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| ANV > SEC Filings for ANV > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-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 and nine month periods ended September 30, 2008 have been prepared based on information available to us as of November 10, 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.
The Company commenced mining operations in August 2008 and in the third quarter of 2008 removed 2,670,000 tons of overburden and placed 205,000 tons of ore with fire assay gold grade of 0.0076 ounces per ton on our leach pad. The initial ore grades were lower than the expected life of mine average.
The mining of ore and waste is expected to increase considerably in the fourth quarter of 2008 due to a full quarter of mining activity and the recent engagement of a mining services contractor to supplement our mining capacity. At the end of September 2008, we began processing operations by applying a cyanide leaching chemical solution to our leach pad and we expect to produce a nominal amount of dorι by the end of 2008.
Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007
Allied Nevada had a consolidated net loss for the three month period ended September 30, 2008, of $9,747,000 compared to a consolidated net loss of $3,387,000 for the same period in 2007. The increase in the consolidated net loss of $6,360,000 is largely due to an increase of $2,616,000 in exploration, property evaluation and holding costs, an increase of $419,000 in corporate general and administrative costs, $2,348,000 of mine start up costs, and $602,000 of interest expense.
Mine start up costs
During the three month period ended September 30, 2008, we expensed $2,348,000 of start up costs consisting primarily of salaries and benefits for employees at the Hycroft Mine site, including mine site general and administrative, mining, and process operations costs. There were no comparable costs incurred during the same period in 2007.
Exploration, property evaluation and holding costs
Exploration, property evaluation and holding costs increased to $4,328,000 in the three month period ended September 30, 2008, as compared with $1,712,000 for the same period in 2007. The principal variances from the 2007 period are as follows:
We expensed $3,833,000 of costs related to exploration activities at the Hycroft Mine in the third quarter of 2008. These expenses were primarily related to drilling and assaying costs. During the three month period ended September 30, 2008, about 85 drill holes were completed for a total of approximately 84,000 feet drilled. The objective of the drilling program was to confirm and expand the existing oxide gold reserves and resources 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.
From July 1, 2007 through September 30, 2007, we expensed approximately $957,000 in preliminary exploration activities consisting of use of a single reverse circulation drill, collection and assaying of surface mineral samples, geologic field work using gravimetric and induced polarization techniques, and geologic and aerial survey mapping.
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 September 30, 2008, the costs of these exploration salaries, benefits and travel expenses were $204,000. In the same period of 2007, we incurred approximately $168,000 of exploration salaries, benefits, and travel costs.
Corporate general and administrative costs
Corporate general and administrative costs increased to $2,238,000 in the three months ended September 30, 2008, compared to $1,819,000 for the same period in 2007. The increase of $419,000 for the 2008 period can be attributed to a number of factors:
In order to maintain the stock listings of Allied Nevada on the Toronto Stock Exchange and American Stock Exchange (n/k/a NYSE Alternext), for the three months ended September 30, 2008 listing fees, investor relations fees, and shareholder communication costs have amounted to $231,000 compared to $60,000 in the same period of 2007.
In the three months ended September 30, 2008, we recognized stock based compensation expense of $828,000 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 compared to $687,000 in the same period in 2007.
In the three months ended September 30, 2008 compensation, benefits, and employee related costs increased to $572,000 compared to $458,000 in the same period of 2007. The increase is the result of the hiring of additional corporate staff compared to the 2007 period.
Depreciation and amortization
In the three months ended September 30, 2008, depreciation and amortization expense was $314,000 compared to $92,000 in the same period of 2007, substantially all of the increase was attributable to the depreciation of capital assets acquired in 2008.
Asset retirement obligation and closure costs
Allied Nevada recorded accretion expense of $104,000 in the three months ended September 30, 2008 compared to $89,000 in the same period of 2007. The accretion expense in the three months ended September 30, 2008 and 2007, respectively, was based on a risk-free credit adjusted rate of 7.5%.
Other income and expense
Interest income
Allied Nevada earned $271,000 in interest income in the three months ended September 30, 2008 compared to $325,000 for the same period in 2007. The decrease of $54,000 is attributable to a decrease in interest earned on our liquid savings accounts of $62,000 and an increase in interest earned on the Hycroft Mine restricted cash account of $13,000. Although the Company had higher cash balances in the third quarter of 2008 compared to the same period of 2007, the decrease in interest earned on the liquid savings account is attributable to lower interest rates during the 2008 period as compared to the same period in 2007.
