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| ANV > SEC Filings for ANV > Form 10-Q on 9-May-2008 | All Recent SEC Filings |
9-May-2008
Quarterly Report
Management's Discussion and Analysis ("MD&A") of the consolidated operating results and financial condition of Allied Nevada Gold Corp. ("Allied Nevada") for the three month period ended March 31, 2008 has been prepared based on information available to us as of May 7, 2008. This MD&A should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2007 and the related notes thereto, which have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States. All amounts stated herein are in U.S. dollars, unless otherwise noted.
Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007
Allied Nevada had a consolidated net loss for the three month period ended March 31, 2008, of $6,870,000 compared to a consolidated net loss of $313,000 for the same period in 2007. The increase in the consolidated net loss of $6,557,000 is largely due to an increase of $4,638,000 in exploration, property evaluation and holding costs, an increase of $1,572,000 in corporate administration and investor relations costs and a decrease of $147,000 in net interest income.
Exploration, property evaluation and holding costs
Exploration, property evaluation and holding costs increased to $4,899,000 in the three month period ended March 31, 2008, as compared with $261,000 for the same period in 2007. The principal variances from the 2007 period are as follows:
• We have expensed $3,625,000 of costs related to exploration activities at the Hycroft Mine. These expenses were primarily related to drilling and assaying costs. During the three month period ended March 31, 2008, about 140 drill holes were completed for a total of approximately 80,000 feet drilled. The objective of the drilling program was to confirm and expand the existing oxide gold reserves and to test the economic viability of the sulfide gold and silver mineralization on the Hycroft property. Most of the drill holes encountered both oxide and sulfide mineralization.
There was no comparable work undertaken in 2007.
• After completion of the Arrangement pursuant to the Arrangement Agreement on May 10, 2007, Allied Nevada began operating as an independent company and employed its own exploration geologists in the corporate office. For the three month period ended March 31, 2008, the costs of these exploration salaries, benefits and travel expenses were $207,000. In the same period of 2007, we were allocated a portion of the Vista corporate expenses under the application of the continuity of interests method of accounting, which totaled $6,000.
• The cost of maintaining the Hycroft Mine site on care and maintenance was $492,000 higher for the three months ended March 31, 2008 when compared to the same period of 2007. Higher care and maintenance costs were incurred during the first quarter of 2008 as we continue maintenance activities to ensure that the property could operate in view of our recent decision to reactivate the mine.
Corporate administration and investor relations
Corporate administration and investor relations costs increased to $1,882,000 in the three months ended March 31, 2008, compared to $310,000 for the same period in 2007. The increase of $1,572,000 for the 2008 period can be attributed to a number of factors:
• In the three months ended March 31, 2008, we were not allocated any of Vista's general and administrative ("G&A") expenses, while in same period of 2007, substantially all of the G&A expenses for the same period in 2006 were allocated from Vista.
• In order to maintain the stock listings of Allied Nevada on the Toronto and American Stock Exchanges, for the three months ended March 31, 2008 listing fees, investor relations fees, and shareholder communication costs have amounted to $138,000. There were no comparable direct stock listing fees, investor relation fees, and shareholder communication costs in the same period of 2007.
• In the three months ended March 31, 2008, we recognized stock-based compensation expense of $623,000 from the Allied Nevada Stock Option Plan, resulting from grants of options to purchase shares of common stock as well as a grant of 300,000 Restricted Share Units pursuant to the Allied Nevada Restricted Share Plan. There were no stock-based
• In the three months ended March 31, 2008, we incurred $1,121,000 of other direct G&A expenses, including $603,000 for compensation, benefits, and related employee costs, $222,000 for legal, accounting, and other consulting fees, $114,000 for director fees and expenses, and $182,000 for other expenses including insurance, office rental, and other miscellaneous costs.
Depreciation and amortization
In the three months ended March 31, 2008, depreciation and amortization expense was $103,000 compared to $49,000 in the same period of 2007, substantially all of the increase was attributable to the depreciation of capital assets acquired between May 10, 2007 and March 31, 2008.
Asset retirement obligation and closure costs
Allied Nevada recorded accretion expense of $100,000 in the three months ended March 31, 2008 compared to no charge in the same period of 2007. The accretion expense in the three months ended March 31, 2007 was based on a risk-free credit adjusted rate of 7.5%.
