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ANV > SEC Filings for ANV > Form 10-K on 24-Feb-2014All Recent SEC Filings

Show all filings for ALLIED NEVADA GOLD CORP.



Annual Report

Item 7. 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 February 24, 2014, 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"). References to "$" refers to United States currency and "CDN $" to Canadian currency. Our discussion and analysis consists of the following subsections:
Introduction to the Company which provides a brief discussion of our current heap leach (oxide) operations, future mill (sulfide) expansion plans, and business strategies and goals;

Executive Summary which lists and discusses significant matters related to our health and safety, financial performance, operations, and expansion projects;

Critical Accounting Estimates which provides a discussion of accounting estimates that we believe are critical in understanding and evaluating our reported financial results because they affect reported amounts and require significant management judgment and assumptions about highly uncertain matters;

Hycroft Mine which provides a detailed discussion of our operations, expansion projects, and 2014 outlook;

Results of Operations which provides a discussion and analysis of our operating results for the last three years;

Liquidity and Capital Resources which provides a discussion of our cash flows (last three years), liquidity, available sources of liquidity, capital requirements, and debt covenants; and

Non-GAAP Financial Measures which includes a description of our non-GAAP financial measure "adjusted cash costs", the reasons for our use of such measure, and a three year reconciliation to our production costs and write-down of production inventories (GAAP).

Introduction to the Company
We are a U.S.-based primary gold producer focused on mining, developing, and exploring properties in the state of Nevada in a safe, environmentally responsible, and cost-effective manner. Gold and silver sales represent 100% of our revenues and the market prices of gold and silver significantly impact our operating results and cash flows.
Our operating mine, the Hycroft Mine ("Hycroft"), is an open-pit heap leach operation and during the year ended December 31, 2013 we sold 181,941 ounces of gold and 858,073 ounces of silver produced at Hycroft. As of December 31, 2013, the Hycroft Mine had proven and probable mineral reserves of 11.3 million ounces of gold and 497.1 million ounces of silver, which are contained in oxide (heap leach) and sulfide (mill) ores. We currently recover metals contained in oxide ores through our recently expanded heap leach operations and are in the process of updating our feasibility study to develop an optimized plan for our previously commenced (and subsequently deferred) mill expansion, the construction of which would allow us to recover metals contained in sulfide
(mill) ores. As an oxide (heap leach) only operation, we expect our annual production through 2020 to average 225,000 ounces of gold and 2.0 million ounces of silver. We cannot control the prices that we receive for the sale of our products, which is why our near-term operating strategies and goals focus on sales volumes, costs, capital expenditures, and other items that we may have discretionary influence over. Our near-term operating strategies and goals, which we strive to accomplish in a safe and environmentally responsible manner, include:
maintain, at all times, sufficient liquid assets and access to capital resources;

maximize operating cash flows by meeting projected ounces sold volumes, achieving our annual targeted mining and processing rates and cost metrics, and operating our heap leach operations to its full, steady-state capacity;

manage discretionary general, administrative, and exploration related spending; and

minimize our capital expenditures.

If we are able to carry out our near-term operating strategies and goals, we believe we will be better positioned to continue working towards our long-term goal, which is the construction and operation of a mill to process our sulfide ore at the Hycroft Mine.
Executive Summary
Our 2013 highlights and significant developments included the following, which are discussed in further detail throughout 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; however, we have taken measures to strengthen the overall health and safety environment at our Hycroft Mine through increased training, more frequent safety meetings, and increased communications.

