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ANV > SEC Filings for ANV > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for ALLIED NEVADA GOLD CORP.

Form 10-Q for ALLIED NEVADA GOLD CORP.


5-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In Management's Discussion and Analysis of Financial Condition and Results of Operations, "we", "us", "our", the "Company", and "Allied Nevada" refer to Allied Nevada Gold Corp. and its subsidiaries. The following discussion, which has been prepared based on information available to us as of November 5, 2013, provides information that we believe is relevant to an assessment and understanding of our consolidated operating results and financial condition. The following discussion should be read in conjunction with our other reports filed with the U.S. Securities and Exchange Commission (the "SEC") as well as our interim unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2012. References to "$" refers to United States currency and "CDN $" to Canadian currency. Overview of the Company
We are a U.S.-based gold producer focused on mining, development, and exploration properties in the state of Nevada. Our operating mine, the Hycroft Mine ("Hycroft"), was restarted in 2008 and is undergoing expansion projects to increase our oxide (heap leach) mineralization processing capabilities and mining rate, a majority of which will be completed and commissioned during 2013. As discussed below in the Hycroft Expansion Projects section, the construction of our previously commenced mill expansion, which would provide us with sulfide mineralization processing capabilities, has been deferred.
At December 31, 2012 we had proven and probable mineral reserves of 11.9 million ounces of gold and 509.6 million ounces of silver. In 2013, our Hycroft Mine is expected to produce approximately 175,000 to 200,000 ounces of gold and 0.9 million to 1.1 million ounces of silver, more of which is expected to be produced in the second half of the year as critical heap leach expansion projects are completed.
In addition to the Hycroft Mine, we own or control leasehold interests in 100% of the Hasbrouck, Three Hills, Mountain View, Wildcat, and the Pony Creek/Elliot Dome Advanced Exploration Properties and have a joint venture with Silver Standard Resources Inc. with respect to the Maverick Springs Advanced Exploration Property. We also have the exploration rights to approximately 78 Other Exploration Properties.
Executive Summary
Our third quarter 2013 highlights and significant developments included the following, which are discussed in further detail throughout the following sections of this Management's Discussion and Analysis of Financial Condition and Results of Operations:
Health and safety: We remained committed to our core values, health and safety, and operated in an environmentally responsible manner. Regrettably, there was one lost time accident at our Hycroft Mine during the third quarter of 2013. We have learned from this setback and taken measures to strengthen the overall health and safety environment at our Hycroft Mine.
Ounces sold: Gold ounces sold in the third quarter of 2013 increased 51% to 52,713 ounces, compared to 34,851 ounces sold in the same period of 2012. The 52,713 gold ounces sold in the third quarter is an all-time quarterly record and represents an increase of 27%, or 11,201 gold ounces, from the second quarter of 2013.
Hycroft Mine operations: During the third quarter of 2013, we placed 12.7 million ore tons on the leach pads containing approximately 75,089 recoverable ounces of gold and approximately 0.5 million recoverable ounces of silver. During the third quarter of 2013, we achieved our targeted mining rate and decreased our mining cost per ton compared to the second quarter of 2013, all while operating in a leaner, more cost-efficient structure as a result of our July workforce reduction.
Hycroft Mine heap leach expansion projects: As discussed below in the Hycroft Mine - Operations and Hycroft Expansion Projects sections, our heap leach expansion projects progressed well during the third quarter, including operation of the North leach pad and two 73 cubic-yard electric rope shovels, initiating commissioning of the new 21,500 gallons per minute ("gpm") Merrill-Crowe plant, and continuing construction of the crushing system.
Hycroft Mine mill construction deferred: As previously announced and discussed below in the Hycroft Expansion Projects section, we have deferred the construction of a mill. We continued work on the design of an optimized mill plan, oxidation test work for sulfide concentrate treatment, and finalization of environmental permits necessary to operate a mill.
Net income: As discussed in the Results of Operations section below, our third quarter and first nine months of 2013 net income was $5.0 million and $18.0 million, respectively. Although we sold a record number of gold ounces during the third quarter of 2013, we were negatively impacted by a lower metal price environment and increases to total cost of sales.