Other income and expense
Interest income and interest expense
Allied Nevada earned $175,000 in interest income in the three months ended March 31, 2008 compared to $245,000 for the same period in 2007. The decrease of $70,000 is attributable to an increase in interest earned on our liquid savings accounts of $129,000 net of a decrease in interest earned on the Hycroft Mine restricted cash account of $18,000, which was offset by a reduction of $181,000 in the allocation of interest income from Vista. The increase in interest earned on the liquid savings account is attributable to higher cash balances available to be invested and the decrease in interest earned on the Hycroft Mine restricted cash account is due to lower interest rates during the 2008 period as compared to the same period in 2007.
Financial Position, Liquidity and Capital Resources
Cash used in operations
Cash used in operations was $3,241,000 in the three month period ended March 31, 2008, compared to $179,000 in the same period of 2007. The increase in cash used in operating activities of $3,062,000 for the three month period ended March 31, 2008 is primarily attributable to the increase in the consolidated net loss of $6, 557,000 for the three months ended March 31, 2008, which increased cash used in operations. As discussed in prior sections, this increased net loss is primarily the result of the increase in exploration costs and G&A costs partially offset by an increase of $2,856,000 in trade accounts payable and $623,000 of non-cash stock compensation expense from the Company's stock option and restricted share plans.
Investing activities
Net cash flows used in investing activities in the three month period ended March 31, 2008 increased to $16,596,000 from $54,000 in the same period of 2007. The increase of $16,542,000 for the 2008 period resulted from the following factors:
• In the three months ended March 31, 2008, we acquired $14.9 million of capital items consisting mainly of a used mining fleet and critical capital spares. We expect to incur approximately $2.5 million of additional capital costs relating to disassembly, transportation, and reassembly costs in moving the above mining fleet from Utah to Nevada.
• In the three months ended March 31, 2008, we incurred $2.2 million in development costs attributed to the proven and probable reserves at the Hycroft mine. This was partially offset by $0.5 million in cost recoveries on other properties for a net increase in mineral properties of $1.7 million.
Financing activities
The net cash provided by financing activities was $8.0 million in the three months ended March 31, 2008 compared to $316,000 in the same period of 2007. The $7.7 million increase in cash provided by financing activities was primarily the result of a subsidiary of the Company entering into a Credit Agreement with Ionic Capital Corp. ("Ionic"), which allows the subsidiary to borrow up to CDN$ 27.0 million. Borrowings on the Credit Agreement totaled approximately $9.7 million (CDN$ 10.0 million) for the three month period ended March 31, 2008. Deferred loan costs consisting of a standby fee, draw down fee, structuring fee, and legal costs totaled $1.7 million.
Liquidity and Capital Resources
At March 31, 2008, our total assets increased to $113.0 million from $106.5 million at December 31, 2007. Most of the increase in total was attributable to the net borrowings under the Ionic Credit Agreement.
At March 31, 2008, we had a working capital deficit of $2.9 million compared to working capital of $19.7 million at December 31, 2007, representing a decrease of $22.3 million. This decrease is primarily attributable to the $11.8 million decrease in cash discussed above combined with the addition of the $9.7 million Ionic term loan, which because it is due in March 2009 is classified as a current liability.
At March 31, 2008, we had cash and cash equivalents totaling $8.3 million. All cash equivalents were short-term investments in United States Government marketable securities. There is no exposure in asset-backed commercial paper.
On April 8, 2008, Allied Nevada completed a public offering of its common stock. The Company sold and issued 12,500,000 common shares and received total gross proceeds of CDN$ 65.6 million or approximately $64.6 million based upon the U.S./Canadian dollar exchange rate on the closing date. On April 18, 2008, Allied Nevada sold and issued an additional 1,875,000 common shares and received total gross proceeds of CDN$ 9.8 million or approximately $9.8 million based upon U.S./Canadian exchange rate on the closing date pursuant to an over-allotment option exercised by the Company's underwriters. Aggregate net cash proceeds from the common shares issued pursuant to the public offering and exercise of over-allotment option were approximately $69.0 million. We anticipate using most of the net proceeds for activities in connection with our proposed reactivation of the Hycroft Brimstone Open Pit Mine. We expect that we would use the majority of any remaining proceeds for our Hycroft exploration drilling program which includes a program to confirm and expand the oxide reserves as well as testing the economic viability of the sulfide gold and silver mineralization on the Hycroft property. Pending application of the net proceeds, we will invest the net proceeds in short-term, investment-grade, interest-bearing securities.
