worth about $500 million. Likewise, when YukonNevadaputs Ketza River into production, it will be

worthalmosttwiceasthecurrentmarketcap.

IfthevalueofYukonNevadasroasterissogreat,whywonttheytrytodoahostiletakeoversincethe

companyissellingforasong?

Thatsagoodquestion,andboththemanagementandChristopherEcclestoneweresurprisedthatthey

didnttry.Becausetheboardofdirectorsforesawthepotentialthreatofahostiletakeover,onOctober

4,2011theyapprovedapoisonpilltopreventitfromhappening.Asaresult,itwouldnowbedifficult

forNewmontorBarricktoattemptahostiletakeover.ChristopherEcclestonesaidthatitisnotunusual

forthebigminingcompaniestomissonincredibledeals.HecomicallystatesWhybuynowifyoucan

paymorelater?

ConsideringthatNewmontandBarrickalreadymissedthechanceforahostiletakeover,whydontthey

justtrytoofferareasonablepriceforYukonNevadanow?

Theywouldprobablynotbeable toconvinceYukonNevadatosell for$500millionor less,especially

now that Deutsche Bank funded the company with $179 million. Maybe before the financing, they

wouldhavehadachanceofgettingitforsuchasteal.Myspeculationisthattheywouldprobablyneed

tooffer$1.5billionor$1.50per share tobe taken seriously.But, this isunlikelybecausehow in the


8/16

world would they explain to their shareholders that they are buying an unknown publicly traded

company for fivetimesthepriceofthestockwhentheroasting facility isnotevenworkingproperly?

TheyaremorelikelytowaitforYukonNevadatocompletethewinterizationandrefurbishmentproject.

Of course, they will have to pay much more for it after it is working properly but as Christopher

Ecclestoneput itWhybuynow ifyoucanpaymore later?Assillyas thismaysound, if thestock

priceof

Yukon

Nevada

were

at

$2.50

per

share,

they

would

be

more

interested

because

it

is

much

easiertoexplaintoshareholderswhytheyarebuyingsomethingfor$3persharewhenitistradingfor

$2.5persharethanbuyingsomethingfor$1.50persharewhenitistradingfor$0.30pershare.

NowthatyouknowhowandwhyYukonNevadasroastercouldbeworth$1billion,theonlyquestion

that remains is whether the company will be able to fix the plant so that it operates properly and

doesntshutdownallthetime,thusreachingitsfullvalue.Obviously,themarketdoesnotbelievethat

YukonNevadawill fixtheplantevenafterraising$179million fromDeutscheBanktoaccomplishthis

exacttask.Inotherwords,themarketbelievesthatafterthrowingseriousmoneyattheplant,nothing

goodisgoingtocomeoutofit.

Itappearsthatsomeinsidersarenotagreeingwiththemarketandaretakingadvantageofthesituation

bybuying shareson the cheap.BetweenNovember21,2011andNovember23,2011, the following

transactionstookplace.

Forsome

investors,

Reicherts

purchase

of

100,000

shares,

Heinrichs

of

30,000,

and

de

Trentinians

purchaseof260,000maynotbeenough.Someinvestorsarenotonehundredpercentconvinceduntil

they see the insidersmortgaging theirhomesandborrowingagainst their kids college funds tobuy

shares.Forme,seeinginsidersbuysisgood,butnotarequirement.

Whyisthestockpriceaslowasitis?


9/16

Investorsareexhaustedfromtherollercoasterandaconstantflowofdisappointments.Inthemiddleof

2010, there was not supposed to be any financing. The funds necessary for the winterization and

refurbishment of the plant were supposed to come from already restarted operations. After Yukon

Nevadareachedasteadystateofproductionatarateof150,000ouncesofgoldperyear,production

was supposed to increase. Also, after the third quarter of 2010 was profitable, everyone expected

profitabilityto

continue

and

to

increase.

