Monday, October 10, 2011

Hallgarten & Company
Coverage Update
Christopher Ecclestone cecclestone@hallgartenco.com

Yukon-Nevada Gold (TSX:YNG, FFT:NG6) Strategy: Long
Key Metrics Price (CAD) 12-Month Target Price (CAD) Upside to Target 12mth hi-low CAD Market Cap (CAD mn) Shares Outstanding (mns) Fully Diluted (mns) Consensus EPS Hallgarten EPS Actual EPS P/E Dividend Yield $ $ 0.34 1.50 348% $0.19 - 0.95 $ 276.9 826.6 849.8 FY09 FY10e n.a ($0.13) n/a 0.00 n/a FY11e n.a $0.02 14.1 0.00 n/a FY12e n.a $0.08 4.0 0.02 6.0%

($0.130) n/a 0.00 n/a

Hallgarten & Company

60 Madison Ave New York, NY 10010

T 973-889-1136

Monday, October 10, 2011

Yukon-Nevada Gold
Leaving Its Travails Behind
+ + + + Recent financing initiatives have set the company on a sound financial footing enabling vital capex and providing a cushion of working capital. Production should ramp up again after a September slowdown to implement long-overdue winterising of the mill facilities. The board is planning to rebalance with the Swiss investors destined to become a minority The company's excess mill capacity has been used to process bought-in feedstock from Newmont at marginal profitability. The strengthened financial position of the company will put “the boot on the other foot” in these types of transactions. The company’s Ketza mine in the Yukon has been signaled to be spun off into a Newco. The production debacle (i.e. wet ore clogging the mill) during the winter was avoidable and it took surprisingly long for the company to seek out a responsible party to chastise. The message on the Ketza spin-off is garbled and incoherent. The opportunity to do this transaction in a fashion that would have rewarded shareholders for their sufferings was let pass. Yukon’s stock desperately needs to be consolidated. It has way too many units on issue (or potentially on issue).

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Producing and Near-Producing Yukon-Nevada Gold Corp. (TSX: YNG, Frankfurt: NG6) is a North American gold company that has as it main assets a producing mine in Nevada and a potentially producing mine in the Yukon Territory. In its current form the company was created via a merger in May 2007, between Yukon Gold Corp (YGC, as it then was) and Queenstake Resources Ltd. to create Yukon-Nevada Gold Corp. As a result of the combination of the businesses and assets of the two companies, Queenstake became a wholly-owned subsidiary of YGC, and YGC changed its name to the current Yukon-Nevada Gold Corp. This created a broader North American focused mining entity. Queenstake’s prime asset was the Jerritt Canyon mine in Nevada where the gold was first discovered in 1972. The Jerritt Canyon property is virtually an entire district of its own with various producing, mothballed and past producing mines. Its asset base includes one of only three refractory roasting facilities in Nevada, a very strategic playing piece. Open pit mining occurred between 1981 and 1999 with the first gold poured in July 1981. Like many other miners at that time, the fluctuating gold prices put paid to the open-pit operations without the pits having been fully mined out or their full potential exploited. Portal-accessed, underground mining commenced in 1993 with the SSX-Steer Complex and the Smith mine. Since mining began, Jerritt Canyon has produced over seven million ounces of gold largely under the management of Anglogold (and Meridian Gold) up until 2003. In its last full year of production (2002) under Anglogold, it produced 338,000 ozs of gold. After Queenstake's travails precipitated a closure of the operations yet again in
Portfolio Investment Strategy 5

Originally the version that went around alluded to a record cold winter.” This raised the issue of why the mill was ever restarted without the basic reorganisation of the mill process to avoid this problem. in any case.Monday. environmental problems relating to mercury emissions kept the mine shut until mining at the site recommenced in the second half of 2010. YNG found itself in an extremely precarious financial situation. but was not as critical as the dryer-move. the company began production without having winterized the plant. left investors deeply dismayed and made Yukon’s financing task well-nigh impossible. after months of projecting bullish scenarios and focusing on the shortlived “Off-balance sheet acquisition funding” (instead of fire-fighting the production SNAFUs). Apportioning blame is not immensely useful post-facto. made for insufficient funds for operations. An added improvement would have been the enclosure of the whole facility in a more encompassing structure. The latter would have cost $25mn. was Portfolio Investment Strategy 5 . Moreover the production that was occurring came at a hefty loss for the company. October 10. What Went Awry It is sometimes said that the flapping of a butterfly’s wings on one side of the plant can create a hurricane on the other side of the globe. In this respect an avoidable dilemma was charged at full head-on and the dilemma won. The majority shareholders of the company at that time eschewed all offers that might have resulted in dilution of their stake. Graham Dickson. but Yukon Nevada’s experience over the last twelve months shows that small actions can have massive consequences. The company started hemorrhaging cash. The solution was as simple as a $6mn installation of a new larger dryer which involved moving the dryer closer to the start of the ore-sorting process. From then on. Recent Travails At the start of the second quarter of 2011. Thus Chief Operating Officer of the time. This revelation. We have been somewhat dubious of this claim since first hearing it. some stockpiled ore and substantial quantities of ore bought in from Newmont. 2011 August 2008. but we were initially dubious of this when we heard that the problem was wet ore rather than frozen ore. To synthesize the essence of the problem we would say that: • The company made a major mistake in ignoring the urging of outside investors in 3Q10 for a financing. the mill has been primarily engaged in processing the mined materials. they latched onto an unattractive gold loan deal that. but ensuring that the same (or similar) mistakes are not made in the future is vital. Production plunged as soon as the non-winterised plant ran into highly foreseeable problems with the first dispatches of wet ore. The alarm bells had sounded with the announcement of the December 2010 financial production and results which showed that something was seriously wrong with the production model. and cash was rapidly draining away. As a result of this. Instead. • • • The essence of the production problem was wet ore being stuck in the screens and cone crushers. When we inquired we were told “this had happened in the past.

