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TickerSymbolYNG(Canada)YNGFF(US)
November27,2011

YukonNevadaGoldCorpTheDramaisabouttoEnd
YukonNevada Gold Corporation has broken a lot of hearts lately. Many individual and professional investors have thrown in the towel and sold at a loss. The remaining shareholders are completely exhausted.Newpotentialinvestorsareafraidtobuyit.Thisisexactlythekindofpessimismthatcreates greatprices. ManyinvestorslearnedaboutYukonNevadainthemiddleof2010andduringthattime,thestockprice was at $0.25 per share (today it is at $0.30 per share or a market cap of $300 million). Within six months,thestockreached$0.90pershare,andsomeoftheshareholdersfeltlikegeniusestriplingtheir moneyinsuchashortperiodoftime.Everythingwasgreatthemanagementwassuccessfulinturning the company around, operations showed profitability, and future growth productions targets were stunning.Thestockpricewasonitswaytoreaching$10pershare. Then, at the beginning of 2011, investors were shocked to learn that YukonNevada lost money on production during the fourth quarter of 2010, after the third quarter of 2010 had showed promising profitability.Thisiswhenthestockpricestartedtodecline.Itbecameclearthatsomethingwasseriously wrong with the production process and that the processing plant was in immediate need of winterizationandrefurbishment.Untilmajorcapitalimprovementsaremadetotheplant,thecompany willneverreachitsfullpotential.ThenewCEOtookoverin2009,hetoldtheboardofdirectorsthatthe plant was in need of more than $100 million in capital expenditures, which would result in more dilution. However, at that time, the controlling shareholders strongly opposed the issuance of more

shares. Without additional money, the management restarted production with the hope of producing enoughcashtopayforthecapitalexpenditures.Soon,itbecameobviousthatthiswasaterriblemistake which could have been avoided from the beginning. Only when it became clear that the companys existence was in question did the board of directors give the management the green light to raise enoughmoneytofixthemalfunctioningplant. The management went on to explore options to raise enough money to winterize and refurbish the plantsothatitwouldproducegoldwithoutbreakingandshuttingdownconstantly.Thefirstoptionwas toofferadiscounttooptionholdersforearlyexercise.Unfortunately,someofthemajorholders(same peoplethatoriginallyrejecteddilution)backedoutatthelastmoment,andthecompanywasstuckina liquiditycrisis.Consequently,theywentwithadifferentplantoengageDeutscheBanktoprovidethe company with a total of $179 million from private placement, warrant exercises, and prepaid gold forwardfacility.

BeforeDeutscheBankwentaheadwiththedeal,ithiredSRKConsulting,aworldclassminingconsulting firm, to examine YukonNevadas plant to determine if its production problems were solvable. After receiving approval from SRK, Deutsche Bank proceeded with the deal. While YukonNevadas managementandDeutscheBankwerenegotiatingallthedetails,theexistingshareholdersweredoing what they are best at screaming, yelling and panicking, making it more and more difficult for the financingagreementtobereached.DuringtheworstofthepaniconMay4,2011,thestockofYukon Nevadaclosedat$0.39pershare. After twenty days, which at that time seemed like an unending nightmare, on May 24, 2011, Yukon Nevada reported that it had raised $59 million. However, this was only part of the $179 million in financing. The day after the announcement, the stock price increased to $0.56 per share which

representeda40percentjumpinoneday.Theoptimismwasshortlivedbecausethestockpricestarted todeclinethenextday.Withintwoweeks,thestockpricewasprettymuchbackatthesamelevelitwas atbeforetheannouncement.Now,theworryshiftedtowardclosingthesecondpartofthefinancing. Finally,onAugust15,2011,YukonNevadaandDeutscheBankclosedthesecondpartofthefinancing, whichwasfor$120millionintheformofprepaidgoldforwardfacility.Now,thecompanyhadenough funds to winterize and refurbish the plant. You might think that after all the panicking and doubting about whether YukonNevada was going to get the necessary financing, this would have been good newsthatwouldhavesentthestockpricehigher,likeitwaswhenthefirstpartoffinancingwasclosed. Butno,themarketcompletelyignoredit.Actually,itwasevenworsebecausebyOctober3,2011,the stockwastradingat$0.28pershare.Yes,youreadthatcorrectly.Whenshareholderswerepanicking becauseYukonNevadawasstrugglingtosurviveduetoalackoffinancing,themarketwaspricingitat $380 million, or $0.38 per share. However, after the company raised $179 million, the market was valuingtheequityportionofthecompanyfor$280million,or$0.28pershare. Howisthispossible?Whenyouaredealingwiththefollowingshareholdersorpotentialshareholders, anythingispossible.