Well, the plant breakdowns created all sort of problems. Profitability disappeared. The hope for

increased production was crushed. Liquidity problems arose. Then, the lack of cash was going to be

solvedbyenticingwarrantholderstoexerciseearly.Thisfellthrough.WhenDeutscheBankcame into

thepicture,newhopewasborn,butas the lawyersonbothsidesweredragging their feet, investors

keptgettingmoreimpatient,sendingthestockpricelowerbytheday.DeutscheBank,seeingthestock

priceplunge, renegotiated thepriceon theprivateplacement tomilkabetterdealoutofdesperate

YukonNevada.By the time thedealactually closed,everyonewas soexhausted that the stockprice

didntevenreact.Plus,recentlytwohedgefundsfacedredemptionsneededtogetoutquickly.

Oncethefinancingclosed,themanagementmadeanotherpromisetocompletethewinterizationand

refurbishmentoftheplant inSeptember2011.By lookingatthedateofwhenthesecondpartofthe

financing closed (August 15, 2011), it doesnt take much imagination to see that such ahuge capex

wouldprobablytakemorethansixweekstocompleteeventhoughtheyhadalreadystartedsomework

rightafter the firstpartof the financing for$59million closedonMay31,2011.Myattitude is that

thingsalwaystakethreetimesaslongasoriginallyanticipated.

HerewearetodayonNovember27,2011,andtheworkisstillnotcomplete.However,whenyoulisten

totheconferencecall(http://podcast.newswire.ca/media/yukonnevadagold20111116.mp3

)thattookplaceonNovember16,2011,youwill learnthatthework isprettymuchdone.Whatwas

slowing everything down was a delay in the manufacturing of the dryer, which is a very important

component.Thedryerwasshippedintwoparts.OnepartalreadyarrivedandisbeinginstalledasIam

writing,andthesecondpart is intransit.Because it iscomingfromMexico, itcouldbeheldupatthe

border, but it will arrive very soon if it has not already arrived. Once it finally gets there, the

managementwillshutdownthemill for10daysto install it,andthewinterizationandrefurbishment

willbeprettymuchcomplete.

The revised completion date is scheduled for midDecember 2011. Whether they will hit the new

deadlineexactlyon time ishard to say. It is alwayspossible that somethingelse can gowrong. It is

constructionwhatdoyouexpect? Ifyoueverremodeledahouse,youknow thatsomethingalways

goeswrong. Ican totally seemore investors sitting inwarmofficesstaringat theircomputer screens

havingafitifitisnotcompletedbyDecemberandsayinghowincompetentthemanagementis.

Whathappensafterthemillisworkingproperly?


10/16

Shortly before the company encountered all the recent problems with the plant malfunctioning, it

reachedapointwhereitwasoperatingatarunrateof150,000ouncesofgold.Afterthewinterization

andrefurbishmentiscomplete,thisisthenumberthatthemanagementisshootingfor,rightoutofthe

gate.Then,for2012,theyareanticipatingatotalproductionlevelof175,000ouncesofgold.Assuming

thepriceofgold is$1,650perounceandthecashcost is$789(Iwilladdresshow Icameupwiththis

numberlater),

this

translates

into

cash

flows

from

mining

operations

of

$150

million.

After

all

the

other

expenses,youarelookingat$108millioninoperatingincome.

Howaretheygoingtogetto150,000ouncesofgold?TheSmithMine iscurrentlycontributing1,000 tonsperday to themillatanaveragegradeof0.235

ouncesperton.TheSSX/SteerMineComplexwasrestartedrecentlyperapressreleaseonOctober3,

2011.

http://www.yukonnevadagold.com/s/NewsReleases.asp?ReportID=483004&_Type=News

Releases&_Title=YukonNevadaGoldCorp.StartsMiningatSSXSteerMineComplex

Atthebeginning,SSX/SteerMineComplexisonlycontributing300tonsperdayandwillrampupto800

tonsperdaybytheendof2011whenadditionalequipment isdeliveredtothesite.Bytheendofthe

firstquarterof2012,itwillbecontributing1,200tonsperday.Thegradeis0.189ouncesperton.