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Ounces sold: We sold an annual record 181,941 gold ounces and 858,073 silver ounces, of which 60,460 (or 33%) gold ounces and 352,922 (or 41%) silver ounces were sold during the fourth quarter as a result of our expanded heap leach operations.
Net income: As discussed in the Results of Operations section below, net income was $1.4 million (or $0.01 per share - basic and diluted). Although we sold a record number of gold and silver ounces, we were negatively impacted by a low metal price environment, increased production costs, and significant charges for assets classified as held for sale, mineral property dispositions, separation and severance costs, and a write-down of production inventories.
Maintained sufficient liquidity: In addition to other liquid assets, we finished the year with $81.5 million of cash and cash equivalents and diligently maintained sufficient liquidity throughout the year despite a low metal price environment and significant capital expenditures. In the second quarter we proactively improved our financial position and liquidity through the completion of a public offering of our common stock for gross proceeds of $150.5 million (net proceeds of $142.0 million). During the fourth quarter we amended our revolving credit agreement, eliminating certain financial ratio covenants which were precluding us from being able to utilize the facility. Borrowing capacity available to us under the amended revolving credit agreement is $40.0 million. Hycroft Mine - operations: We achieved our annual mining rate target and placed 45.6 million ore tons on the leach pads containing approximately 256,384 recoverable ounces of gold and approximately 1.5 million recoverable ounces of silver. During the second half of the year we decreased our per ton mining and processing costs from the first half of the year and from prior years' costs, all while operating in a leaner, more cost-efficient structure as a result of our mine-site and corporate workforce reductions.
Hycroft Mine - heap leach expansion projects: As discussed below in the Hycroft Mine - Operations and Hycroft Expansion Projects sections, our heap leach expansion projects were successfully completed. During the year we increased our mining rate and commissioned the North leach pad, two 73 cubic-yard electric rope shovels, and a 21,500 gallons per minute ("gpm") Merrill-Crowe plant. We also mechanically completed construction of the crushing system, which we expect to commission during the first quarter of 2014.
Hycroft Mine - mill construction deferred: As discussed below in the Hycroft Expansion Projects section, during the second quarter we deferred construction of a mill. We are working with an independent engineering firm to update our feasibility study of the mill expansion, incorporating onsite oxidation of our sulfide concentrates and reviewing the capital and operating costs. Critical Accounting Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States. The preparation of these statements requires us to make assumptions, estimates, and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We base our assumptions, estimates, and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our Consolidated Financial Statements are prepared. On a regular basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could (will) differ, and such differences could be material.
We consider an accounting estimate to be critical if it requires significant management judgments and assumptions about matters that are highly uncertain at the time the estimate is made and if changes in the estimate that are reasonably possible could materially impact our financial statements. Although other estimates are used in preparing our financial statements, we believe that the following accounting estimates are the most critical to understanding and evaluating our reported financial results. For information on all of our significant accounting policies, see Note 2 - Summary of Significant Accounting Policies to our Notes to Consolidated Financial Statements. Ore on Leach Pads and Stockpiles
Estimate Required:
The recovery of gold at the Hycroft Mine is accomplished through a heap leaching process, the nature of which limits our ability to precisely determine the recoverable gold ounces in ore on leach pads and stockpiles. We estimate the quantity of recoverable gold ounces in stockpiles and ore on leachpads using surveyed volumes of material, ore grades determined through sampling and assaying of blastholes, and estimated recovery rates based on ore type and domain. The quantity of recoverable gold ounces and recovery rates varies based on ore mineralogy, ore grade, and ore particle sizes. The estimated recoverable gold ounces stockpiled or placed on the leach pads and recovery rates are periodically reconciled by comparing the related ore to the actual gold ounces recovered (metallurgical balancing). The ultimate recoverable gold ounces or life-of-mine recovery rate is unknown until mining operations cease. A change in the recovery rate or the quantity of recoverable gold ounces in our stockpiles or ore on leach pads could materially impact our financial statements.

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Impact of Change in Estimate:
Changes in recovery rate estimates or estimated recoverable gold ounces that do not result in write-downs are accounted for on a prospective basis. If a write-down is required, stockpiles and ore on leach pads would be adjusted to market values before prospectively accounting for the remaining costs and revised estimated recoverable gold ounces. We have not experienced any significant changes to estimated recovery rates or estimates of recoverable gold ounces. As discussed in Note 4 - Stockpiles and Ore On Leach Pads to our Notes to Consolidated Financial Statements, our $12.6 million write-down of ore on leach pads resulted solely from the application of our lower of cost or market accounting policy and was unrelated to our metallurgical balancing analytics or changes to recovery rates.
At December 31, 2013, if our estimate of recoverable gold ounces on the leach pad decreased by 1% or 2%, recoverable gold ounces in ore on leach pads would decrease by 2,585 ounces or 5,169 ounces, respectively, which would require a write-down of $3.0 million or $5.9 million, respectively, of our ore on leach pad costs before prospectively accounting for the remaining costs. A 1% or 2% increase to our estimate of recoverable gold ounces in ore on leach pads would increase the estimated recoverable ounces by the aforementioned amounts and reduce our weighted average cost per ounce by approximately $11 per ounce or $22 per ounce, respectively, which would be accounted for on a prospective basis. Proven and Probable Ore Reserves
Estimate Required:
Proven and probable ore reserves are the part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination. Estimated recoverable gold ounces in our proven and probable reserves at the Hycroft Mine are used in units-of-production amortization calculations and are the basis for future cash flow estimates utilized in impairment calculations. When determining proven and probable reserves, we must make assumptions and estimates of future commodity prices and demand, the mining methods we use and intend to use in the future, and the related costs incurred to develop, mine, and process our reserves. Our estimates of recoverable gold ounces in proven and probable reserves are prepared by and are the responsibility of our employees and are reviewed by independent experts in mining, geology and reserve determination. Any change in estimate or assumption used to determine our proven and probable ore reserves could change our estimated recoverable gold ounces in such reserves, which may have a material impact on our financial statements.
Impact of Change in Estimate:
Our proven and probable ore reserves are periodically updated, usually on an annual basis. Resulting changes in estimates of recoverable gold ounces are used in our units-of-production calculations and impairment calculations on a prospective basis.
Estimated recoverable gold ounces used in our units-of-production amortization and impairment calculations are based on proven and probable ore reserves that were determined using gold and silver selling prices of $800 per ounce and $14 per ounce, respectively. Accordingly, based upon our most recently completed proven and probable reserve study (March 6, 2013), we do not anticipate an impairment write-down to our long-lived assets until spot market metal prices approach, or drop below, the gold and silver selling prices used in the determination of our proven and probable ore reserves. If our proven and probable ore reserves increased or decreased by 5% the effect on our 2013 amortization expense would be less than $0.1 million.

