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Weekend reading

Southeastern Asset Management’s Q1 Letter: Good read

Gut bacteria can classify people in groups: What blood types did for classification of humans, now gut bacteria could lead to similar classification

Lloyd Blankfein’s journey from nowhere: Lloyd Blankfein’s journey from nowhere to the CEO of GS

Stan Ovshinsky’s latest invention: One of the great inventors of our time is now, at age of 88, working on making Solar cheap

Pickens advocating his Nat Gas Act: T. Boone Pickens working this PR to get the Nat Gas Act passed

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Categories: Reading
  1. bob
    April 26, 2011 at 7:12 pm

    with respect to yukon nevada, the more i’m reading about mining companies, the more it seems that capital expenditure can get out of hand pretty fast and hence repeat cycles of dilution from mining companies that can’t access the debt markets. i am long yukon, but i wonder if it’s something where the replacement value of the roaster will eventually be eroded through successive dilutions that this management team did not anticipate having to do. heck, the ceo isn’t even on the premises much of the time as he’s also tending to monument.

    • paras
      April 26, 2011 at 9:11 pm

      Yes, mining is a CapEx intensive business. At the early stage of the business, the companies need cash to build out the infrastructure. Companies tend to issue shares at the start. The shares tend to be very cheap then because of the associated risk. So issuing shares will dilute the shareholders and erode any value.

      YNG doesn’t need much capital for CapEx. The majority of the infrastructure is already in place. They are already producing 100K+ oz currently. The conversion of warrants at discount is to make the production weather proof. There really isn’t much dilution since the warrants were issued a while back. The dilution is due to the 18% discount on conversion.

      The company has mentioned that it will not issue any new shares. It will raise capital via debt. If you look at the recent presentation the company mentioned they are looking to raise 40M of debt. If the company is not able to raise debt or the cost to make the mine weather proof runs higher than expectation then we could have some problems. But now we are in a ‘good weather’ time, with high gold prices. So the company should be making good cash flow for the next couple of quarters.

      A turnaround is always tricky. Things can go against plan. So even though the management doesn’t expect any more dilution, expects strong cash flow in the next few quarters, all plans could go out the window if they can’t execute.

      Paras

  2. bob
    April 27, 2011 at 1:31 pm

    appreciate your thoughts – well laid out. given the presentation just being changed, what are your thoughts on the future production projection declines? given the roaster, what do you think the acquisition value of the company is? thanks in advance.

    • paras
      April 27, 2011 at 2:04 pm

      funny you ask about the new presentation. I just stumbled upon their website today morning and saw the new presentation. Quick thoughts:
      – First time I saw them talk about their Silver assets. Still not clear how much they own and what the costs would be
      – Mgmt upped their valuation of their roaster facility to 1B. Only a month ago it was valued at 750M. Wonder how they value this and if it really means anything. Probably related to price of gold. My take is company couldn’t sell it at market value, but even if you take a very conservative valuation,lets says 60% haircut you still get 400M value compared to diluted market cap around 600M.
      – looks like the near term production numbers are down and longer term are up. I expected them to take a hit on near term production due to weatherization of plant delaying other management goals. I’m not too concerned here. I’m willing to hold this for a while, so production is not my big concern. Although who knows what gold prices will be like 3 yrs out, so cash flow gets very fuzzy now.
      – no news on purchasing ore. I guess the company can’t get a good price agreement to make it worth while. Not a big problem, cause the big value is in the ability of YNG to acquire other companies
      – mgmt believes their cost of production can come down dramatically 2 years out. will have to wait and see if company is able to execute.

      overall no major changes in my outlook for YNG. production decline is not good news but i think the outlook 3+ yrs out for production is still good. biggest concern is execution and gold prices. next 12 months are key to mgmt executing on its goals. also, this one will take a while to get to strong cash flow, so gold prices 2+ yrs out can have big impact. no one knows what gold prices will be that far out.

      Paras

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