BeforeIgetintowhyshareholdersareactingsopessimistically,letmelistexactlywhatitisthatyouget forthecurrentpricetagof$300millionor$0.30pershare.YukonNevadahasnodebt,$120millionpre paidgoldforwardfacilityandthreemainassets:JerrittCanyon,aroasterfacility,andKetzaRiver.

JerrittCanyon Jerritt Canyon consists of openpit and underground mines that have been exploited over the last 30 years. Since 1981, it produced 8 million ounces of gold. As shown in the following illustration, the propertyproduced300kouncesofgoldperyearuntil2002.

JerrittCanyonhasabout3.5millionouncesofgoldwhentotalingwhatisinmeasured,indicated, inferred,andstockpiledasshownbelow.

WhatisJerrittCanyonworthintermsofgoldintheground? If we ignore the fact that YukonNevada is a gold producer and value the ounces as if it was an explorationcompany,wecouldprobablyget$30perounce. Value=3.5millionouncesx$30perounce=$105millionorabout$0.11pershare

RoastingFacility

Themanagementclaims that theroastingfacilityiswhatgivesYukonNevadaitsvalue.Theyestimate thattheroastingfacilityisworth$1billionor$1pershare.Fornow,letsjustassumethatthisvaluation isaccurate. KetzaRiver KetzaRiverisapropertyinYukon,Canada,whichhistoricallyproduced98,000ouncesofgoldandby productsilverbetween1988and1990.Currently,ithas485,000ouncesin43101betweenmeasured, indicated,andinferred.

Atonepoint,themanagementwasgoingtospinoffKetzaRiverwhenitwaslookingforoptionstoraise money for the winterization and refurbishment project. Christopher Ecclestone of Hallgarten &

Company,whocoversYukonNevada,believesthatifKetzaRiverwasmarketedproperlyandspunoffas aseparatecompany,itcouldbringavalueof$100millionor$0.10pershare.Toreadhisreport,seethe followinglink: http://classicvalueinvestors.com/i/2011/10/yukonnevadagoldcoverageupdate/ Atthispoint,becausethecompanyraisedmoneyfromDeutscheBank,therearenoplanstospinitoff. Instead,thecompanywillputitbackintoproductionatarateof70,000ofgoldperyear.However,this willbeafterJerrittCanyoninNevadaisgeneratinglotsofcash.Fornow,wewilljustignorethefuture plansandvalueitonlyat$100millionasChristopherEcclestoneadvised. ValueSummary JerrittCanyon=$105millionor$0.11pershare RoastingFacility=$1billionor$1pershare KetzaRiver=$100millionor$0.10pershare Total=$1.2billionor$1.2pershare ConsideringthatthemarketcapofYukonNevadais$300millionandenterprisevalueof$420million ($300+$120goldforwardfacility),themarketisnotvaluingthecompanyevencloseto$1.2billion.If weassumethatthemarketispricingJerrittCanyonsgoldinthegroundat$105millionandKetzaRiver at$100million,itisleavingonly$215million($420$105$100=$215)fortheroasterfacility.This meansthatafterthemanagementraised$179milliontowinterizeandrefurbishtheplant,themarketis telling us that the plant is worth only slightly more than the money that they raised to fix it. This is ludicrous.Itisequivalenttospending$10,000toredoanentirekitcheninasinglefamilyhousewhile themarketpricestheentirehouseat$12,000. Becausethereissuchadisconnect,it wouldbeusefulto understandhow theplantcouldpossiblybe worth$1billion.Therearemanywayoflookingatit.Onewayitistofigureouthowmuchitwouldcost to build it. This is exactly how the management came up with their estimate of value. However, you couldnt build a roaster like this in the region because you couldnt get it permitted, and even if you could,itwouldtakeyou8to10yearstocompletetheconstruction. YukonNevadasroasterisoneofonlythreeroastersinNevadaandthesurroundingregion.Theother two roasters are owned by Newmont and Barrick and both are running at full capacity. Roasting is currentlytheonlyeconomicmethodofprocessingrefractorysulfideore,whichisprolificintheregion. ObtainingapermitfornewroastercapacityinNevadaandthesurroundingregionisextremelydifficult andtimeconsumingduetoenvironmentalconcerns.Nonewroastershavebeenpermittedinthepast 12years,andnonearecurrentlyproposedorinthefeasibilitystage.