Table of Contents

Hycroft Mine
Operations
Key operating statistics for the three and nine months ended September 30, 2013
and 2012 are as follows:
                                        Three months ended September 30,      Nine months ended September 30,
                                              2013               2012               2013              2012
Ore mined (000's tons)                            12,690           7,147               32,074          15,521
Ore mined and stockpiled (000's tons)                948             670                1,752           1,492
Waste mined (000's tons)                           8,395           5,843               23,320          19,417
                                                  22,033          13,660               57,146          36,430
Excavation mined (000's tons)                          -           5,560                3,288           9,807
Ore mined grade - gold (oz/ton)                    0.011           0.011                0.011           0.013
Ore mined grade - silver (oz/ton)                  0.253           0.198                0.213           0.309
Ounces produced - gold                            52,198          28,182              129,412          91,317
Ounces produced - silver                         184,070         185,604              504,911         559,968
Ounces sold - gold                                52,713          34,851              121,481          72,960
Ounces sold - silver                             184,082         177,844              505,151         480,886
Average realized price - gold ($/oz)1  $           1,378     $     1,703     $          1,421     $     1,683
Average realized price - silver ($/oz) $              22     $        31     $             24     $        31
Average spot price - gold ($/oz)       $           1,326     $     1,652     $          1,456     $     1,652
Average spot price - silver ($/oz)     $              21     $        30     $             25     $        31
Adjusted cash costs per ounce2         $             905     $       690     $            794     $       606

The Hycroft Mine operational efforts, together with our increased ore under leach on the North leach pad and additional solution processing capacity from our carbon columns, resulted in the sale of a record number of gold ounces during the third quarter of 2013. Silver ounces sold during the third quarter and first nine months of 2013 did not increase proportionately to the increase in gold ounces sold as approximately 62% of our third quarter gold ounces sold were recovered from solution processed through the carbon columns, which have low silver recoveries. Our average silver ounces to gold ounces sold ratios for the third quarter and first nine months of 2013 were approximately 3.5:1 and 4.2:1, respectively, which we expect to increase to over 6.0:1 during the fourth quarter when solution is primarily processed through the new Merrill-Crowe plant. The new Merrill-Crowe plant began processing approximately 7,000 gpm of solution in mid-October and by the end of October was fully commissioned and capable of processing solution at the full 21,500 gpm capacity. Our total tons mined during the first nine months of 2013 increased approximately 31% from the 2012 period as a result of our expanded mobile mine equipment fleet. We were able to achieve our third quarter 2013 target mining rate through efficiencies gained with our mobile equipment dispatch system and increased loading capacity of the two 73 cubic-yard electric rope shovels, all while operating with an approximately 24% leaner mine-site workforce. During the third quarter of 2013 our average mining cost per ton and average processing cost per ore ton decreased by 22% and 14%, respectively, from second quarter 2013 per ton amounts. We expect such efficiencies in mining and processing costs to continue during the remainder of 2013, which we believe will positively impact our future production costs and adjusted cash costs per ounce2. As of September 30, 2013, we had approximately 11.4 million square feet under leach, an increase of approximately 4.3 million square feet from June 30, 2013. The North leach pad continued to perform well during its first five months of operations as our overall metal recoveries and timing of such metal recoveries remained consistent with our expectations. During the third quarter of 2013 we continued our remediation efforts of the Lewis leach pad and received permits which allowed us to begin introducing solution into wells that have been drilled into dry areas of the pad. Test work is ongoing to determine the timing of solution penetration and the rate in which metal production is expected to occur.

1 The average realized price per gold ounce for the third quarter of 2013 includes positive adjustments that totaled approximately $17/oz related to the settlement of provisionally priced sales. There were no such adjustments to the average realized prices per ounce during any of the other periods presented. For additional information on our provisionally priced sales see Note 17 - Derivative Instruments to our Notes to Condensed Consolidated Financial Statements.
2 The term "adjusted cash costs per ounce" is a non-GAAP financial measure. Non-GAAP financial measures do not have any standardized meaning prescribed by GAAP and, therefore, should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. See the section on "Non-GAAP Financial Measures" in this MD&A for additional information.


