Just as in the case of oil currently, the problem with gold (and countless other commodities) trading where it does, is that as we have shown repeatedly on previous occasions [4], it is at or below the marginal production cost of various gold producers.
[5]
And with miners losing money on every incremental ounce (or barrell) they pull out of the ground, there is only so much capital they can burn before they have not choice but to file for bankruptcy. Which is precisely what happened to Allied Nevada Gold, the operator of the gaming state’s Hycroft mine, which earlier today filed for bankruptcy in Delaware.
The company blamed its deteriorating financial condition on the drop in gold and silver prices in recent years, an overleveraged capital structure, delays in a key expansion project, and currency swap exposure.
Yes, this is that Allied Nevada whose stock price traded as high as $45 when gold hit its all time high of over $1,900 hours before the SNB imposed its first, and now failed, currency floor which translated into a market cap of just about $4.5 billion.
It was trading at under a $1, and since the company is now bankrupt, the equity is most likely worthless as the creditors take over the equity.
The company, incorporated in Delaware in 2006, owns more than 50 Nevada properties acquired in a merger, as well as interests in what it calls some of state’s “most prolific gold-producing trends.”
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As Bloomberg reports [7], Allied Nevada said it reached an agreement with a group of bondholders on a $78 million debtor-in-possession credit facility that will allow it to keep operating while its debts are restructured.
The miner has struggled with operational setbacks at Hycroft, most recently when a chalky substance slowed production and forced Allied Nevada to lower its annual gold and silver sales forecasts.
The Reno, Nevada-based company has also contended with plunging gold prices. The metal dropped 28 percent in 2013, the first annual decline in 13 years, and declined 1.4 percent last year.
With just $1.3 million of cash at the end of November, the company sold stock for $1 with warrants in December to raise $21.5 million. Debt crept up to $567.9 million by Nov. 30, including $48.0 million in cash borrowings under a loan. Completing a mill that it needs to recover more metals would cost almost $1.4 billion, according to a December regulatory filing.
In a normal world, in which supply and demand would be reflected in the price, a bankruptcy such as this one, which guarantees the mothballing of Allied's operations indefinitely and perhaps forever, the resulting decline in supply on the margin would mean an increase in prices. However, in a world in which physical supply and demand are irrelevant (and in the case of the biggest source of demand, outright misrepresented), the only thing that matters for pricing is how much paper gold will be created/destroyed via GLD and other ETFs, and/or how many Gold futures contracts the BIS trading desk in Basel will sell (not buy) in any given day.
In any event, while hardly having an impact on the gold price, this latest bankruptcy merely brings us one day closer to what we write in December of last year, namely that peak physical gold has arrived [4], and that going forward, producers will have no choice but to reduce their gold output.
[8]
One other thing: sooner or later, just like with oil and every other commodity, physical supply will catch up with physical demand, bypassing the great black box that is paper/synthetic/derivative trading of gold. And the more such miners go belly up, the faster this moment will finally arrive.