Off-Balance sheet arrangements
Allied Nevada has no off-balance sheet arrangements.
Contractual obligations
In April 2008, the Company agreed to have Kamatsu Equipment Co. transport the purchased Lisbon Valley mining fleet to the Hycroft mine site. The move will entail disassembly of the haul trucks and loaders, freight to the site, and reassembly of the equipment upon arrival. The smaller pieces including dozers, drills, and excavators will be moved in one piece. The relocation of the mining fleet is estimated to be completed within 6-8 weeks with an estimated cost of $2.5 million.
Planned Reactivation of Hycroft Mine
On September 11, 2007, the Board of Directors approved the reactivation of the Hycroft Mine. The Hycroft reactivation project involves reopening the Brimstone oxide open pit mine, which had been in production from 1994 until 1998 when the entire Hycroft Mine was closed and put on care and maintenance due to low gold prices.
While in production the Brimstone deposit contributed 175,000 ounces of gold production to the Hycroft total production of approximately 1 million ounces of gold. Once reactivated, the Brimstone Mine is expected to produce 375,000 ounces of gold over the next five years. Virtually all of the capital funds will be spent in 2008, with a target of achieving production in the fourth quarter of 2008. The critical constraints to achieve the gold production schedule include the timing of reclamation bond approval, the availability to complete the pre-stripping, and the availability of a contractor to construct the leach pad. Allied Nevada has scheduled these activities to begin in April 2008, but it is possible that these activities can be completed sooner resulting in an earlier start of gold production.
Upon completion of the oxide developmental drill program we will focus on our deep drilling program which is designed to validate the overall extent of the sulfide system to depth, thereby allowing Allied Nevada to design a detailed drill program in order to define the size, continuity and economic value of the mineralization. Minable reserves will be updated incorporating the results of the sulfide and oxide drill results to aid in optimizing the existing mine plan by the second quarter of 2008.
Outlook
The Company intends to evaluate the mineral potential of several of the land positions in our portfolio during 2008. These activities include but are not limited to the following:
• Activities in connection with the planned reactivation of the Hycroft Mine, as approved by the Board of Directors in September 2007. Development plans for the remainder of the year include:
• Complete bond cost calculation and post bond for the planned mining disturbance.
• Review and repair site electrical system.
• Hire key site managers
• Complete phase one of the refinery design including general layout drawing and equipment selection.
• Complete phase design of pad construction and detailed engineering cost estimate.
• Continue mine equipment selection and procurement.
• Continue repairs on site infrastructure.
• Interpret geophysical anomalies and identify future exploration targets.
• Complete oxide reserve development drilling program.
• Continue the deep sulfide gold and silver resource development program.
• Initiate exploration field work to develop drill targets on the priority projects for the second and third quarter.
• Continue to expand infrastructure required to operate as a publicly traded company. The activities planned for the remainder of the year are as follows:
• Complete staffing requirements at the head office and the Hycroft Property. Total number of employees is estimated to be approximately 140 by year-end.
• Continue the development of those business systems required to operate in an efficient manner. These systems included accounting, finance and land monitor systems.
• Refine those systems required to manage the Human Resource function in an efficient manner.
Critical Accounting Policies and Estimates
These interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States and follow the same accounting policies and methods of their application as the most recent annual financial statements. See Management's Discussion and Analysis and the financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2008 for a description of our critical accounting policies and estimates
Recent Accounting Pronouncements
Fair Value Measurements
In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for the Company's fiscal year ending December 31, 2008. Currently the Company does not hold any of the financial assets or liabilities to which this statement applies.
Fair Value Option for Financial Assets and Liabilities
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of SFAS 159 are effective for the Company's year ending December 31, 2008. The Company has determined that the adoption of this statement will have little or no effect on the Company's consolidated financial position, results of operations, and disclosures. Currently the Company does not hold any of the financial assets or liabilities to which this statement applies.
Business Combinations
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for the Company with respect to business combinations for which the acquisition date is on or after January 1, 2009. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on the consolidated financial position, results of operations, and disclosures.
Noncontrolling Interests
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of noncontrolling owners. SFAS 160 is effective for the Company as of January 1, 2009. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 160 on the consolidated financial position, results of operations, and disclosures.