saw the Swiss directors reduced to a minority.Monday. On the positive side we would note that the debacle spurred a reassessment of Ketza’s role. or in association with sedimentary carbonaceous material. tossed overboard the SPV scheme and left the mill poised for profitable production once the mill-flow reorganization is completed. and the mines tend to be in the hills (as can be seen in the aerial view below). The map above shows the core part of the district (Starvation Canyon though is off the map). The current focus is the Smith mine to the East with the Steer/SSX underground complex at the western edge of the Portfolio Investment Strategy 5 . native gold. The damage had however been done with the company losing fans in the institutional space. Due to the sulfide and carbonaceous affinities.000 feet in depth measured from the elevations at their portals. None of the Jerritt Canyon mines exceed 1. Lesser amounts of ore are hosted by intermediate to mafic intrusive rock. Jerritt Canyon The complex that YNG controls at Jerritt Canyon consists of an array of open-pit and underground mines (plus virgin prospects) that have been exploited over the last 30 years. most of the gold deposits at Jerritt Canyon require fine grinding and oxidation to permit the gold particles to be liberated by standard. resulted in a new COO. 2011 replaced by Randy Reichert in late June 2011 in a move that we welcomed. October 10. on or within pyrite. Pits are in the valleys. Gold in the Jerritt Canyon ore deposits occurs as free particles of intergranular. Paleozoic calcareous and sulfidic sedimentary rocks. The Jerritt Canyon deposits are typical of the Carlin-type deposit of micron to submicron-sized gold particles hosted primarily by carbonaceous. losing a year of earnings potential (and instead engaging in unprofitable “production”) and burning through cash. losing ground share price-wise. carbon-in-leach cyanidation.

073 opt Au for a total of 65.9 1290.8 5.1 15. in a rather small way.100 per oz Au price.5 899.2 Inferred K tons 90.3 182.5 365.4 25.2 65.8 0.5 99.9 0.9 We took the liberty of excising the minimal amounts of resource (a few tens of thousands of ounces) in Portfolio Investment Strategy 5 .194 0.2 502.221 0.276 0.073 6148.9 556.8 0 2358.4 0.35 902.4 Indicated K oz K tons 48.1 15.28 oz/t Murray Murray Zone 9 SSX/Steer Saval Smith Starvation Wright Window Stockpiles Total 26.209 0.224 0.9 2369.6 1982. The Measured.2 226 70.284 0. over the last year along with ore being produced from SSX/Steer Mine.000 tons of ore at an average grade of 0.227 0.285 0.9 0.9 97.31 -0 0.304 210. This stockpile has been milled.1 58. the company continued mining and thus accumulated significant ore stocks (to the detriment of its finances and cashflow).36 Murray Murray Zone 9 SSX/Steer Saval Smith Starvation Wright Window Total Inferred oz/t 0.2 65.156 55.2 0.195 0.7 4.209 0.8 0.2 42.4 656 4186.228 0.7 143.4 496.229 0.4 61.4 2203.9 93.Monday.226 0.5 0 0 4602.7 141.3 256.1 0. October 10.7 470 2 -0 0 1079.156 902.237 0.7 oz/t 0.277 1653.221 0.073 10750.3 19 2265.4 58.3 0.6 0.4 Measured and Indicated K oz K tons oz/t K oz 7.900 ounces of Au.4 97.269 210.8 123 513.235 0. This was constructed using a $1.3 -0 533.6 12.7 983.3 469.277 4012. 2011 map being the secondary target for reactivation.365 0 0 0.258 0.1 201.6 479.2 148.2 0.22 K oz 20. Indicated and Inferred resources shown below were published in the 2011 NI 43-101 compliant report prepared by Mark Odell and Karl Swanson and published in June 2011. The stockpile (as at last January) contained 902. After the environmental travails of the company began (which were in the processing rather than the mining part of the complex). JERRITT CANYON – RESOURCES as at January 2011 Deposit/mine Measured K tons 155.7 1157.233 0.

The drift allowed the SSX-Steer deposits to share infrastructure in order to optimize production. The drift connecting the SSX and Steer mines was completed in late 2005.653.800 Measured + Indicated KTons 4. Production Goals Portfolio Investment Strategy 5 .200 oz Au.9 Indicated Au Grade Contained (opt) Au (oz) 0.125 Ktons 2.Steer connection also enables drill platforms to explore this prospective corridor. and the two mines are now referred to as the SSX-Steer Complex.358.226 533. the company announced the long-awaited reactivation of the SSX/Steer deposit. Measured Au Grade Cutoff (opt) 0. This mine will restart at an average of 300 tpd and will ramp up to 800 tpd by the end of 2011 as additional equipment is delivered to the site. but now that funds are available there should be an aggressive exploration campaign with a particular focus on the old openpits where some step-out drilling is believed to hold the potential of uncovering material to justify reactivation of mining the pits.Monday.4 Au Grade Contained (opt) Au (oz) 0. It is examining the potential of reactivating gold production from mines (open pits & underground) that were decommissioned at much lower gold prices.194 opt gold containing 93. in the recent years. this connection allowed commercial production from Steer to begin in 2005.224 899. The exploration effort thus far in 2011 has been minimal due to the cash crisis.400 Ktons 1. By providing a secondary escape way and ventilation. The deposit occurs 450 to 1. the main gold producer at Jerritt Canyon. Ramp up to the ultimate production target of 1. It was.012. Since 2008 new management team has been compiling historic drilling data to provide an overall view of how the various ore bodies on the property are related. The NI 43-101 compliant resource published in June superseded one prepared by SRK back in 2008.200 The M&I resource of the mine from the NI43-101 published in June 2011 is shown in the table above with an additional Inferred resource at SSX consisting of 479.9mn ozs. The complex was shuttered with the generalized problems at the Jerritt Canyon site back in 2008. Again a sizable resource by any comparison but the overly anxious are concerned that this only represents six years of minelife. 2011 the open pits from this resource statement. with the goal of enhancing Reserve and Resource calculation through this broader overview. October 10. and mining commenced in 1997. The current M&I Au resource at 2.200 tpd will be complete by the end of 1Q12. The SSX. The former operators did not consolidate drill data.5 Au Grade Contained Au (opt) (oz) 0.221 365.3mn ozs is not unrespectable by any measure however the parts of the district that are likely to be producing in the near term are only SSX/Steer and Smith and they total less than 1. Reactivation of Underground Mining In recent weeks.100 tons averaging 0. The SSX deposit was discovered in the early 1990s.000 feet below the surface.