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Although our third quarter 2013 mining and processing costs improved from previous periods, our adjusted cash costs per ounce1 for the first nine months of 2013 were negatively impacted by lower silver ounces sold, increased production costs incurred during the first half of 2013, and additional external refining costs for carbon in-process inventories sold during the third quarter of 2013. Further, during the third quarter and first nine months of 2013 our average realized price per ounce of silver sold decreased by approximately $9 (30%) and $6 (19%), respectively, compared to the same periods of 2012, resulting in increases to our adjusted cash costs per ounce1. Operations Outlook
2013 operations outlook
We continue to expect our 2013 full year metal sales will approximate 175,000 to 200,000 ounces of gold and 0.9 million to 1.1 million ounces of silver. We expect to move 76.3 million tons of material, including 41.0 million tons of ore at average grades of 0.012 oz/ton gold and 0.25 oz/ton silver. The overall strip ratio for 2013 is expected to be 0.6:1. Adjusted cash costs per ounce1 for 2013 are expected to be in the range of $800 to $825 per ounce (with silver as a byproduct credit).
Allied Nevada intends to focus its resources towards the Hycroft operations and expansion. At this time, no exploration drilling is planned for the remainder of 2013.
Heap leach only operations outlook
Until the decision to resume construction of a mill is made, as a heap leach only operation, we expect to be able to mine existing heap leach reserves of approximately 2.0 million ounces of gold and 84.3 million ounces of silver for six years (starting in 2014) and process at a reduced rate through 2021. The average mining rate is expected to be 81.2 million total tons, including 33.5 million ore tons processed, per year. Production is expected to average 225,000 ounces of gold and 2.7 million ounces of silver annually, through 2020, assuming heap leach operations only. The Hycroft Mine deposit remains open to the south with the potential for further expansion which could provide additional heap leach mineralized material.
Hycroft Expansion Projects
We have previously announced and commenced projects to expand our oxide (heap leach) operations and implement sulfide mineralization processing capabilities through the construction of a mill, which would provide staged increases to production. Although not all of the following expansion projects are ongoing, as discussed further below, our previously announced expansion projects at the Hycroft Mine included (1) increasing the mining rate through larger capacity haul trucks, shovels, and production drills; (2) expanding leach pad operations through increased pad size, additional solution processing capacity, and the addition of a gyratory crusher to enhance the exposure of ore to the leach process; (3) constructing a mill to process higher grade transitional and sulfide mineralization; and (4) upgrading infrastructure items to handle the milling demands, including power transmission and distribution, the construction of a railroad spur and an employee housing project.
The significant decline in gold and silver prices during the second quarter of 2013 impacted our expected cash flows from operations, resulting in our decision to defer construction of the mill and related infrastructure upgrades, further discussed in the following Mill construction and Infrastructure upgrades sections.
The decision to defer the mill construction does not reduce our estimated 2013 capital expenditures, as expected spending during the 2013 year is largely for the expansion of our leach pad operations, mining equipment, and previously ordered tangible mill components. As of September 30, 2013 we had $111.3 million of outstanding purchase obligations. We estimate that 2013 capital expenditures at the Hycroft Mine for the expansion projects will total approximately $483.8 million. For additional discussion about the Hycroft Mine expansion spending see the Liquidity and Capital Resources section below.
The following sections provide details and updates on the previously announced Hycroft Mine expansion projects.
Increasing the mining rate
This phase of the expansion project was completed during the third quarter of 2013. Equipment to increase the annual mining rate first began arriving on site in late 2010 and as of the end of July 2013, we had commissioned all 33 of the planned 320-ton Komatsu haul trucks and the first two (of three) 73 cubic-yard electric rope shovels. During the third quarter of 2013, we began efforts to sell the third electric rope shovel (which has not been built), and is included in Prepaids and other as property and equipment held for sale in our Condensed Consolidated Balance Sheet. We believe that our current mobile equipment fleet is sufficient to support our future operations, including a milling scenario, without a third electric rope shovel.

1 The term "adjusted cash costs per ounce" is a non-GAAP financial measure. Non-GAAP financial measures do not have any standardized meaning prescribed by GAAP and, therefore, should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. See the section on "Non-GAAP Financial Measures" in this MD&A for additional information.