Disclosures About Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 ("SFAS 161"). SFAS 161 requires enhanced disclosures about an entities derivative and hedging activities. SFAS 161 is effective for the Company as of January 1, 2009. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 161 on the consolidated financial position, results of operations, and disclosures.
Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report constitute "forward-looking statements". All statements, other than statements of historical facts, included herein and in press releases and public statements by our officers or representatives, that address activities, events or developments that management of Allied Nevada expects or anticipates will or may occur in the future, are forward-looking statements, including but not limited to such things as future business strategy, plans and goals, competitive strengths, expansion and growth of our business, plans for reactivation of the Hycroft Mine including anticipated scheduling and production estimates, as well as estimated capital and other costs, technical risks associated with the Hycroft reactivation project, timing of reclamation bond approval, the availability of outside contractors, and availability of a contractor to construct the leach pad, results of exploration drilling programs currently underway at Hycroft, current estimates of gold oxide mineralized material, potential for upgrading and expanding oxide gold mineralized material and extension of life of the oxide project, results of evaluation of underlying sulfide mineralization at Hycroft, future gold prices, availability and timing of capital for financing the planned reactivation of the Hycroft Mine, anticipated cash flows if production is resumed, estimated completion dates, estimated exploration expenditures, operations, proven or probable reserves, mineralized material, current working capital, cash operating costs, and statements made concerning anticipated effects of the Arrangement.
The words "estimate", "plan", "anticipate", "expect", "intend", "believe" "target", "budget", "may", "schedule" and similar words or expressions identify forward-looking statements. These statements involve known and unknown risks, uncertainties, assumptions and other factors which may cause our actual results, performance or achievements, including anticipated scheduling and production estimates in connection with our proposed reactivation of the Hycroft Mine and anticipated consequences of the Arrangement, to be materially different from any results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on current expectations. The anticipated timing and cost of reactivation of the Hycroft Mine as well as the expected production from the mine are based on the following assumptions: Capital cost estimates are based on current cost estimates (July 2007) of construction and mining costs. These estimates were developed by independent consultants and Allied personnel. Production estimates are based upon the actual gold recovery achieved on Brimstone ores. Ore tonnage estimates and gold grades are based on the mine plans and production schedules developed by an independent consultant. Although our management believes that its expectations are based on reasonable assumptions, we can give no assurance that these expectations will prove correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among others:
• Business-related risks including:
• Risks related to our lack of operating history;
• Risks relating to the planned reactivation of the Hycroft Mine including:
• uncertainties relating to obtaining approvals and permits from governmental regulatory authorities including timing of required reclamation bond approval
• risks of delays in completion of construction;
• risks relating to availability of a contractor to construct the leach pad;
• risks of shortages of equipment or supplies; and
• risks of inability to achieve anticipated production volume or manage cost increases;
• Risks that our acquisition, exploration and evaluation activities will not be commercially successful;
• Risks relating to fluctuations in the price of gold;
• The inherently hazardous nature of mining activities;
• Uncertainties concerning estimates of reserves and mineralized material;
• Uncertainty of being able to raise capital on favorable terms or at all;
• Risks relating to intense competition within the mining industry;
• Our dependence on outside sources to place mineral properties into production;
• Potential effects on our operations of U.S. federal and state governmental regulation, including environmental regulation and permitting requirements;
• Risks of significant cost increases;
• Uncertainties concerning availability of equipment and supplies;
• Risks relating to our dependence on third parties that are responsible for exploration and development on some of our properties;
• Risks that we may lose key personnel or fail to attract and retain personnel;
• Risks that we may experience difficulty in managing our growth;
• Potential challenges to title in our mineral properties; and
• Risks that our principal stockholders will be able to exert significant influence over matters submitted to stockholders for approval.
• Risks related to our common stock, including:
• Potential volatility in the trading price of our common stock;
• Risks inherent in accurately valuing our common stock; and
• Potential adverse effect of future sales of our common stock on the trading price of our common stock.
For a more detailed discussion of such risks and other important factors that could cause actual results to differ materially from those in such forward-looking statements, please see those factors discussed in this Form 10-Q and other filings with the SEC. Although we
have attempted to identify important factors that could cause actual results to differ materially from those described in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that our forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in the statements. We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
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