The company has both the existing Smith mine and the million tons of stockpiled ore with which to work.000 ozs per annum within 12-18 months and 400.600 tpd of ore to Yukon Nevada is a mere drop in the bucket when one has the amount of stockpiled ore that these two gold majors control. The delay here has been due to a lack of underground rolling stock. a side-effect of the generalized mining boom. Yukon Nevada was targeting a total production of 150. The company recommenced underground operations in February 2010 at the Smith Mine with the rate of 1. Doing this on a tolling basis was not of interest to YGN so it hoped to purchase ore to put through its mill that would make the output countable as “YNG’s gold. the ore will pull down its headline grades and bring attention to its logistical problems in Nevada. The issue of “why sell?” when these majors can retain the ore and process it after their mines are eventually exhausted is answered by the sheer scale of the ore that is mounting up and the environmental considerations from letting excavated sulphide ores lie around in large piles.200-1. Thus selling the ore at around $400 per contained oz to Yukon Nevada would have brought cashflow without corrupting the average grades of the majors’ gold output. Stockpile Processing The spare capacity at the refractory mill opened up the possibility of the company treating ore from other miners. 2011 There are two components to the production revival at the Jerritt Canyon mine complex in Nevada.” a situation that would not exist for tolled ore. It makes sense that it should want to on-sell its low-grade ore because if it processes the ore itself. The planned ramp-up of the mill as stated to us in mid-2010. The end result was that YNG ended up effectively processing the ore (grading 0. By milling a combination of available stock piles and recommencing mining activity.09 opt or 2. Portfolio Investment Strategy 5 .5 opt ore point and stockpiling the lower grade material. As a result. The reality was that both companies are at full capacity at their refractory mills in Nevada and cannot add capacity. YNG's hopes on this score were dashed in 2010 (and through 2011) with Newmont adamantly refusing to do anything on terms that YNG set. Newmont alone has accumulated a stockpile of unprocessed low-grade ore (mainly below 0. Expansion is scheduled with the reactivation of the SSX/Steer underground mine in the first quarter of 2011 which should add another 1. though the last quarter of the year was firmly in the black. However when it came down to it. Thus they have been focusing on processing 0.Monday. The target suppliers in the first instance were Barrick and Newmont.75g/t) on the thinnest of margins and this only served to distort YNG's own cash-cost.400 tpd of ore for processing. However the cash-cost was way higher (amongst other things climatic issues impacted) and the company was only a marginal earner in the second half of FY10.000 ounces of gold in the first full year of production at a cash cost of US$465 per ounce after re-start of operations and after the mill established steady state operation.000 ozs per annum within 24-36 months. at least for the near future. The steady state production was achieved in August of 2010. October 10. was to produce up to 250.223 opt) being achieved in September 2010. Even selling 3.1 opt) that amounts to 53 millions tons. Newmont had clearly perceived a weakness here on YNG's part and took advantage of it.4-0.000 tpd (at 0.

Burns Basin now has a Measured resource of 27.492 ounces at an average grade of 0. In recent days the company made a surprise announcement (in being earlier than many had expected) that preliminary engineering work towards advancement of open-pit mining at Burns Basin pit (which is shown front-centre in the photo above) had commenced.4 million short tons averaging 0.163 opt gold and an Indicated resource of 213. Anticipated startup for the Burns Basin open pit mining operation is in 4Q12. which YNG had already eschewed. The aerial photo on the next page shows the intense pattern of pits that exists at the core of the Jerritt Canyon deposit. 2011 Now that YNG has got its financial house in order (and more able to fill its own production pipeline) Newmont is going to lose its power to call the shots. It is highly likely then that whatever remnants of relations there are with Newmont's excess supply will be on a tolling basis.104 opt gold. A preliminary mine plan has recently been completed for the Burns Basin resource totaling 241. October 10. sequentially. This is an example of finally “getting real” in the long run after a major faux pas on this thirdparty ore concept. In theory. The resource is not a Portfolio Investment Strategy 5 . thus still some way off.000 ore tons per day. The Open Pits The company has a series of old open pits from which (largely) oxide ore was extracted up until the start of the last decade to feed the now-mothballed wet mill. These pits fell victim to low prevailing gold prices and were thus not abandoned due to exhaustion. The plan now is that at least half of the drilling budget will be focused on step-out drilling around the open-pits with a view towards reactivating them.828 ounces at an average grade of 0.169 opt gold based on internal mine records. with daily production of 2. Historical mining from Burns Basin from 1988 to 1998 extracted 412.9 miles west from the active SSX-Steer underground mine and has existing haul road access.Monday.320 of contained ounces of gold in the Measured and Indicated category and is listed in the table below. This pit is located around 0. Yukon Nevada is excellently positioned with spare capacity in refractory milling when it is unlikely that refractory mills will ever see any capacity increase (or new facilities) in Nevada due to environmental issues.328 ounces from 2. to provide mill feedstock.

492 2.170 0. As Burns Basin shall be the first pit reactivated.000 ore ton per day production schedule.337 Total 0.133 0.080 0.118 0.983 0.163 27.212 25. October 10.400 Measured Indicated Measured + Indicated Au Grade Au Au Au Contained Au Contained Contained Cutoff Ktons Grade Ktons Grade KTons Grade (oz) Au (oz) Au (oz) (opt) (opt) (opt) (opt) 0.151 163.147 165.400 Au price which is a three-year trailing average price + 10 percent. and a $1. 2011 stunning one but in light of the relatively minimal effort required to reactivate the pit and with all the milling facilities available. and enable detailed mine planning.062 0.Monday.100 0. it is eminently sensible to kickstart this pit (and the others).07 0.108 241.320 Notes: The Burns Basin resource is based on a Lerchs-Grossman pit determination using a new 20 x 20 x 20 block model. The mine plan was conducted by mining consultants Mark Odell and Karl Swanson under the supervision of Todd Johnson.054 2. current mining costs.815 1.013 0. The preliminary mine plan at Burns Basin is based on work carried out subsequent to the completion of the former NI 43-101 Technical Report on the property.8: 1 (waste:ore).168 1. YNG has prioritised funds from the aforementioned exploration budget on the open-pits for further drilling at Burns Basin to confirm and expand the resource. Vice President of Exploration for YNG. Burns Basin Open-Pit Resource at a Gold Price cut/off of $1. It is a shame that this goal was not actually pursued earlier.051 50.233 0.104 213.068 75. a 2. Portfolio Investment Strategy 5 .982 0. The stripping ratio for this Burns Basin resource is 10.828 2.052 0.036 0.324 1.