Smith 1,000tpdx0.235=235ouncesperdayx365days=85,775ouncesperyear

SSX/Steer 800tpdx0.189=151ouncesperdayx365days=55,188ouncesperyear

Total 85,775+55,188=140,963ouncesperyear

BetweentheSmithandSSX/Steermines,thecompanycanproduceapproximately141,000ouncesof

gold.However,asofJanuary2011,thecompanystockpiled902,000tonsoforeatanaveragegradeof


11/16

0.073ouncespertonwhichequatesto65,900ouncesofgold.Addingthistotheouncesproducedfrom

theSmithandSSX/SteerMines, Iarriveat206,863 (140,963+65,900=206,863).Youcaneasilyhow

theycanreach150,000ouncesofgoldrightafterthemilliscompletelyfixedor175,000ouncesofgold

for the entire year in 2012. The managements projection of 175,000 for 2012 might be on the

conservativeside.

By2013,thecompanyisplanningtoproduceatarunrateof300,000ouncesofgoldperyear.Thisisnot

someunrealisticnumberpulledoutofthinair.Theproductionrateof300,000ouncesofgoldperyear

wasachievedbefore,from1987to2002.Thereisnoreasonwhytheycannotachieveitagainwiththe

renovatedroasterand3.5millionouncesofgold intheground.Plus,theyarecurrentlyupdatingtheir

43101andbelievethattheywillhaveanadditional3millionounces.

Toarriveattherunrateof300,000ouncesofgoldperyear,thecompanywillneedtoopenmoremines

toinadditiontotheSmithandSSX/Steermines.StarvationCanyon,thethirdundergroundmine,willbe

opened,contributing600 tonsperdayatanaveragegradepertonof0.22ounces.Thecompanywill

alsoreopenBurnBasin(openpitoperation) inthefourthquarterof2012,contributing2,000tonsper

day

at

an

average

grade

of

0.104.

SSX/Steer,

instead

of

contributing

800

tons

per

day,

will

contribute

1,200tonsperday.

Smith 1,000tpdx0.235=235x365=85,775

SSX/Steer 1,200tpdx0.189=227x365=82,782

Starvation 600tpdx0.220=132x365=48,180

BurnBasin 2,000tpdx0.104=208x365=75,920

Total 85,775 + 82,782 + 48,180 + 75,920 = 292,657 ounces per year (this is close to the

managementsestimateof300,000)

Tosustain

this

kind

of

production

profile

for

many

years,

the

company

will

need

to

reopen

additional

minesand/orexploremoreatStarvationCanyonandBurnBasinbecause these twoonlyhaveabout

twotothreemoreyearsofgoldinthegroundbeforetheywillbedepleted.SmithandSSX/Steermines

haveenoughinthegroundtolastformorethan10yearsofproduction.

CoststoProduceGold


12/16

YukonNevadasprofitabilityoranyminersprofitability is the functionof thepriceof gold, the cash

costs of mining and processing, and the costs of running the entire company. During the last seven

quarters,YukonNevadageneratedapositivegrossprofitonlyonce,andsome investorsareconfused

why the company isnotable to generateprofitwhen thepriceof gold isashighas it is today.The

followingisthesummaryofthelastsevenquarters:

Asyoucansee,theonlypositivequarter in termsofgrossprofitwasachieved in the thirdquarterof

2010.Inordertounderstandwhythecompanyhasbeenlosingmoneyandisabouttoturnthecorner,it

isuseful

to

break

the

cost

of

sales

into

two

components

the

cost

of

mining

and

the

cost

of

processing

as shown below. The cost of mining is what it costs the company to get ore from the Smith and

SSX/SteerMinesorfromothersourcessuchasbuyingorefromathirdparty.Thecostofprocessingore

isthecostofrunningitthroughtheroaster.

Thefollowingisthesamechartbutdisplayedincostsperouncesold.

I calculated thisbreakdownbyusingpartial informationprovidedby the company. It isbynomeans

totallyaccurate,butitisbetterthannothing.Forexample,duringthefirstquarterof2010,18,786tons

or4,200

ounces

were

delivered

from

Smith

Mine,

which

indicates

that

the

grade

was

0.22357

ounces

perton.Thecostpertonwasapproximately$95whichtranslates into$425perounce($95/0.22357).

This is where the $425 cost of mining per ounce comes from. Because the total cost of sales was

$13,743,000 and the number of ounces sold was 9,105, the total cost per ounce was $1,480

($13,743,000/9,105).Wecanconcludethatthedifferencebetween$1,480and$425or$1,055wasthe

costofprocessingore.