Onecanarguethatitdoesntmatterwhatitcoststobuildtheroaster.Whatmattersiswhetherthereis a buyer for it and how much such a buyer could afford to pay for it. The two most logical buyers are NewmontandBarrick. Newmont and Barrick may be interested in the facility because of the reasons that I listed before YukonNevadas roaster is one of only three roasters in Nevada with spare capacity. Because the permittingofnewroastercapacityinNevadaandthesurroundingregionisextremelydifficultandtime consuming, both of these companies are using their roasters to process only the highest quality ore (0.40to0.50ouncesperton)andarestockpilingthelowerqualityore.Forexample,Newmonthas53 milliontonsoforewithagradeoflessthan0.10ouncespertonsittingidle.Thisisequivalenttoabout5 millionouncesofgold.Atthecurrentpriceofgold,thistranslatesintomorethan$8billion.IfNewmont acquiredYukonNevadasroaster,theycouldprobablyprocesstheir53milliontonsfor$40pertonor$2 billion,pocketingtheremaining$6billion. Could Newmont afford to pay $1 billion for YukonNevada? I think even if they paid $2 billion, they would make out like bandits. Not only would they be able to process their 53 million tons of ore and pocket$6billion,theywouldalsogetaccessto3.5millionouncesofYukonNevadasgoldintheground. InthehandsofaproducerlikeNewmont,theseounceswouldprobablybeworth$700million,or$200 perounce,insteadofmyestimateof$105million,or$30perounce.Then,theywouldputKetzaRiver into production much more quickly because they have big pockets. At a production rate of 70,000 ouncesofgoldperyear,theycouldgetKetzaRivercashflowingatnearly$90millionperyear(70,000x ($1,650goldprice$400cashcost)=$88million).Tothem,KetzaRiver,producingatthisrate,wouldbe worth about $500 million. Likewise, when YukonNevada puts Ketza River into production, it will be worthalmosttwiceasthecurrentmarketcap. IfthevalueofYukonNevadasroasterissogreat,whywonttheytrytodoahostiletakeoversincethe companyissellingforasong? Thatsagoodquestion,andboththemanagementandChristopherEcclestoneweresurprisedthatthey didnttry.Becausetheboardofdirectorsforesawthepotentialthreatofahostiletakeover,onOctober 4,2011theyapprovedapoisonpilltopreventitfromhappening.Asaresult,itwouldnowbedifficult forNewmontorBarricktoattemptahostiletakeover.ChristopherEcclestonesaidthatitisnotunusual forthebigminingcompaniestomissonincredibledeals.HecomicallystatesWhybuynowifyoucan paymorelater? ConsideringthatNewmontandBarrickalreadymissedthechanceforahostiletakeover,whydontthey justtrytoofferareasonablepriceforYukonNevadanow? Theywould probablynotbeable toconvinceYukonNevadato sellfor$500millionorless,especially now that Deutsche Bank funded the company with $179 million. Maybe before the financing, they wouldhavehadachanceofgettingitforsuchasteal.Myspeculationisthattheywouldprobablyneed to offer $1.5 billion or $1.50 per share to be taken seriously. But, this is unlikely because how in the

world would they explain to their shareholders that they are buying an unknown publicly traded companyforfivetimesthepriceofthestockwhentheroastingfacilityisnotevenworkingproperly? TheyaremorelikelytowaitforYukonNevadatocompletethewinterizationandrefurbishmentproject. Of course, they will have to pay much more for it after it is working properly but as Christopher Ecclestone put it Why buy now if you can pay more later? As silly as this may sound, if the stock price of YukonNevada were at $2.50 per share, they would be more interested because it is much easiertoexplaintoshareholderswhytheyarebuyingsomethingfor$3persharewhenitistradingfor $2.5persharethanbuyingsomethingfor$1.50persharewhenitistradingfor$0.30pershare. NowthatyouknowhowandwhyYukonNevadasroastercouldbeworth$1billion,theonlyquestion that remains is whether the company will be able to fix the plant so that it operates properly and doesntshutdownallthetime,thusreachingitsfullvalue.Obviously,themarketdoesnotbelievethat YukonNevadawillfixtheplantevenafterraising$179millionfromDeutscheBanktoaccomplishthis exacttask.Inotherwords,themarketbelievesthatafterthrowingseriousmoneyattheplant,nothing goodisgoingtocomeoutofit. Itappearsthatsomeinsidersarenotagreeingwiththemarketandaretakingadvantageofthesituation by buying shares on the cheap. Between November 21, 2011 and November 23, 2011, the following transactionstookplace.