2011 Source: YNG The company has stated that preliminary plans are in progress for the open-pit mines at Steer and Saval Canyon. Combined Production Projections Our projections (shown in graphic form below) are for years 2010 to 2012. Portfolio Investment Strategy 5 . Drilling has already been authorized and is currently in progress for some of these areas to ascertain their suitability for reactivation. though these do not have the recent open-pit announcement factored in.Monday. and after that the projections are from the company. West Generator. October 10. The table above shows the amounts of ore and gold that historically has been extracted from these open pits. and Wright Window. Mill Creek.

October 10. The deposit is located on private land owned by Yukon Nevada in the southwestern part of the Jerritt Canyon District.000 100.000 300. Portfolio Investment Strategy 5 .000 50. an area considered to have similar geologic structures as the mines in the northern part. 2011 YNG . it views Starvation Canyon as having the most potential to add sizeable new resources and production.000 150.000 Bought In YNG Mines 250. Beyond that.Monday. though. Drilling has identified a prospective 4 1/2-mile mineralized trend that includes Starvation Canyon and mineralized targets at Waterpipe II and Pie Creek.000 0 2010 Source: Hallgarten/YNG 2011e 2012e 2013e 2014e 2015e Starvation Canyon – Next Up? Yukon Nevada now has both the Smith and SSX/Steer mines in operation and will be looking to expand the potential of the oxide ore around the old open pits.Targeted Production Oz Gold 350. The northwest structure that appears to be the primary control for the Starvation Canyon resource could hold potential for additional clusters of mineralization both to the northwest and southeast. The discovery of high-grade mineralization at Starvation Canyon was the first substantial gold deposit found in the southern part of the district.000 200.

drilling has indicated that the thickness and grade of mineralization are comparable to that found previously at Jerritt Canyon.Monday.000 tonnes grading at 0. while previously the company completed.300 ozs Au. Interestingly this was outside the area of the preexisting resource calculation. The grade is good and the resource is not enormous.7 meters at 11 grams per tonne (gpt).33 ounce of gold per ton (opt) or 13. The Indicated Resource is 697. Investment Plan Beyond changes to the processing plant which were carried out during a shutdown for the whole month of September 2011. Plans are in place for a new 50mn ton fully-lined tailings storage facility with construction starting in late 2011 (though ground breaking Portfolio Investment Strategy 5 . Thus the last meaningful announcements were in 2007 when the company announced one drill hole intersecting 45 feet of 0. Now the capacity of the existing tailings pond will be sufficient for three years. with the various crises besetting the company in 2008 and 2009. History at Jerritt Canyon has shown that the underground resources have excellent replacement as the mine advances. a number of tailings reclamation projects. Thus far. However. 2011 The gold mineralized zone (shown above) lies above the water table in the area of steep topography and could be easily accessed by portal from the hillside. including Seepage Pond reclamation and upgrades of fluid conduit and pumps.000 ozs Au.282 opt giving 161. The mineralized zones that host the Starvation Canyon deposit are mostly classified as indicated resources in the December 2007 reserve estimate with probable reserves of 571.287 opt yielding 200. However this should be put in the context of most of the infrastructure being already in place in close proximity. in 2010. drilling any part of the property was a low priority.600 tonnes grading at 0. October 10.

Yukon Nevada would supposedly retain the remaining approximate 75% of the issued shares of Portfolio Investment Strategy 5 .Monday. the company decided to transfer the Ketza River property to a separate corporate entity. the Yukon domiciled company which holds the Ketza River assets. at least at the beginning. Some 41% of the measured and indicated recoverable resource ounces are hosted in oxide ores which have a gold recovery of 90%. This asset consists of two properties (Ketza River & Silver Valley) in the Yukon in Canada.000 oz Measured in 167.212. The current gold Resource (dating from June 2011) includes: 29.800 tonnes grading 5.. The remaining 59% of the measured and indicated recoverable resource ounces are hosted in sulfide or mixed sulfide+oxide ores that generally have gold recoveries of 70%.300 tonnes grading 5.000 oz of gold and byproduct silver between 1988 and 1990. and will own 100% of the shares of Ketza River Holdings Ltd.300 oz in 453. Unlike many of the more isolated mining projects in the Yukon. Ketza River– a Confusing Exit Scenario The Ketza River Project is in the same location as the historic Ketza River Mine. which will be.62 gpt is present in the Inferred category. Newco. In early March 2011.38 gpt and 388. a wholly-owned subsidiary. Indicated in 2. A further 67. these properties are connected by an 82 km all-weather road to Ross River.46 gpt.700 tonnes grading 4. which produced 98.700 oz. October 10. YNG indicated that it would make a public distribution of approximately 25% of its shares to fund the pre-production costs of the Ketza River assets. 2011 was originally scheduled for late summer 2010).