Interest expense
Allied Nevada incurred $602,000 of interest expense in the three months ended September 30, 2008, which consisted primarily of recognizing interest expense of the remaining balance of deferred loan costs on the credit agreement. There was no interest expense in the same period of 2007.
Other income (expense)
Other expense, net for the three months ended September 30, 2008 totaled $84,000 compared to no other income for the same period in 2007. Other expense for the 2008 period consisted of a net realized foreign exchange loss of approximately $95,000, partially offset by a gain of $13,000 resulting from the sale of a mineral interest property.
Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007
Allied Nevada had a consolidated net loss for the nine month period ended September 30, 2008, of $26,474,000 compared to a consolidated net loss of $5,476,000 for the same period in 2007. The increase in the consolidated net loss of $20,998,000 is largely due to an increase of $12,289,000 in exploration, property evaluation and holding costs, an increase of $3,633,000 in corporate general and administrative costs, $2,640,000 of mine start up costs, and $1,825,000 of interest expense.
Mine start up costs
We expensed $2,640,000 of start up costs consisting primarily of salaries and benefits for employees at the Hycroft Mine site, including mine site general and administrative, mining, and process operations costs. There were no comparable costs incurred during the same period in 2007.
Exploration, property evaluation and holding costs
Exploration, property evaluation and holding costs increased to $14,810,000 in the nine month period ended September 30, 2008, as compared with $2,521,000 for the same period in 2007. The principal variances from the 2007 period are as follows:
We have expensed $11,801,000 of costs related to exploration activities at the Hycroft Mine during the nine month period ended September 30, 2008. These expenses were primarily related to drilling and assaying costs. During the same period, about 327 drill holes were completed for a total of approximately 225,000 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.
From May 10, 2007 through September 30, 2007, we expensed approximately $1,093,000 in preliminary exploration activities consisting of use of a single reverse circulation drill, collection and assaying of surface mineral samples, geologic field work using gravimetric and induced polarization techniques, and geologic and aerial survey mapping.
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 nine month period ended September 30, 2008, the costs of these exploration salaries, benefits and travel expenses were $632,000 compared to $193,000 from May 10, 2007 through September 30, 2007.
The cost of maintaining the Hycroft Mine site on care and maintenance was $514,000 higher for the nine months ended September 30, 2008 when compared to the same period of 2007. Higher care and maintenance costs were incurred during the first half of 2008 as we engaged in maintenance activities to ensure that the property could operate in view of our decision to reactivate the mine.
Corporate general and administrative costs
Corporate general and administrative costs increased to $6,997,000 in the nine months ended September 30, 2008, compared to $3,364,000 for the same period in 2007. The increase of $3,633,000 for the 2008 period can be attributed to a number of factors:
In the nine months ended September 30, 2008, we recognized stock based compensation expense of $2,961,000 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 compared to $644,000 in the same period of 2007. The increase in total stock based compensation expense is attributable to nine months of such expense in 2008 compared to three months of expense in 2007 and $923,000 resulted from option grants in May and June 2008 being one-third vested at the time of grant (Note 10). Additionally, Vista's stock based compensation allocations to us, which are described above and included in the above allocated expenses, were $65,000 in the same period of 2007.
In the nine months ended September 30, 2008 compensation, benefits, and employee related costs increased to $1,772,000 compared with $894,000 for the same period in 2007. The increase is a result of nine months of expense in 2008 compared to four months in 2007 and hiring of additional corporate staff.
In order to maintain the stock listings of Allied Nevada on the Toronto Stock Exchange and American Stock Exchange (n/k/a NYSE Alternext), for the nine months ended September 30, 2008 listing fees, investor relations fees, and shareholder communication costs have amounted to $477,000 compared to $346,000 in the same period of 2007.
In the nine months ended September 30, 2008, we were not allocated any of Vista's general and administrative ("G&A") expenses, while in same period of 2007, $383,000 of the G&A expenses were allocated from Vista.
Depreciation and amortization
In the nine months ended September 30, 2008, depreciation and amortization expense was $539,000 compared to $250,000 in the same period of 2007, substantially all of the increase was attributable to the depreciation of capital assets acquired in 2008.