13/16

Asyoucansee,thecostofminingperouncewasthesame$425forthefirst,second,andthirdquarters

of 2010. The cost of processing per ounce declined over the same three quarters. This happened

becausethecompanyincreasedproductionoverthesethreequarters.Thismakessensebecauseasyou

runmoreorethroughtheroaster,thecostperouncedeclinesbecausethemajorityoftheprocessing

costsarefixed.Therefore,bythethirdquarter,thecompanywasabletoachieveatotalcostof$1,161

perounce

which

was

lower

than

the

average

price

per

ounce

of

$1,252.

This

is

why

the

company

achievedapositivegrossprofit.

Unfortunately,duringthe fourthquarter2010,boththecostofminingandthecostofprocessingper

ounce increasedto$733and$1,018respectively.Thisdrovethetotalcostperounceto$1,751which

washigherthantheaveragepriceofgoldof$1,366perounce.Inordertounderstandwhythecostof

mining increased from $425 to $733 (a 72 percent increase) from the prior quarter, it is useful to

investigatewheretheoretofeedtheplantcamefrom.Thetotalof71,173tonsor14,919ounces(grade

0.20962ouncesperton)camefromtheSmithMine.Byusingthecostof$95perton,thisisequivalent

to$453perounce($95/0.20962).Becausethecostofminingforfourthquarterof2010was$733per

ounce,and

we

just

calculated

that

it

cost

the

company

$453

per

ounce

to

get

the

ore

from

the

Smith

Mine,therehadtobesomeothersourceoforethatwasmoreexpensivetodrivethecosthigher.The

company bought ore from Newmont for $198.53 per ton. Because the grade was 0.19598, this is

equivalent to$1,013perounce.For simplicitys sake, ifwejustaverage the twonumbers,$453and

$1,013,wearriveat$733perounce,whichisthecombinedcostofminingperounce.

Fromthiscalculation,we learnthatbuyingorefromNewmont increasesthecostofminingperounce.

Because the company continued to buy ore from Newmont in 2011, the cost of mining per ounce

continuedtobehighat$671inthefirstquarterof2011,$821inthesecondquarterof2011,and$857

in the third quarter of 2011. The reason why these costs trended higher from quarter to quarter is

becauseNewmontchargesYukonNevadamoreperounceas thepriceofgoldcontinues to increase.

Whataterribledeal!

Thissituationisabouttochange.StartinginJanuaryof2012,YukonNevadawillnolongerbebuyingore

from Newmont. Instead, it will be getting its own ore from the Smith Mine, the recently opened

SSX/Steer MineComplex, and stockpiles. In themost recent investorpresentation, the management

stated that thecostofbringingore fromSmithMine iscurrentlyaround$140per ton (thiswillcome

down to $80 to $90 per ton after YukonNevada stops utilizing a third party mining company the

contractexpires inthemiddleof2012).Fornow, Iwillkeepusing$140perton,whichtranslates into

$596perounce.Thecostofbriningore fromSSX/SteerMineComplex isapproximately$85per ton,

whichtranslatesinto$450perounce.Basedonthisinformation,IestimatethataftertheNewmontore

buyingdealiseliminatedandmoreoreisbroughtfromtheSSX/SteerMineComplex,thecostofmining

perouncewilldeclineto$523perounce.

If buying ore fromNewmont is such abad deal for YukonNevada,why do it in the first place? The

managementalwaystreateditasatemporarysolutionuntilthecompanysownorecouldreplaceit.In

theshortterm,theywerehopingthatthe increase inproductionwould lowertheprocessingcostper


14/16

ounce because as mentioned before, the more ore that is run through roaster, the cheaper it is to

processperounce.Letsseehowsuccessfulthisstrategywas.

In the fourth quarter of 2010, after getting additional ore from Newmont, the processing costs per

ounceincreasedto$1,018.Then,bythefirstquarterof2011,theyshotupto$1,739,sendingtheentire

costperounceto$2,410.Youcantpossiblymakemoneywhenitcostsyou$2,410toproduceanounce

ofgoldwhile thepriceofgold isbelow$2,000perounce.Obviously, thestrategy togetmoreore to

decreasetheprocessingcostsperouncefailed.Actually,boththeprocessingcostperounceandmining

costperounceincreased,whichistheworstsituationyoucanbein.