Yukon Nevada has targeted production from Ketza River at an estimated 60. and geotechnical characterization of the lower tailings site. we saw no reason why the spinoff shouldn’t receive a robust reception from investors. The timeline for review is a minimum of one year from the date of submission. metallurgy drilling and testing programs developed and upper tailings site identified and drilled. With a vibrant funding environment at the time that this “separation” was announced. Concurrently. In considering how much the entire spin-off might be worth in market capitalization terms. Current work at Ketza includes the following activities: Drill program for 2011 includes > 6.Past and Planned Work Baseline studies for the Ketza River Project began in 2008. though this could be pushed higher with expansion of the resource. There is still a mill at the site and there is also a fully equipped camp and facilities. Community and First Nations consultation meetings. During 2009 and 2010. we would not be surprised to see the Newco entity debut with a market valuation of around $100mn if this transaction is carried out in an intelligent and market savvy fashion. Frankly. though the Yukon province still manages to generate more excitement than other gold mining districts. or a merger partner for the Newco was flushed out. additional geotechnical and hydrogeology drilling in the proposed resource areas. The proposed transaction remains subject to further review and approval by the company's Board of Directors. A CAD$9mn Flow-through financing was completed in May 2010 to fund an expanded exploration Portfolio Investment Strategy 5 .100m of drilling. In late September 2011. Yukon-Nevada announced that it had submitted its Yukon Environmental and Socio-economic Assessment Application for the Ketza River Project to the Executive Committee of the Yukon Environmental and Socio-Economic Assessment Board. Ketza . This “transaction” is another example of the company’s past tendency to announce first and think later.Monday. we would prefer to see the whole of the Newco’s shares distributed to existing shareholders as a reward for their perseverance with YNG through its recent tribulations. and Obtaining a type A water license for the existing tailings facility. geotechnical and hydrogeology drilling programs were initiated. Now of course markets are not nearly as bustling and a lot of IPOs have gone back into the freezer. exploration drilling. The planned mine includes nine open pits and two underground declines with 83% of the ounces to be mined from open pits. It is the intention that Newco will make application for a listing of its shares on a recognized stock exchange.000 opa Au. Installation of a replacement camp (completed August 2011). An assessment is a first step in gaining the necessary approvals in order to bring the Ketza River Mine back into production. soil surveys. Drilling of a new water well for use at the camp and the new mine facilities. 2011 Newco. Nothing is set in stone though and the first announcement seems to have been a kite-flying expedition to see if a potential acquirer. YNG conducted geophysical surveys. October 10.

Share Structure (as of 12 August. it is that the company is seriously in need of a stock consolidation of at least 1:5 to get the number of shares down and make the company more acceptable to an institutional base.10 per Unit. Yukon Nevada closed a CAD$5mn non-brokered private placement for a total of 22. This large number of shares on issue is a result of a number of events over the last few years. this has been earmarked towards getting the Keska River project (discussed later) moving forward.639.4mn flow-through common shares at $0. In August 2009 the company held a non-brokered private placement in which some $4mn was raised via the issue of 40 million units at a price of $0. the company’s trading in relatively thin (averaging three-quarters of one million shares per day over the last three months) compared to other companies of similar size. coming down the pike.549.Monday.125 per share within 30 months of closing of the private placement. start contributing in late FY12 and/or FY13. The warrant was exerciseable to purchase one additional common share at a price of $0. The second being the rescue financing largely funded by the Swiss investors in December 2008 and the third being the issue of “inducement warrants” in late 2009 and most recently a series of smaller financings including a flow-through financing that raised money to move the Yukon project forward and the massive warrant conversion in May 2011. As this money has to be dedicated to projects within Canada. Below can be seen the current shares on issue and potential dilution. in late April 2010. in theory. Each unit consisted of one common share and one share purchase warrant. In late March 2010.514 1.727. 2011 program.612.275 per FT Share.301 90. now that substantial financing is at hand the flow-through cash can once again be applied. However in reality. particularly with it appearing like Ketza River might be the exit hatch for the former COO (who brought this mine to the merged entity originally). 2011) Shares issued: Warrants: Options: Shares Fully Diluted: 960. Not to mention recent shares issued in the legal settlement with Golden Eagle. the company held a brokered private placement for gross proceeds of around $10mn through the sale of 36.907 And yet.22 per share and. If one thing is clear after all this process. Portfolio Investment Strategy 5 .092 56. However. Such a move would also make the stock eligible for an NYSE listing.424.077. we have not factored any production or income from this mine into our revenue model at this point but this could. As a result of the current uncertainty surrounding Ketza’s fate. just after that. it seems that this money might actually have been consumed by YNG's other more pressing needs. Financing & Share Capital The company has a truly prodigious number of shares on issue at the current time with a steady potential flow of warrants (most of which are in the money). October 10.272 common shares at a price of $0. The first of these was the merger with Queenstake.

In retrospect. Subsequent to the receipt of the US$120 million prepayment. 2. This transaction was unwound mid-2011 using the proceeds of the warrant exercise at a cost of around $29mn. 2011 The Deutsche Bank Gold Deal Gold loans have a bad reputation and well they might as most of the gold loans we have seen have been at exceptionally punitive purchase prices.950. In mid-August 2011.330 ounces per month. the annoying thing here is that institutional holders were panting to get more equity at that time and the company could have done a very attractive equity financing. However having said that we have not seen many of them lately and the most egregious ones that crossed our radar were perpetrated at the worst of the financing slump in the wake of the 2008 slump when financing could not be had for love nor money (though gold was a preferred alternative).114 shares of SPDR GLD Gold Shares beginning September 2010. when we first heard that Yukon Nevada was pondering a gold loan proposal we went into wary mode. This Senior Secured Note had a US$25mn principal and 25mn common share purchase warrants. the remainder of the purchase price for the gold will be paid to Queenstake against the monthly gold deliveries to Deutsche Bank and will be equal to the amount that the gold price exceeds US$850 up to a maximum gold price of US$1.Monday. The 173.000 ounces per month. the company advised that it had closed a Forward Gold Purchase Agreement with Deutsche Bank’s London Branch. Each warrant entitled Sprott to purchase one common share of YNG at a price of $0. By Portfolio Investment Strategy 5 . 4. because of an aversion to dilution by the then-majority shareholders of the company. Thus. 1. The schedule of gold payments is: during the first six months of the term. the board opted for this highly unattractive “debt” financing with Sprott. 2012 and were secured by a charge over all the assets of the company's wholly-owned subsidiaries that contained the Jerritt Canyon mines and assets.3% of the gold reserves or 5. The transaction that transpired was a gold loan in the third quarter of 2010 with the Sprott grouping of Toronto. YNG guaranteed a minimum rate of return of 5% per annum on the aggregate principal amount over the term of the Notes. for the final 36 months of the term. this was a very sweet deal for Sprott.40 per share for a period of three years following closing.000 ounces per month. Those (now redeemed) Notes had a maturity date of December 31. Almost one year later the company then closed yet another gold loan. As financing improved companies on the verge of production steered a wide berth around the gold loan banks and thus few transactions took place. Instead.1% of the total gold resources at the Jerritt Canyon property. The Notes were intended to be repaid through monthly cash installments based on a notional amount of approximately 284. Under the facility (which is technically a forward contract) YNG shall deliver 173.880 ounces of gold over a 48-month term. October 10. for the next six months of the term. All in all. the wholly-owned subsidiary which owns the Jerritt Canyon assets. This consisted of a US$120 million prepaid gold forward facility to Queenstake Resources USA. but how the times had changed.880 ounces of gold that have been committed under this gold facility represent approximately 24.