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Expanding leach pad operations
To accommodate the increased mining rate we have expanded and are continuing to expand our leach pad capacity and solution processing capabilities. The North leach pad, which was commissioned during the second quarter of 2013, increased our gross leach pad capacity by 80.0 million tons. We had 60.0 million tons of remaining leach capacity as of September 30, 2013, an increase of 48.0 million tons from the December 31, 2012 remaining capacity of 12.0 million tons. The new 21,500 gpm Merrill-Crowe processing plant increased our total solution processing capacity to 33,000 gpm. As long as our solution flows remain at 26,500 gpm or less, we would expect processing to occur at the new and old Merrill-Crowe plants, thereby eliminating the use of our less efficient carbon columns. The new Merrill-Crowe plant began processing 7,000 gpm of solution in mid-October and by the end of October was fully commissioned and capable of processing solution at the full 21,500 gpm capacity. During the third quarter of 2013, we continued construction on the crushing system, including the primary, secondary, and tertiary crushers, which we expect to commission in the fourth quarter of 2013. Assuming there are no delays in commissioning the crushing system, we expect that this phase of the expansion project will be considered largely complete by the end of 2013.
In 2014, we do not expect to add additional leach pad space. As part of our sustaining capital requirements we may need to add leach pad space in 2015. We had originally planned to construct a new pad, which we referred to as the "South leach pad"; however, we now believe that we can expand our leach pad capacity on the north side of the property. Mill construction
To process the higher grade oxide and transitional ores and the sulfide ore, our previously announced expansion plans included the construction of a mill, which we have decided to defer due to declining metal prices and the resultant lower than expected cash flows generated by our operations.
During the next twelve months we will continue to develop an optimized mill plan, perform test work for onsite oxidation of our concentrates, and finalize the permits necessary to operate a mill once constructed. As part of the mill optimization work, we have engaged a third party to complete a feasibility study which will incorporate the results of our concentrate oxidation test work. We also plan to evaluate varying mill scenarios in terms of design capacity, including a staged mill scenario in which we would start with a 75,000 tons per day plant that could be increased to 130,000 tons per day in the future once the initial phase is operating according to plan. At this time, we cannot estimate a revised time frame, scope, or capital cost for different mill scenarios or revised long-term projections and estimates of production. We expect to make a decision on when construction of a mill will be resumed once a new feasibility study is completed, which we anticipate completing during the third quarter of 2014.
We continue to work with our engineers to finalize and catalog the detailed engineering work performed thus far so it can be quickly resumed at a future date. Some mill related capital spending will continue during the remainder of 2013 as we receive the mills themselves, the motors, and finish cataloging the mill-related engineering. Mill components that we have received (and continue to be received) will be stored until the decision is made to continue construction of a mill or offer the components for sale. Infrastructure upgrades
Our previously announced expansion plans required improvements to infrastructure at the Hycroft Mine, including the construction of a rail spur and upgrading the power transmission and distribution system to handle the demands of a mill and our electric rope shovels. Concurrently with our decision to defer construction of a mill, we decided to delay certain infrastructure improvements, including the rail spur and certain electrical upgrades, which were specific to supporting the demands of a mill. However, during the third quarter of 2013, we continued work on necessary infrastructure upgrades to support our expanding leach pad operations, including the electric rope shovels, Merill-Crowe plant, and crushing system.
Additionally, we have been building single family homes and townhouses in Winnemucca, NV for our current workforce and in anticipation of an expanded future workforce necessary to operate a mill, which we planned to rent and/or sell to our employees. Our original plans called for the completion of 39 single family homes and 50 townhouses; however, the scope of our housing needs is now lower with our decision to defer construction of a mill. Our plans are now to complete 29 single family homes and 34 townhouses. We have also completed a temporary housing project in anticipation of lodging needs related to the construction of a mill. We expect to vacate this facility by the end of 2013 and believe it will be available for use if we begin construction of a mill. Results of Operations
Revenue
Gold revenue
The table below summarizes changes in gold revenue, ounces sold, and average realized prices for the following periods:


Table of Contents

                                    Three months ended September 30,            Nine months ended September 30,
                                        2013                 2012                 2013                   2012
Total gold revenue (thousands)   $        72,649       $        59,337     $        172,567       $        122,812
Gold ounces sold                          52,713                34,851              121,481                 72,960
Average realized price (per
ounce)1                          $         1,378       $         1,703     $          1,421       $          1,683

