Allied Nevada clears out worrisome covenants

Allied Nevada Gold (TSX: ANV; NYSE-MKT: ANV) has gained some wriggle room as it pushes into the new year with a lofty plan to expand its flagship Hycroft mine in Nevada.

The Reno, Nev.-based company had been feeling the pressure of some debt covenants given the slumping price of gold, but it has amended its credit agreement with the Bank of Nova Scotia and other lenders in a way that should improve its liquidity.

The big win for Allied in the new arrangement is the removal of the cash flow related covenants connected to the leverage ratio and interest coverage ratio. Both of those covenants, which were in danger of being tripped, are now gone with the new agreement fashioning covenants that call for the company to maintain a post-maturity reserve tail of 600,000 recoverable gold-equivalent ounces, as well as a current ratio (current assets divided by current liabilities) of no less than 1.25 to 1.

But getting the Bank to agree to drop the old covenants means sacrificing some financial flexibility, as the new agreement cuts the amount of debt available to Allied to $40 million from the previous $120 million. The initial credit facility was established in October 2012.

The new deal has an “accordion” feature, however, that allows the total amount that Allied can borrow to move up to as high as $75 million, with the amount that Allied can borrow being tied to the amount of inventory on its leach pads.

Allied also announced that it amended agreements with Société Générale, and will enter a new deal with the National Bank of Canada around its already established currency swaps.

The new agreements this year call for Allied to cash collateralize or post a letter of credit for any amount due for the fair market value of current settlement cost related to its $90-million cross currency swap. As of the end of the year that amount would have been $8.2 million.

The currency swap was entered as part of Allied’s issuance of $400 million worth of senior notes, with a coupon rate of 8.75%.

The key takeaway for investors is that Allied has put itself into a better position on the liquidity front by removing the covenants that can wreak havoc on a company should they be tripped.

With the greater flexibility Allied says it will focus on updating the prefeasibility and feasibility studies for the Hycroft mill expansion over the year.

“The amended agreement should allow ANV to draw against its credit facility and provide sufficient liquidity in the near term,” CIBC analyst Jeff Kileen wrote in a research note. “However, we believe concerns regarding the company’s long-term debt will remain, resulting in an underperformance in Allied Nevada shares relative to peers.”

Kileen has a Allied Nevada’s stock rated as a “sector underperformer,” with a US$3 price target.

In New York on Jan. 3, the day the news was released, the company’s stock was down 1%, or 4¢, to US$3.93 on 4.48 million shares traded.