72 -$17. $1.00 $199.200 FY12e $172.00 $107.13 23.84 128.950 for an extended period of time.00 $10.50 $134.80 $27.purchased ore . This only starts to really hurt should gold hurtle through $1.85 7.85 $19. Earnings Outlook The model that follows lays out our thoughts on how earnings may evolve over the next few fiscal years.592 60% $1.45 $49.50 $0.purchased Total Revenue Cost of Revenue -mined Cost of Revenue -own stockpiles Cost of Revenue .350 for FY12 and $1. Thus the discount the company is taking is a rather modest $160 per oz.Monday.00 $71.000 20. 2011 our calculations this implies that YNG receives a prepaid $690 per oz plus the top-up for exceeding $850.37 $0.36 $36.bought stockpiles Gross Profit on definable ops Ozs of Au Mined Ozs of Au Milled (own stockpile) Ozs of Au Milled (bought in) Ore to be tolled Mill throughput (tpd) Utilisation Cash cost .96 $0.50 $0.36 $13.802 -$15.00 $241. but our understanding was that this has previously been liquidated using the proceeds of the warrant issue.oz FY13e $241.500 for the second half of FY11.104 19.95 $30.00 $0.320 $747 1.00 $15.728 40% $1. Prime considerations in constructing this model include: We are presuming an average price of Au of $1.00 $78.37 $28.250 for FY13 We have not factored in any Ketza production We have not factored in any production that may come from oxide material being put through the revived wet mill Our key metrics are shown below but the cost of ore from the SPV source is an imponderable. The company claimed that the use of proceeds from the Gold Facility included repayment of senior secured notes issued to note holders led by Sprott Asset Management.800 100% $945 $747 2.898 24.Mine Tolling Stockpile .300 1H11 $47.093 6.16 65.23 $0.mined oz Cash cost .27 $0. Key Metrics Revenue .00 $47.000 10.23 193. October 10.000 2H11e $34.466 $747 Portfolio Investment Strategy 5 . All in all though this looks like one of the most attractive gold loan transactions we have seen.80 $120.23 $63.08 FY10 $71.000 100% $695 $747 4.

531 -0.8 -1.37 71.32 -0.5 -4.82 -2.13 1001.410 0.40 145.08 -105.49 1.26 28.042 837.74 -1.093 65.208 2Q10 11.14 0 -7.46 0.39 -7.98 58.883 $1.29 69.08 -10.07 -26.649 0.56 4.31 4.63 -1.440 9.00 0.477 7.14 -42.93 0.71 -6.028 849.10 -8.25 1Q11 18.99 30.12 -0.732 15.84 685.39 35.00 0.542 -3.41 0 -51.718 13.00 68.29 -120.01 -11.34 -40.364 1.769 0.purchased Total Revenue Cost of Revenue -mined Cost of Revenue -stockpiles Gross Profit Selling/General/Admin.22 283.946 691.95 77.91 9.027 22.00 2.73 2Q11 28.86 -64.7 1.40 6.52 -0.00 0.226 2.74 2.42 1.55 -18.69 0 -7.802 45.43 -0.36 185.200 $465 FY12e 172.07 405.590 5.72 10.31 1.69 -19.5 2.000 $465 $747 FY11e 81.35 1.41 578.13 3.39 -1.896 29.05 -16.92 6.91 652. October 10.000 $1.81 2.85 13.011 23.04 3Q09 0 0 1.265 $422 4Q10 29.40 6.38 23.549 0.19 -0.11 5.9 -117.08 -0.00 68.98 48.108 $1.35 -1.00 0.00 0.56 -5.896 38.41 0 0 1.80 1.53 5.876 $1.93 0 -17.14 0. 2011 Yukon Nevada Gold USD mns FY13e Revenue .00 0.85 11.650 $1.547 $1.40 6.purchased ore .69 0.00 20.12 18.1 -0.00 0.821 -17.68 -0.128 0.08 1013 0.43 0.98 2.66 338.64 1.000 20.83 1.46 48.93 2.55 2.07 0.001 -4.13 2.74 -44.01 0 -42.11 0.52 -0.02 FY06 0.679 50.26 30.03 2Q09 4.11 -51.63 98.50 172.32 2.01 -4.636 18.019 67.14 3.02 0 0.14 0.97 -0.02 -0.80 0.973 32.963 1.18 0.000 31.55 0.39 -18.Monday.006 0.87 -5.11 5.00 0.3 -6.63 0.44 4.09 -1.91 26.341 $1.36 1.31 0.770 $1.76 5.616 -0.823 -0.00 111.91 0.8 -0.22 16.89 50.28 53.02 18.22 -0.41 0 -11.302 -0.545 2.146 0.73 130.08 -5.42 -0.77 0.73 23.508 37.41 81.067 193.21 -44.89 -13.16 13.oz 241.027 16.96 -0.302 56.13 4Q09 5.55 -13.72 11.16 10.93 667.79 6.80 95.973 18.551 -20.80 27 199.366 18.20 -0.24 9.37 83.22 33.8 -0.36 104.015 $1.009 0 0 16.64 -1.72 5.168 16.567 -0.303 1.44 -12.73 0 1.043 1.466 18.61 -18.00 16.16 -48.3 1.46 64.375 18.16 1.390 FY10 71.19 -1.80 833 0.55 -12.117 $924 Portfolio Investment Strategy 5 .200 9.45 0.00 70.Mine Tolling fees Stockpile .902 -4.027 24.00 69.50 241.15 9.79 4.066 0.3 0.01 2.46 0 -18.15 -0.97 -1.28 94.02 0 -1.10 690.2 2. Expenses Stock Based Compensation Depreciation/Amortization Exploration Unusual Expense (Income) Other Operating Expenses Total Operating Expense Operating Income Interest Income(Expense) Forex Loss Warrants valuation/costs Income Before Tax Tax Income After Tax Weighted Average Shares EPS Diluted Weighted Average Shares Diluted EPS Ozs of Au Produced Ozs of Au Milled (own stockpile) Ozs of Au Milled (bought in) Ozs of Au Sold Cash cost – overall – oz Cash cost .145 28.39 -0.07 -0.104 19.89 0.000 65.035 14.258 9.10 0.02 1Q09 0 0 0.21 -1.49 -0.12 169.180 44.008 0 -5.69 311.80 0.57 FY07 64.27 0.43 7.905 21.00 18.770 4.424 -0.00 0.02 1006 0.31 -0.359 0.12 5.41 0.091 1.933 3.68 355.47 -3.069 128.00 69.414 $1.116 9.11 -94.21 837 0.770 16.74 -9.466 19.21 0.80 -1.31 1.50 129.55 -93.541 38.32 -8.088 1Q10 10.24 -18.09 4.67 0.27 11.08 64.9 121.11 -1.00 28.09 FY09 9.690 3Q10 19.135 826.917 1.50 130.423 0.021 0.252 9.82 792.59 0.56 FY08 48.38 -12.08 1013 0.