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Hycroft Mine
Key operating statistics for the previous three years, together with our current
2014 projections, are as follows:
                                  Projected                     Years ended December 31,
                                    2014                2013               2012             2011
Ore mined (000's tons)         33,600 - 35,300           45,557             30,299           16,638
Ore mined and stockpiled
(000's tons)                     4,700 - 4,900            3,515              3,346                -
Waste mined (000's tons)       51,400 - 54,100           32,969             22,088           11,393
                               89,700 - 94,300           82,041             55,733           28,031
Excavation mined (000's
tons)                                        -            3,288              4,945            5,976
Ore mined grade - gold
(oz/ton)                                 0.014            0.011              0.012            0.013
Ore mined grade - silver
(oz/ton)                                 0.350            0.219              0.211            0.340
Ounces produced - gold       230,000 - 250,000          190,831            136,930          104,002
Ounces produced - silver     1.7 - 2.0 million          882,225            794,097          479,440
Ounces sold - gold           230,000 - 250,000          181,941            114,705           88,191
Ounces sold - silver         1.7 - 2.0 million          858,073            696,144          372,000
Average realized price -
gold ($/oz)                                         $     1,365        $     1,681      $     1,577
Average realized price -
silver ($/oz)                                       $        23        $        31      $        35
Adjusted cash costs per
ounce1                             $825 - $850      $       855   (2)  $       638      $       488

As discussed below in the Hycroft Mine - Hycroft Expansion Projects section, our mining rate and processing capabilities were expanded during 2013, which resulted in the production and sale of a record number of gold and silver ounces. Our total tons mined during 2013 increased approximately 41% from 2012 as a result of our expanded mobile mine equipment fleet and the addition of the two electric rope shovels. Efficiencies gained with our mobile equipment dispatch system helped us achieve our 2013 target mining rate, all while operating with an approximately 24% leaner mine-site workforce following the July reductions. During 2013, we commissioned the North leach pad and a 21,500 gpm Merrill-Crowe plant and were provided with additional solution processing capacity from our carbon columns (which we expect to de-commission in 2014). As of December 31, 2013, we had approximately 12.2 million square feet under leach, an increase of approximately 5.1 million square feet (or +72%) from December 31, 2012. The North leach pad has performed well since becoming operational in early 2013 as our overall metal recoveries and timing of such metal recoveries remained consistent with our expectations. During the second half 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 and, to date, we are seeing positive results. The timing of the metal recoveries is dependent on the advance rate of the solution into the wells on the pad and our overall management of solution flows to the Lewis leach pad and the wells themselves. We expect metal recoveries from our remediation efforts to occur over the next two years. Production costs were high during the first half 2013 as additional drilling, lime, and cyanide costs associated with the Lewis leach pad remediation, increased maintenance costs of older loading equipment, and inefficient utilization of the mobile fleet resulted in a significant increase to the average cost per ounce placed on the leach pads. During the second half of 2013, our average mining cost per ton and average processing cost per ore ton decreased by 22% and 12%, respectively, from the first half 2013 per ton costs. We expect such efficiencies in mining and processing costs to continue into 2014, which we believe will positively impact our future production costs and adjusted cash costs per ounce1.
During 2013, our adjusted cash costs per ounce1 increased by $217 (or +34%) from 2012. Although our second half 2013 mining and processing costs improved from previous periods, our adjusted cash costs per ounce1 for 2013 were negatively impacted by increased production costs incurred during the first half of 2013, external refining costs for carbon in-process inventories sold during the year, and $9.7 million (or $53 per ounce) in previously incurred cash production costs that were written-off (as discussed in Note 4 - Stockpiles and Ore On Leach Pads to our Notes to Consolidated Financial Statements). Further, during 2013 our average realized price per ounce of silver sold decreased by approximately $8 (or -26%) compared to 2012, thereby decreasing the benefit received from each ounce of silver sold and increasing our adjusted cash costs per ounce1 by approximately $38.

