Yukon-Nevada Gold (YNG.TO): definitely a value trap

Mines are a depleting resource.  Usually you mine the most economic ore first.  This causes the economics of the mine to get worse and worse as the mine ages.  Yukon Nevada owns the Jerritt Canyon project which is on its last legs.  Not surprisingly, its economics have gotten worse and worse.

Some value investors see value in Yukon Nevada (see VIC writeup).  I disagree.  The mine has negative cash flow and therefore is not making money.  It will probably lose even more money in the future and it should be closed.  That’s the reason why it was recently closed.

Refractory ore and roasting

Refractory ore refers to ore that is very difficult (read: expensive) to process.  The ore in Jerritt Canyon consists of grains of gold encased in sulfides.  The gold can be extracted by roasting it (by heating it up / burning it).  This releases all sorts of pollution: mercury, particulates, sulfur dioxide (causes acid rain), etc.  Yukon Nevada does take some steps to reduce these emissions but this costs money.  At the end of the day, the type of ore in Jerritt Canyon is the most expensive type of ore to process.  That is why they do not make money even with such high grades.

The roaster is worth a billion dollars?

If it could generate a lot of positive cash flow, it could be worth that much.  It does not.

Underground mining versus open-pit

Open pit mines tend to have an increasing strip ratio as mining progresses.  For each ton of ore, you have to move more and more waste.  Thus your costs go up.

Yukon-Nevada has hit the point where it is cheaper to go with underground mining.  But the thing about underground mining is that it is expensive.  In the case, the more important thing is that productivity is lower.  Underground mining tends to happen at lower rates than open-pit.  It is unlikely that YNG will see production levels like the past.

Management is lying to you

The VIC writeup referred to previously anticipates operating cash costs magically decreasing from $1,445 to $850/oz.  If this were possible, it would have happened a lot earlier.  It is possible that the previous owners of the mine were incredibly incompetent by not cutting costs.  However, it is the current management of the mine that is incompetent.  If you restart a mine and it turns out that the mine has strongly negative cash flow, you screwed up because you lost money.  But the CEO (who sometimes has another job) may not care since he receives a salary even if the company is losing money.

What the current management is doing is deceiving investors because they do not understand that cash costs is a figure that can be manipulated.  By shifting mining from contract mining (you basically rent the equipment) to owning and operating the equipment yourself, you lower cash costs but increase capex (and by extension, D&A).  There may be overall savings but they will be very minor.  It’s actually more sensible for Yukon Nevada to use contract mining in my opinion.  By buying underground mining equipment, they are committing money towards equipment that they may not have a use for.  If it turns out that the mine is not profitable, they will be stuck with equipment that they will be trying to sell.

Closing remarks

This is an example of public markets being mined.  I have not looked at the Ketza river project and it is a significant part of Yukon-Nevada’s value.  You should do your own due diligence on that portion of YNG.

*Disclosure:  No position.  If it rallies strongly, I may short it.  I just don’t want to short mining equities since they are so beat down right now.  And if the commodities bull market continues (or something happens that causes gold to skyrocket), you may need to be careful about shorting gold stocks.

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5 thoughts on “Yukon-Nevada Gold (YNG.TO): definitely a value trap

  1. Pingback: Altius Minerals (ALS.TO) – Great business trading at a discount | Glenn Chan's Random Notes on Investing

  2. Pingback: Veris Gold: The end is near… | Glenn Chan's Random Notes on Investing

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