Allied Nevada Gold Could be First Domino to Fall

Editor’s note: This article has been revised since publication. It was originally published on gold Investing News on March 10, 2015.
In a move that some market watchers likely did not expect, Allied Nevada Gold (TSX:ANV,NYSEMKT:ANV) filed for chapter 11 bankruptcy Tuesday morning in a bid to reduce its debt obligations. 
The move is quite a step down for Allied Nevada. According to Bloomberg, the US-based gold mining and exploration company, which holds the Hycroft gold-silver mine in Nevada and a variety of other properties in that state, reached a high of $45 back in 2011 when the gold price peaked.
However, lately it’s been troubled by difficulties at Hycroft — most recently it encountered acid leach material in planned mining areas — as well as by lower prices for both gold and silver.
Looking at how bad it got for the company, the news outlet states that Allied Nevada’s debt clocked in at $664 million as of December 31, 2014, with its assets coming to $941 million. Meanwhile, the company had less than $1.3 million in cash in November of last year; though it was able to bump its treasury up by later raising $21.5 million, by Tuesday its cash was back down at just $4.5 million.
As mentioned, Allied Nevada’s filing is in support of a financial restructuring that will allow the company to reduce its “funded debt obligations and provide [it] with additional liquidity” — specifically, it will receive a cash boost of $78 million. The majority of the company’s creditors reportedly support the restructuring, and all of its creditor and vendors are expected to be paid in full when it’s complete.

The first domino? 

Looking at Allied Nevada’s situation, it’s clear that its issues came about in large part because it took on so much debt. But why did it do that?
As those involved in the mining space likely know, companies have two main options when it comes to financing their operations: debt or equity. The former involves selling bonds, bills or notes to individual or institutional investors, with those parties becoming creditors; the idea is that ultimately they will be repaid for the money they’ve contributed. Meanwhile, the latter involves selling company shares.
Both options of course have advantages and disadvantages. Looking at debt financing, the main disadvantage is that — as with any loan — it essentially requires comapnies to bet on their ability to pay the money back in the future. In the mining space especially that’s a tough bet to take — the industry is known for being cyclical, and debt taken on when times are good can easily become a burden when times turn.
For Allied Nevada, that’s exactly what happened. As mentioned, the company was flying high several years ago when times were good for gold, but is now suffering the consequences of taking on so much debt. And unfortunately, it’s not alone.
Recently other major miners, including Teck Resources (TSX:TCK.B,NYSE:TCK) and Barrick Gold (TSX:ABX,NYSE:ABX), have received downgrades precisely because their debt is so high. In terms of Teck, it was downgraded by Moody’s Investors Service at the beginning of the month, with the firm stating in a note, “[t]he company’s leverage is high, its free cash flow is materially negative, and we expect continuing weakness in commodity prices will limit Teck’s ability to improve its financial metrics through 2016.”
Similarly, RBC Capital Markets downgraded Barrick back in January, with mining analyst Stephen Walker noting that the miner’s debt-to-total-capital ratio was 45 percent, making its financial leverage higher than average; he also said that it would need to bring in extra money to reduce its long-term debt, which was sitting at about US$1.3 billion.
It’s perhaps a stretch to speculate that other miners will go down the same path as Allied Nevada, but investors would definitely do well to keep an eye on how much debt has been taken on by companies in their portfolios.
At close of day Tuesday, Allied Nevada’s share price was sitting at $1.08 on the TSX, down a whopping 82.35 percent year-over-year. The TSX is currently undertaking a delisting review for the company. Meanwhile, trading of the company on the NYSE MKT has been suspended, with the exchange working to delist it.
 
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.