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.
2 Calculation is inclusive of a $9.7 million (or $53 per ounce) write-down of previously incurred cash production costs. See Note 4 - Ore on leachpads to our Notes to Consolidated Financial Statements for additional detail.

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Operations Outlook
2014 operations projections
Ounces sold - We currently expect our sales to increase to approximately 230,000 to 250,000 ounces of gold and 1.7 million to 2.0 million ounces of silver. We are currently projecting gold ounces sold will increase approximately 26% - 37% and silver ounces sold will increase approximately 98% - 133% as leach pad expansion projects that were completed during the second half of 2013 will have a positive benefit in 2014. We currently believe our annual sales projections are attainable as we sold 60,460 ounces of gold and 352,922 ounces of silver during the the fourth quarter of 2013 when our Hycroft Mine began to operate near its steady-state, heap leach capacity.
Depreciation and amortization - We currently expect our 2014 depreciation and amortization to increase significantly to approximately $80.5 - $84.5 million (or $335 - $352 per ounce) as a result of increases to our plant and equipment placed in service from our 2013 heap leach expansion projects, which will increase the amount of non-cash expense we recognize per gold ounce sold. During 2014, plant and equipment in service will continue to increase as the crushing system is expected to be commissioned in the first quarter of 2014. Additionally, as discussed above, our projected 2014 volume increase in gold ounces sold is expected to further contribute to increased depreciation and amortization.
Exploration, development, and land holding - We currently expect our 2014 exploration, development, and land holding costs to approximate $2.5 - $3.5 million, consisting of land holding costs and minimal reserve drilling at Hycroft. Consistent with our strategy and goal to preserve liquidity by managing discretionary spending, we have planned no statewide exploration activities at any of our properties and we no longer employ a statewide exploration workforce. Adjusted cash costs per ounce(1) - We currently expect our adjusted cash costs per ounce(1) to approximate $825 - $850 per ounce (with silver as a byproduct credit).
Capital expenditures - Consistent with our strategy and goal to preserve liquidity by minimizing capital expenditures, we currently expect our 2014 capital spending to decrease significantly from the amount spent in 2013. Non-expansion (sustaining) and expansion capital expenditures are expected be less than $15.0 million and approximately $73.8 million, respectively, in 2014. For information about our 2014 outlook on corporate general and administrative and interest expense refer to the Results of Operations section below. Heap leach only operations projections
Until the decision to resume construction of a mill is made, as a heap leach only operation, we currently 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 currently expected to be 81.2 million total tons, including 33.5 million ore tons processed, per year. Production is currently expected to average 225,000 ounces of gold and 2.0 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 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 below Mill construction and Infrastructure upgrades sections. The decision to defer the mill construction did not reduce our actual 2013 capital expenditures from our initial estimates, as spending during 2013 was largely for the expansion of our leach pad operations, mining equipment, and previously ordered tangible mill components. Our 2013 capital expenditures at the Hycroft Mine for expansion projects totaled approximately $327.6 million and as of December 31, 2013 we had $73.8 million of outstanding purchase obligations for expansion expenditures we expect to make in 2014. For additional detail about Hycroft Mine expansion spending see the Liquidity and Capital Resources section below.

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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The following sections provide details and status updates on the previously announced Hycroft Mine expansion projects. Increasing the mining rate
This 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. The operational benefits realized from this expansion project may be evidenced by the increase to our annual tons mined, which totaled 85.3 million total tons during 2013, an increase of 41% from the 2012 total. For additional information refer to the Hycroft Mine - Operations section above. As part of this expansion project we had previously ordered a third electric rope shovel; however, during the third quarter of 2013, we began efforts to sell it prior to it being built. Accordingly, expenditures for the third electric rope shovel are included in assets held for sale in our Consolidated Balance Sheets as of December 31, 2013. 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. Expanding leach pad operations
This expansion project is expected to be completed during the first quarter of 2014 with the commissioning of the crushing system, but was considered largely complete by the end of 2013. To accommodate the increased mining rate we expanded our leach pad capacity and solution processing capabilities. The North . . .

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