Graham Dickson is now the senior vice president of acquisitions and corporate development. Within those five years he held the position of General Manager. Stockpiled or bought-in ore is now going to be a swing factor for filling the production pipeline rather than a crucial element of the big plan. he was the general manager of a turnkey construction company for gold milling facilities in remote locations. October 10. prior to working for Bema Gold. He spent over five years in Russia with Bema Gold. Management/Board Changes We must confess to have been initially dismayed that heads did not roll for the “Winter Debacle” but as time has worn on the Grim Reaper has claimed a number of victims in management and on the board. We also suspect that the Swiss investors will want a dividend at some point and the company should be in a good position. Operations of the Kupol gold mine in Chukotka.Monday. Dickson’s new role involved traveling between Vancouver. now Teck. our outlook is: a small profit of around $18mn in FY11. Elko and the Yukon. Most recently he was President and COO for Colossus Minerals (TSX:CSI) responsible for the development of its Serra Pelada project in Brazil. with a current market capitalization of around US$243mn.8mn or EPS of 8 cts per share production of 193.000 ozs in FY13 Net earnings of US$68. Dickson had worked in mining in North America for the last 24 years. Using the aforementioned price parameters and assumptions and the production metrics we have expounded upon. which was originally his bailiwick pre-merger with Queenstake. Golden Patricia Mill for Bond Gold and Seabee Mill for Claude Portfolio Investment Strategy 5 . to start a regular payout from FY13. and subsequently Kinross Gold Corporation.2mn or EPS of 8 cts per share However. Russia. He has also held positions within various mining operations with Cominco Limited. Prior to this he was COO of Oriel Resources plc and Orsu Metals Corp. where Yukon-Nevada is based. On the practical side. Reichert’s role will be focused on the Jerritt Canyon Mine. in our view. a Masters in Rock Mechanics from Queens University and a GDBA from Simon Fraser University. 2011 We foresee production (finally) starting to ramp up from October onwards after what has essentially been a lost (and losing) twelve months. He is a professional engineer with a Mining Engineering degree from the University of British Columbia. Reichert has 23 years' experience from his international work at various operating mines and process facilities. Russia and General Manager for the Julietta gold mine in Magadan. Almost surprisingly SSX-Steer has come on line and the openpits now seem like they are moving forward. being primarily the result of the accounting gain from the warrant exercise production leap to 128. a net profit of nearly US$70mn in FY12 is indeed impressive. Randy Reichert stepped into the Chief Operating Officer's position once Graham Dickson had been shifted to corporate development. including the Snip Mill for Cominco. and we are only conjecturing one year out to achieve this goal. where the company has exploration projects.000 ozs in FY12 net earnings of $69. This sounds to us like he is being groomed to take over the helm again at the spun-off Ketza River.

Valuation Issues The trend in investor questioning in recent months. From our discussions.Monday. He was also President of a controlled subsidiary. To other buyers (probably owners of deposits in Northern Nevada. he completed the surface facilities for Bema Gold's Julietta mine in Far East Russia. commission and operation of six mineral processing plants and gold producing projects (including the Kingston and Aurora mines in Nevada). with many potential customers in relative proximity. Toronto. His roles with the Golconda Group also included being Managing Director of Duketon Exploration Limited. Thus to hazard a valuation. Nevada Goldfields Corporation. Baldock was originally drafted in as President.. Before joining YNG. their logic goes. but with a focus on the mining industry. The other restructuring play he is involved in at the current time is Monument Mining (TSXV:MMY). so how to find a valuation metric? Where else is there a refractory mill. He was the co-founder and Managing Director and subsequently Executive Chairman of Golconda Minerals group of mining companies listed on the ASX. he served in various capacities with BYG Natural Resources Ltd. in particular. it would be a case of what would it cost for them to build an equivalent mill to get their mines into operation? The latter may be a moot point if one believes the accepted wisdom that it is unlikely that the State is ready to license new refractory mills. listed on the ASX. Further afield. where he is the President & CEO. CEO and as a Director in the wake of the chaotic situation after the debacle of 2008. which had an operating gold mine in the Yukon Territory. and this even more the case now that the former COO Graham Dickson has moved on. investors were bemused as to why Newmont did not move on the company when YNG was so beaten down in price in May. the main driver at Yukon Nevada remains clearly Bob Baldock. Thus the time value of money and opportunity cost come into the calculation for wannabe producers. October 10. a gold producing company in Malaysia. it’s less a case of what such a mill would go for on Ebay or Craigslist but rather. To pick a number out of thin air. and that even if it was. However. 2011 Resources. USA and Stuttgart Stock Exchanges. The mill is unique (if one takes that the Newmont and Barrick refractory mills are not on the market) and provides a highly strategic playing piece for any gold company of reasonable size with a refractory ore problem. NASDAQ and Stuttgart Stock Exchanges. We had no logical answer to that except that majors always let an opportunity to pick up something cheap pass them buy. construction. the process would be long and arduous. though more around the time of the company's financial crunch in May/June. with a clean environmental bill of health and spare capacity? This is a rara avis. He was the CEO of Yukon Gold when it merged with Queenstake to create Yukon Nevada in 2007. He had a track record in more recent years as a mining executive as well as being a veteran accountant with over 30 years of bankruptcy. listed on the TSX. Thus the sale value of the mill was a crucial factor in many of the inquiries we fielded. NASDAQ. As for valuation. was focused on residual value should the mining concept not work. when you can pay more later? Scrap value of any mine is a few million dollars at best. “what is it worth to you?” Thus to Newmont or Barrick it would be worth whatever they value the being able to clear out stockpiles of old unmilled ore. one must make a blend of these disparate factors and throw in some “X” Factor for the individual attraction/need to/of different parties. administration (in the Chapter 11 sense) and turnaround experience of public and private corporations across a wide range of industries. we Portfolio Investment Strategy 5 . Why buy low now. During his period of tenure he had responsibility for capital raising to oversee the design. indeed.