Thereasonwhytheprocessingcostswereupwasbecausethecurrentroaster isold,breaksdownall

thetime,andeatsuptremendousamountsofenergy.Theonlywaytoaddressthisistofix itwhich is

exactlywhatthecompanyhasbeenworkingonafterraising$179millionfromDeutscheBank.

Now,letslookatmyestimateoftheprocessingcostsperounceafteralltheworkiscomplete.During

the fourthquarterof2010,when themillwasoperatingata rateof1,000 tonsperdayandwasnt

breaking down as much, the processing costs per ounce were $736. If I was totally ridiculous and

assumedthatthenewlyrefurbishedroasterwillnot improveefficiencyatallfromthis level,and Iuse

the$736perounceastheprocessingcostperounce,YukonNevadawillbeprofitable.Afteraddingmy

previouslycalculated

mining

costs

of

$523

per

ounce

to

the

processing

costs

of

$736

per

ounce,

we

get

atotalcostperounceof$1,259.Consideringthatthepriceofgoldis$1,650perounce,YukonNevada

willbemaking$391perounce.Ataproductionrateof150,000ouncesofgold,thistranslatesinto$58

millioningrossprofit.

However, the roasterwillbe runningata rateof4,000 tonsperday,not1,000 tonsperday,which

means that the processing costs will be lower than $736 per ounce. Also, after spending money to

improvetheplant,itsperformanceissuretoimprove.Iwastoldthattheroasterwillbeabletoprocess

orefor$40perton.Ifweuseagradeof0.15ouncesperton,thistranslatesinto$266perounce,which

ismuchcheaperthan$736perounce.

Basedonmyestimates,thecombinationofminingandprocessingcostsperouncewillequal$789per

ounce ($523 + $266). The management estimates $785 per ounce, so I am close. How will this all

translateintoearnings?


15/16

Considering

the

current

market

capitalization

is

$300

million,

you

are

buying

Yukon

Nevada

for

three

times theprojected2012earnings.Bringingproductionto175,000ouncesofgoldperyear isjustthe

firststep.Bytheendof2013,themanagementisplanningtoincreasetheproductionto300,000ounces

ofgold,whichiswhatithistoricallyproducedbetween1987and2002.Iusedthecostof$789perounce

eventhoughby2013,themanagement isplanningto lowerthesecostsevenfurtherbyopeningmore

minesandtakingtheminingatSmithMineinhouse.Ifandwhentheylowerthecosts,itwillbeanice

bonus.Fornow,Iwillstickwith$789.


16/16

ConclusionAssumingthatYukonNevadaachievesaproductiongoalof300,000ouncesofgoldbythebeginningof

2013, itwillbe set to generatemore than$216million inopearing income.Applyinga conservative

multipleof7getsyouto$1.50pershare,whichisafivebaggerfromnow.

RisksIbelievethatthemajorityofriskhasbeen liftedafterthecompanyraised$179millionfromDeutsche

Bank for the winterization and refurbishment of the facility. Obviously, there still remains more

execution risk. However, YukonNevadas problems came from the malfunctioning plant, not from

metallurgyoralackofresourcesintheground.Malfunctioningplantisfixablewithmoney.Therealsois

ariskthatthemoneyraisedwillnotbeenough.Consideringthattheyarealmostdone,Idoubtthatthey

willneedto raisemoremoney for thewinterizationandrefurbishmentof theplant.But iftheydo, it

shouldntbemuch.

Also,anotherrisk isthepriceofgold. Icantreallyhelpyouhere.Ifyouthinkthatthepriceofgold is

abouttocrash,thenyoushouldobviouslystayawayfromthiscompany.

Ithinkthatthebiggestriskofall isother investors.Sofar,theyhaveacted impatientlyandas ifthey

know very little about the company. There is nothing that will stop them from continuing to act

foolishly.Therefore,ifyouchoosetoinvestinthiscompany,justknowthatyouwillneedtobuckleupor

youwillbethrownoffthehorsebytheinsanevolatilitycreatedbyotherinvestors.

VideowiththeCEO

http://www.youtube.com/watch?v=E5ohtXv9pvM

yng the drama is about to end november 27 2011

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