For some investors, Reicherts purchase of 100,000 shares, Heinrichs of 30,000, and de Trentinians purchaseof260,000maynotbeenough.Someinvestorsarenotonehundredpercentconvinceduntil they see the insiders mortgaging their homes and borrowing against their kids college funds to buy shares.Forme,seeinginsidersbuysisgood,butnotarequirement. Whyisthestockpriceaslowasitis?

Investorsareexhaustedfromtherollercoasterandaconstantflowofdisappointments.Inthemiddleof 2010, there was not supposed to be any financing. The funds necessary for the winterization and refurbishment of the plant were supposed to come from already restarted operations. After Yukon Nevadareachedasteadystateofproductionatarateof150,000ouncesofgoldperyear,production was supposed to increase. Also, after the third quarter of 2010 was profitable, everyone expected profitabilitytocontinueandtoincrease. Well, the plant breakdowns created all sort of problems. Profitability disappeared. The hope for increased production was crushed. Liquidity problems arose. Then, the lack of cash was going to be solvedbyenticingwarrantholderstoexerciseearly.Thisfellthrough.WhenDeutscheBankcameinto the picture, new hope was born, but as the lawyers on both sides were dragging their feet, investors keptgettingmoreimpatient,sendingthestockpricelowerbytheday.DeutscheBank,seeingthestock price plunge, renegotiated the price on the private placement to milk a better deal out of desperate YukonNevada. By the time the deal actually closed, everyone was so exhausted that the stock price didntevenreact.Plus,recentlytwohedgefundsfacedredemptionsneededtogetoutquickly. Oncethefinancingclosed,themanagementmadeanotherpromisetocompletethewinterizationand refurbishmentoftheplantinSeptember2011.Bylookingatthedateofwhenthesecondpartofthe financing closed (August 15, 2011), it doesnt take much imagination to see that such a huge capex wouldprobablytakemorethansixweekstocompleteeventhoughtheyhadalreadystartedsomework right after the first part of the financing for $59 million closed on May 31, 2011. My attitude is that thingsalwaystakethreetimesaslongasoriginallyanticipated. HerewearetodayonNovember27,2011,andtheworkisstillnotcomplete.However,whenyoulisten totheconferencecall(http://podcast.newswire.ca/media/yukonnevadagold20111116.mp3 )thattookplaceonNovember16,2011,youwilllearnthattheworkisprettymuchdone.Whatwas slowing everything down was a delay in the manufacturing of the dryer, which is a very important component.Thedryerwasshippedintwoparts.OnepartalreadyarrivedandisbeinginstalledasIam writing,andthesecondpartisintransit.BecauseitiscomingfromMexico,itcouldbeheldupatthe border, but it will arrive very soon if it has not already arrived. Once it finally gets there, the managementwillshutdownthemillfor10daystoinstallit,andthewinterizationandrefurbishment willbeprettymuchcomplete. The revised completion date is scheduled for midDecember 2011. Whether they will hit the new deadline exactly on time is hard to say. It is always possible that something else can go wrong. It is construction what do you expect? If you ever remodeled a house, you know that something always goes wrong. I can totally see more investors sitting in warm offices staring at their computer screens havingafitifitisnotcompletedbyDecemberandsayinghowincompetentthemanagementis. Whathappensafterthemillisworkingproperly?

Shortly before the company encountered all the recent problems with the plant malfunctioning, it reachedapointwhereitwasoperatingatarunrateof150,000ouncesofgold.Afterthewinterization andrefurbishmentiscomplete,thisisthenumberthatthemanagementisshootingfor,rightoutofthe gate.Then,for2012,theyareanticipatingatotalproductionlevelof175,000ouncesofgold.Assuming thepriceofgoldis$1,650perounceandthecashcostis$789(IwilladdresshowIcameupwiththis numberlater),thistranslatesintocashflowsfromminingoperationsof$150million.Afteralltheother expenses,youarelookingat$108millioninoperatingincome.