Asset retirement obligation and closure costs
Allied Nevada recorded accretion expense of $305,000 in the nine months ended September 30, 2008 compared to $133,000 in the same period of 2007. The accretion expense in the nine months ended September 30, 2008 and September 30, 2007, respectively, was based on a risk-free credit adjusted rate of 7.5%.
Other income and expense
Interest income
Allied Nevada earned $819,000 in interest income in the nine months ended September 30, 2008 compared to $742,000 for the same period in 2007. The increase of $77,000 is attributable to an increase in interest earned on our liquid savings accounts of $327,000 and a decrease in interest earned on the Hycroft Mine restricted cash account of $6,000, which was offset by a reduction of $241,000 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.
Interest expense
Allied Nevada incurred $1,825,000 of interest expense in the nine months ended September 30, 2008 compared to $11,000 in the same period of 2007. $1,748,000 of the Company's interest expense was attributable to the Ionic term loan described in Note 13 to the Condensed Consolidated Financial Statements. Approximately $1.1 million of deferred loan costs were expensed as a result of a voluntary repayment on the Ionic term loan of CAD$ 10.0 million in May 2008. Under the terms of the Ionic credit agreement, CDN $17.0 was available to be drawn down through the end of July 2008. The Company did not borrow any amounts after it voluntarily repaid the initial drawdown described above. Consequently, the Company recognized the remaining balance of deferred loan costs of approximately $0.6 million on as interest expense in July 2008.
Impairment of mineral interests
As discussed in Note 7 to the Condensed Consolidated Financial Statements, Allied Nevada incurred an impairment of $432,000 for the nine month period ended September 30, 2008 relating to termination of royalty agreements and exploration rights on nine mineral properties by a joint venture partner in April 2008. There were no mineral interest impairments for the nine month period ending September 30, 2007.
Other income (expense)
Other income, net for the nine months ended September 30, 2008 totaled $255,000 compared to $61,000 for the same period in 2007. Other income for the 2008 period consisted mainly of a net realized foreign exchange gain of approximately $48,000 and a gain of $209,000 resulting primarily from the sale of mineral interest properties.
Financial Position, Liquidity and Capital Resources
Cash used in operations
Cash used in operations was $16,182,000 in the nine month period ended September 30, 2008, compared to $3,950,000 in the same period of 2007. The increase in cash used in operating activities of $12,232,000 for the nine month period ended September 30, 2008 is primarily attributable to the increase in the consolidated net loss of $20,998,000 for the nine months ended September 30, 2008, which was offset by an increase of $5,778,000 in cash provided from trade accounts payable, an increase of $2,344,000 of non-cash stock based compensation expense, and $1,748,000 of non-cash amortization of deferred loan costs.
Investing activities
Net cash flows used in investing activities in the nine month period ended September 30, 2008 increased to $38,356,000 from $15,146,000 in the same period of 2007. The increase of $23,210,000 for the 2008 period resulted from the following factors:
In the nine months ended September 30, 2008, we acquired $25.2 million of capital items consisting primarily of a used mining fleet, the completion of a one million square foot leach pad expansion, and a new refinery.
In the nine months ended September 30, 2008, we incurred $7.8 million in capitalized mine development costs attributable to the proven and probable reserves at the Hycroft Mine consisting primarily of capitalized stripping costs and ore reserve exploration costs.
In the nine month period ended September 30, 2008, the Company entered into three capital leases for mining equipment in exchange for down payments of $0.3 million and $3.2 million of capital lease obligations. $3.2 million of $3.5 million of equipment acquired has been reflected as a non-cash financing and investing activity on our Condensed Consolidated Statement of Cash Flows for the three and nine month period ended September 30, 2008.
In the nine months period ended September 30, 2007, the Company acquired the Pescio Nevada Assets in exchange for $15.0 million and 12.0 million shares. There was no comparable acquisition of mineral interests in the nine month period ended September 30, 2008.
During the nine months ended September 30, 2008, we received proceeds from the sale of mineral interest properties of $1,025,000. These were no comparable sales in the same period of 2007.