                                   2013 vs. 2012                              2013 vs. 2012
The change in gold revenue was
attributable to (thousands):
Increase in ounces sold          $        30,411                           $         81,674
Decrease in average realized
price                                    (11,305 )                                  (19,170 )
Effect of average realized price
decrease on ounces sold increase          (5,794 )                                  (12,749 )
                                 $        13,312                           $         49,755

During the third quarter and first nine months of 2013 our gold revenue increased by approximately 22% and 41%, respectively, from the same periods of 2012 primarily due to increases in the number of gold ounces sold. Increases in the number of gold ounces sold in the 2013 periods were due to our expanded mine equipment fleet, increased ore under leach and solution flows, and increased solution processing capacity created by the additional carbon columns. During the third quarter of 2013 we processed solution at an average of 13,993 gpm, an increase of 124% from the third quarter of 2012. When compared to the 2012 periods, gold revenue for the third quarter and first nine months of 2013 was negatively impacted by decreases in the average realized price per ounce of $325 (19%) and $262 (16%), respectively.
Silver revenue
The table below summarizes changes in silver revenue, ounces sold, and average realized prices for the following periods:

                                      Three months ended September 30,             Nine months ended September 30,
                                         2013                    2012                 2013                 2012
Total silver revenue (thousands) $           4,092         $         5,492     $        12,362       $        14,908
Silver ounces sold                         184,082                 177,844             505,151               480,886
Average realized price (per
ounce)                           $              22         $            31     $            24       $            31

                                     2013 vs. 2012                               2013 vs. 2012
The change in silver revenue was
attributable to (thousands):
Increase in ounces sold          $             193                             $           752
Decrease in average realized
price                                       (1,539 )                                    (3,140 )
Effect of average realized price
decrease on ounces sold increase               (54 )                                      (158 )
                                 $          (1,400 )                           $        (2,546 )

During the third quarter and first nine months of 2013 our silver revenue decreased by approximately 25% and 17%, respectively, primarily due to decreases in the average realized prices per ounce and lower silver recoveries from solution processed through the carbon columns. The silver ounces to gold ounces sold ratio the first nine months of 2013 was approximately 4.2:1, compared to approximately 6.6:1 during the same period of 2012. During the fourth quarter we expect the silver ounces to gold ounces sold ratio to increase to over 6.0:1 when solution is primarily processed through the new Merrill-Crowe plant, which yields higher silver recoveries than the carbon columns.

1 The average realized price per gold ounce for the third quarter of 2013 includes positive adjustments that totaled approximately $17/oz related to the settlement of provisionally priced sales. There were no such adjustments to the average realized prices per ounce during any of the other periods presented. For additional information on our provisionally priced sales see Note 17 - Derivative Instruments to our Notes to Condensed Consolidated Financial Statements.


Table of Contents

Total cost of sales
Total cost of sales consists of production costs and depreciation and amortization. The table below summarizes changes in total cost of sales for the following periods (in thousands):

                                  Three months ended September 30,       Nine months ended September 30,
                                        2013               2012               2013               2012
Production costs                 $          51,775     $    29,533     $         108,813     $    59,110
Depreciation and amortization                9,607           3,758                19,194           7,859
Total cost of sales              $          61,382     $    33,291     $         128,007     $    66,969

                                    2013 vs. 2012                         2013 vs. 2012
The change in cost of sales was
attributable to:
Increase in gold ounces sold     $          17,063                     $          44,537
Increase in average cost of
sales per ounce                              7,291                                 9,910
Effect of average cost per ounce
increase on ounces sold increase             3,737                                 6,591
                                 $          28,091                     $          61,038

As discussed above in the Gold Revenue section, during the third quarter and first nine months of 2013 we sold 51% (or 17,862 ounces) and 67% (or 48,522 ounces) more gold ounces, respectively, than the same periods of 2012 which, together with an increase in the average cost of sales per gold ounce, increased our total cost of sales.
Production costs
As shown above in the Hycroft Mine - Operations table, during the third quarter and first nine months of 2013 we experienced lower waste to ore strip ratios than the same periods of 2012; however, higher first half of 2013 production costs continued to negatively impact our average cost of sales per ounce. . . .

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