Howaretheygoingtogetto150,000ouncesofgold? The Smith Mine is currently contributing 1,000 tons per day to the mill at an average grade of 0.235 ouncesperton.TheSSX/SteerMineComplexwasrestartedrecentlyperapressreleaseonOctober3, 2011. http://www.yukonnevadagold.com/s/NewsReleases.asp?ReportID=483004&_Type=News Releases&_Title=YukonNevadaGoldCorp.StartsMiningatSSXSteerMineComplex Atthebeginning,SSX/SteerMineComplexisonlycontributing300tonsperdayandwillrampupto800 tonsperdaybytheendof2011whenadditionalequipmentisdeliveredtothesite.Bytheendofthe firstquarterof2012,itwillbecontributing1,200tonsperday.Thegradeis0.189ouncesperton. Smith 1,000tpdx0.235=235ouncesperdayx365days=85,775ouncesperyear SSX/Steer 800tpdx0.189=151ouncesperdayx365days=55,188ouncesperyear Total 85,775+55,188=140,963ouncesperyear Between the Smith and SSX/Steer mines, the company can produce approximately 141,000 ounces of gold.However,asofJanuary2011,thecompanystockpiled902,000tonsoforeatanaveragegradeof

0.073ouncespertonwhichequatesto65,900ouncesofgold.Addingthistotheouncesproducedfrom the Smith and SSX/Steer Mines, I arrive at 206,863 (140,963 + 65,900 = 206,863). You can easily how theycanreach150,000ouncesofgoldrightafterthemilliscompletelyfixedor175,000ouncesofgold for the entire year in 2012. The managements projection of 175,000 for 2012 might be on the conservativeside. By2013,thecompanyisplanningtoproduceatarunrateof300,000ouncesofgoldperyear.Thisisnot someunrealisticnumberpulledoutofthinair.Theproductionrateof300,000ouncesofgoldperyear wasachievedbefore,from1987to2002.Thereisnoreasonwhytheycannotachieveitagainwiththe renovatedroasterand3.5millionouncesofgoldintheground.Plus,theyarecurrentlyupdatingtheir 43101andbelievethattheywillhaveanadditional3millionounces.

Toarriveattherunrateof300,000ouncesofgoldperyear,thecompanywillneedtoopenmoremines toinadditiontotheSmithandSSX/Steermines.StarvationCanyon,thethirdundergroundmine,willbe opened, contributing 600 tons per day at an average grade per ton of 0.22 ounces. The company will alsoreopenBurnBasin(openpitoperation)inthefourthquarterof2012,contributing2,000tonsper day at an average grade of 0.104. SSX/Steer, instead of contributing 800 tons per day, will contribute 1,200tonsperday. Smith 1,000tpdx0.235=235x365=85,775 SSX/Steer 1,200tpdx0.189=227x365=82,782 Starvation 600tpdx0.220=132x365=48,180 BurnBasin 2,000tpdx0.104=208x365=75,920 Total 85,775 + 82,782 + 48,180 + 75,920 = 292,657 ounces per year (this is close to the managementsestimateof300,000) Tosustain thiskindofproductionprofileformanyyears,the companywillneed toreopenadditional mines and/or explore more at Starvation Canyon and Burn Basin because these two only have about twotothreemoreyearsofgoldinthegroundbeforetheywillbedepleted.SmithandSSX/Steermines haveenoughinthegroundtolastformorethan10yearsofproduction. CoststoProduceGold

YukonNevadas profitability or any miners profitability is the function of the price of gold, the cash costs of mining and processing, and the costs of running the entire company. During the last seven quarters, YukonNevada generated a positive grossprofit only once, and some investors are confused why the company is not able to generate profit when the price of gold is as high as it is today. The followingisthesummaryofthelastsevenquarters:

Asyoucansee,theonly positivequarterin terms ofgrossprofitwasachievedin the thirdquarterof 2010.Inordertounderstandwhythecompanyhasbeenlosingmoneyandisabouttoturnthecorner,it isusefultobreakthecostofsalesintotwocomponentsthecostofminingandthecostofprocessing as shown below. The cost of mining is what it costs the company to get ore from the Smith and SSX/SteerMinesorfromothersourcessuchasbuyingorefromathirdparty.Thecostofprocessingore isthecostofrunningitthroughtheroaster.