Financing activities
The net cash provided by financing activities was $67,349,000 in the nine months ended September 30, 2008 compared to $40,853,000 in the same period of 2007. The increase of $26,496,000 in cash provided by financing activities is the result of the following factors:
In April 2008, Allied Nevada sold and issued 14,375,000 shares of its common stock in public offering and received gross proceeds of CDN$ 74.4 million or approximately $74.5 million based upon the U.S./Canadian exchange rate on the closing date. We incurred approximately $5.2 million of costs in connection with the April 2008 offering. There was no comparable public offering in the same period of 2007.
In May 2007, Vista in connection with the Arrangement Agreement paid Allied Nevada $25.0 million. There was no comparable payment from Vista to Allied Nevada in the 2008 period.
In July 2007, the Company sold and issued 3,696,000 shares in a private placement and received gross proceeds of CDN $17.0 million or approximately $16.3 million based upon the U.S./Canadian exchange rate on the closing date. There was no comparable private offering in 2008.
In March 2008, Allied Nevada borrowed $9.7 million (CDN$ 10.0 million) from Ionic Capital Corp. ("Ionic") and paid $1.7 million of deferred loan costs to Ionic. After completion of the public offering described above, Allied Nevada voluntarily repaid CDN$ 10.0 million ($10.1 million). There were no comparable borrowings and repayments of debt in the same period of 2007.
Liquidity and Capital Resources
At September 30, 2008, our total assets increased to $162.9 million from $106.5 million at December 31, 2007. Most of the increase in total assets is attributable to the net proceeds from the April 2008 offering described above.
At September 30, 2008, we had working capital of $27.9 million compared to working capital of $19.7 million at December 31, 2007, representing an increase of $8.2 million. The increase is attributable to the $12.8 million increase in cash discussed above, and an increase in inventory of $2.1 million, which was partially offset by a $6.5 million increase in accounts payable and an increase in accrued liabilities and current capital lease obligations of $1.0 million.
At September 30, 2008, we had cash and cash equivalents totaling $32.9 million. All cash equivalents were invested in high quality short-term money market instruments, including bankers' acceptances, bank notes, certificates of deposit, government securities, commercial paper and repurchase agreements of domestic and foreign issuers. At September 30, 2008, we had no funds invested in asset backed commercial paper.
Off-Balance sheet arrangements
Allied Nevada has no off-balance sheet arrangements.
Contractual obligations
In October 2008, a subsidiary of the Company entered into an agreement with a mining services contractor to mine and haul overburden and ore. The Company will pay the mining services contractor an hourly fee, and a mobilization and demobilization
fee. The Company will provide fuel for the operation of the mining contractor's fleet. The purpose of the contract is to supplement the Company's existing mining fleet and expedite the removal of overburden and placement of ore on the Company's leach pad. The Company anticipates its mining and hauling capacity will increase by approximately 15,000 tons per day.
Outlook
The Company intends to evaluate the mineral potential of several of the land positions in our portfolio during the fourth quarter of 2008 and in 2009. These activities include but are not limited to the following:
Activities in connection with the reactivation of the Hycroft Mine:
Refine the Hycroft Health, Safety and Environmental Management Systems
Complete staffing of operational personnel
Complete construction of the new leach pad
Continue repairs on site infrastructure
Interpret geophysical anomalies and identify future exploration targets
Complete a third phase oxide reserve and resource development drilling program at Hycroft in 2009
Update oxide ore reserve and resource and sulphide resource calculation for Hycroft in 2009
Continue the third phase deep sulfide gold and silver resource development program at Hycroft in 2009
Initiate exploration field work to develop drill targets on the priority projects for 2009
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 160 by year-end.
Continue the development of accounting, finance and land monitoring systems.
Refine systems required to manage the Human Resource function.
Evaluate gold production expansion options, including but not limited to stacking solutions, crushing ore, and expanding the mining fleet.
Evaluate opportunities to realize value from the Company's portfolio of mineral properties by entering into joint venture agreements or selling uncommitted properties.
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, 2007 for a description of our critical accounting policies and estimates.
Recent Accounting Pronouncements
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.
Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an entity's Own Stock
In June 2008, the Emerging Issues Task Force issued EITF No. 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock" ("EITF No. 07-5"). EITF No. 07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock. EITF No. 07-5 provides that equity-linked financial instruments denominated in a currency other than the issuers functional currency are not considered indexed to an entities own stock. Accordingly, those instruments must be accounted for in accordance with the FASB No. 133, . . .
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