The plan as it stands is a win-win for both sides. Newmont could have picked up the whole of YNG for less than that amount. Likewise the announcement of the Ketza spinoff was most welcome but could have done with a little more baking before exposure to the critical eye of the market. 2011 would settle for a minimum value of US$500mn though for a while in May. It muddied the waters for investors by speaking too soon of its planned off-balance sheet financing vehicle and then was not able to deliver either on that rather grandiose plan or on the more basic aspect of making the mill run through the winter. Expectations could have been managed better (or not raised at all). we would note that the massive amounts of ore held by these parties are above and beyond any amount that they could conceivably process in any scenario except one in which their mines close and thus their mills are freed up to work exclusively on their stockpiles. It would have given shareholders a relatively instantaneous payday when it started trading. but now the list has been whittled down quite significantly. but the lack of follow-on news means that it is Portfolio Investment Strategy 5 . While Newmont has played tough so far any success with the rehab of the mill (and reactivation of the second underground mine) would signal an approaching end to YNG’s negotiating from a position of perceived “inferiority” to the majors. Conclusion Yukon Nevada is still a work in progress.S. On the bought-in ore issue. anything can happen from unexpected quarters.Monday. Recent experience has not been good on cash costs and the improvement required is quite literally a quantum leap downwards in costs. The environmental issues appear to be behind the company. Old problems like financing risk and environmental risk while mine viability in currently being dealt with. This implies that the current market capitalisation has nothing in it for the value of the gold in the ground. but being the U. Thus the mill provides a sort of bottom line from which valuations can be solidly grounded. October 10. The chief pitfalls that might await the company are: Not being able to achieve budgeted cash costs per ounce Inability to get production near to the ambitious targets of which the company has spoken Further problems with the environmental issues Remaining in some large investors’ “too hard” baskets because it will not consolidate it shares Inability to negotiate sufficiently attractive terms for processing ore from Newmont and/or Barrick Missing the opportunity to capitalize on the Yukon asset in the current fevered attention on that zone The main challenge is to deliver upon the production promises while establishing a cash-cost that can stand up to scrutiny versus peers. Risks Laying out the risks over the past two years would have been an expansive task. the mine infrastructure or for Ketza River.

or access to. YNG has been a whirlwind of activity over the last 18 months making identifying the moving parts of relevance into a task beyond most investors and analysts. but it has a stranglehold on the only spare capacity in the refractory mill sphere in Nevada. Not only does Yukon Nevada have the prospect of having three mines in operation on its Jerritt Canyon site within three years. 2011 just another piece of unwelcome uncertainty surrounding the company’s future look.Monday. With the preponderance in Nevada of sizable sulphide ore projects the ownership of. It is not a concept that is too hard to understand for parties that understand the tolling and refining business model that is more common in the base metal space. October 10. Portfolio Investment Strategy 5 . However getting the arms around the company has been a challenge for a management that became distracted by the chimeric pursuit of the SPV concept just as its wheels were falling off the production effort in 4Q10. Thus. we are reiterating our Long rating on Yukon-Nevada and the twelve-month target price remains at $1. The things that separate YNG out from the pack of miners. Yukon Nevada is most likely overlooked by analysts and investors who obsess over NI 43-101 reserves as the company adheres more to the “mine it” philosophy followed in the Australian mining space (from which its CEO hails). a mill capable of processing refractory ores would be a key factor. The logic of focusing upon the company’s milling advantage (and downplaying resource as a metric) is rooted in one of the company’s main advantages as a “hired gun” in the milling industry. This sounds like the fruit machine has potential to ring up all the right fruit for the company. with similar sub-$500mn market capitalizations. are firstly that it is a producer and secondly that it has in its possession one of the few refractory mills in the state of Nevada. application to revisiting the company should be well-rewarded as the company’s current valuation is well underpinned by the unique franchise that its refractory mill represents and includes none of the upside yet for the relative near future (or for the value realizable through some sort of Ketza spin-off).50. This represents a prospective P/E of 14 times in FY11 and a mere four times our estimated EPS in FY12. However.

October 10. 2011 Portfolio Investment Strategy 5 .Monday.

Christopher Ecclestone.Monday. hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. 6th Floor. or will be. or it is a stock that we do not wish to place a rating on at the present time. before or after. NEUTRAL denotes a stock that is not likely to provide outstanding performance in either direction during the next twelve months. is. New York. NY. © 2011 Hallgarten & Company. but we do not guarantee their accuracy. This report is for information purposes only and is not intended as an offer to sell or as a solicitation to buy securities. related to the specific recommendations or view expressed in this research report. Hallgarten policy does not permit any analyst to own shares in any company that he/she covers. SHORT and NEUTRAL recommendations. Additional information is available upon request. Prices and opinions concerning the composition of market sectors included in this report reflect the judgments of this date and are subject to change without notice. while SHORT suggests capital depreciation to our target price during the next twelve months. Hallgarten & Company or persons associated do not own securities of the securities described herein and may not make purchases or sales within one month.com 60 Madison Ave. the publication of this report. directly or indirectly. 10010 Portfolio Investment Strategy 6 . LONG suggests capital appreciation to our target price during the next twelve months. October 10. Reprints of Hallgarten reports are prohibited without permission.hallgartenco. Information contained herein is based on sources that we believe to be reliable. Web access at: Research: www. All rights reserved. LLC. I also certify that no part of my compensation was. 2011 Important disclosures I. Hallgarten’s Equity Research rating system consists of LONG.