Thefollowingisthesamechartbutdisplayedincostsperouncesold.

I calculated this breakdown by using partial information provided by the company. It is by no means totallyaccurate,butitisbetterthannothing.Forexample,duringthefirstquarterof2010,18,786tons or4,200ouncesweredeliveredfromSmithMine,whichindicatesthatthegradewas0.22357ounces perton.Thecostpertonwasapproximately$95whichtranslatesinto$425perounce($95/0.22357). This is where the $425 cost of mining per ounce comes from. Because the total cost of sales was $13,743,000 and the number of ounces sold was 9,105, the total cost per ounce was $1,480 ($13,743,000/9,105).Wecanconcludethatthedifferencebetween$1,480and$425or$1,055wasthe costofprocessingore.

Asyoucansee,thecostofminingperouncewasthesame$425forthefirst,second,andthirdquarters of 2010. The cost of processing per ounce declined over the same three quarters. This happened becausethecompanyincreasedproductionoverthesethreequarters.Thismakessensebecauseasyou runmoreorethroughtheroaster,thecostperouncedeclinesbecausethemajorityoftheprocessing costsarefixed.Therefore,bythethirdquarter,thecompanywasabletoachieveatotalcostof$1,161 per ounce which was lower than the average price per ounce of $1,252. This is why the company achievedapositivegrossprofit. Unfortunately,duringthefourthquarter2010,boththecostofminingandthecostofprocessingper ounceincreasedto$733and$1,018respectively.Thisdrovethetotalcostperounceto$1,751which washigherthantheaveragepriceofgoldof$1,366perounce.Inordertounderstandwhythecostof mining increased from $425 to $733 (a 72 percent increase) from the prior quarter, it is useful to investigatewheretheoretofeedtheplantcamefrom.Thetotalof71,173tonsor14,919ounces(grade 0.20962ouncesperton)camefromtheSmithMine.Byusingthecostof$95perton,thisisequivalent to$453perounce($95/0.20962).Becausethecostofminingforfourthquarterof2010was$733per ounce,andwejustcalculatedthatitcostthecompany$453perouncetogettheorefromtheSmith Mine,therehadtobesomeothersourceoforethatwasmoreexpensivetodrivethecosthigher.The company bought ore from Newmont for $198.53 per ton. Because the grade was 0.19598, this is equivalent to $1,013 per ounce. For simplicitys sake, if we just average the two numbers, $453 and $1,013,wearriveat$733perounce,whichisthecombinedcostofminingperounce. Fromthiscalculation,welearnthatbuyingorefromNewmontincreasesthecostofminingperounce. Because the company continued to buy ore from Newmont in 2011, the cost of mining per ounce continuedtobehighat$671inthefirstquarterof2011,$821inthesecondquarterof2011,and$857 in the third quarter of 2011. The reason why these costs trended higher from quarter to quarter is because Newmont charges YukonNevada more per ounce as the price of gold continues to increase. Whataterribledeal! Thissituationisabouttochange.StartinginJanuaryof2012,YukonNevadawillnolongerbebuyingore from Newmont. Instead, it will be getting its own ore from the Smith Mine, the recently opened SSX/Steer Mine Complex, and stockpiles. In the most recent investor presentation, the management stated that the cost of bringing ore from Smith Mine is currently around $140 per ton (this will come down to $80 to $90 per ton after YukonNevada stops utilizing a third party mining company the contractexpiresinthemiddleof2012).Fornow,Iwillkeepusing$140perton,whichtranslatesinto $596 per ounce. The cost of brining ore from SSX/Steer Mine Complex is approximately $85 per ton, whichtranslatesinto$450perounce.Basedonthisinformation,IestimatethataftertheNewmontore buyingdealiseliminatedandmoreoreisbroughtfromtheSSX/SteerMineComplex,thecostofmining perouncewilldeclineto$523perounce. If buying ore from Newmont is such a bad deal for YukonNevada, why do it in the first place? The managementalwaystreateditasatemporarysolutionuntilthecompanysownorecouldreplaceit.In theshortterm,theywerehopingthattheincreaseinproductionwouldlowertheprocessingcostper

ounce because as mentioned before, the more ore that is run through roaster, the cheaper it is to processperounce.Letsseehowsuccessfulthisstrategywas.

In the fourth quarter of 2010, after getting additional ore from Newmont, the processing costs per ounceincreasedto$1,018.Then,bythefirstquarterof2011,theyshotupto$1,739,sendingtheentire costperounceto$2,410.Youcantpossiblymakemoneywhenitcostsyou$2,410toproduceanounce of gold while the price of gold is below $2,000 per ounce. Obviously, the strategy to get more ore to decreasetheprocessingcostsperouncefailed.Actually,boththeprocessingcostperounceandmining costperounceincreased,whichistheworstsituationyoucanbein. Thereasonwhytheprocessingcostswereupwasbecausethecurrentroasterisold,breaksdownall thetime,andeatsuptremendousamountsofenergy.Theonlywaytoaddressthisistofixitwhichis exactlywhatthecompanyhasbeenworkingonafterraising$179millionfromDeutscheBank. Now,letslookatmyestimateoftheprocessingcostsperounceafteralltheworkiscomplete.During the fourth quarter of 2010, when the mill was operating at a rate of 1,000 tons per day and wasnt breaking down as much, the processing costs per ounce were $736. If I was totally ridiculous and assumedthatthenewlyrefurbishedroasterwillnotimproveefficiencyatallfromthislevel,andIuse the$736perounceastheprocessingcostperounce,YukonNevadawillbeprofitable.Afteraddingmy previouslycalculatedminingcostsof$523perouncetotheprocessingcostsof$736perounce,weget atotalcostperounceof$1,259.Consideringthatthepriceofgoldis$1,650perounce,YukonNevada willbemaking$391perounce.Ataproductionrateof150,000ouncesofgold,thistranslatesinto$58 millioningrossprofit. However, the roaster will be running at a rate of 4,000 tons per day, not 1,000 tons per day, which means that the processing costs will be lower than $736 per ounce. Also, after spending money to improvetheplant,itsperformanceissuretoimprove.Iwastoldthattheroasterwillbeabletoprocess orefor$40perton.Ifweuseagradeof0.15ouncesperton,thistranslatesinto$266perounce,which ismuchcheaperthan$736perounce. Basedonmyestimates,thecombinationofminingandprocessingcostsperouncewillequal$789per ounce ($523 + $266). The management estimates $785 per ounce, so I am close. How will this all translateintoearnings?

 Considering the current market capitalization is $300 million, you are buying YukonNevada for three times theprojected2012earnings.Bringingproductionto175,000ouncesofgold peryearisjust the firststep.Bytheendof2013,themanagementisplanningtoincreasetheproductionto300,000ounces ofgold,whichiswhatithistoricallyproducedbetween1987and2002.Iusedthecostof$789perounce eventhoughby2013,themanagementisplanningtolowerthesecostsevenfurtherbyopeningmore minesandtakingtheminingatSmithMineinhouse.Ifandwhentheylowerthecosts,itwillbeanice bonus.Fornow,Iwillstickwith$789.

Conclusion AssumingthatYukonNevadaachievesaproductiongoalof300,000ouncesofgoldbythebeginningof 2013, it will be set to generate more than $216 million in opearing income. Applying a conservative multipleof7getsyouto$1.50pershare,whichisafivebaggerfromnow. Risks Ibelievethatthemajorityofriskhasbeenliftedafterthecompanyraised$179millionfromDeutsche Bank for the winterization and refurbishment of the facility. Obviously, there still remains more execution risk. However, YukonNevadas problems came from the malfunctioning plant, not from metallurgyoralackofresourcesintheground.Malfunctioningplantisfixablewithmoney.Therealsois ariskthatthemoneyraisedwillnotbeenough.Consideringthattheyarealmostdone,Idoubtthatthey will need to raise more money for the winterization and refurbishment of the plant. But if they do, it shouldntbemuch. Also,anotherriskisthepriceofgold.Icantreallyhelpyouhere.Ifyouthinkthatthepriceofgoldis abouttocrash,thenyoushouldobviouslystayawayfromthiscompany. Ithinkthatthebiggestriskofallisotherinvestors.Sofar,theyhaveactedimpatientlyandasifthey know very little about the company. There is nothing that will stop them from continuing to act foolishly.Therefore,ifyouchoosetoinvestinthiscompany,justknowthatyouwillneedtobuckleupor youwillbethrownoffthehorsebytheinsanevolatilitycreatedbyotherinvestors. VideowiththeCEO http://www.youtube.com/watch?v=E5ohtXv9pvM