Why This AuRico Gold Smackdown Is Way Overdone

Even in the absence of the prolific dealmaker who built this well-positioned mid-tier gold producer, the shares of AuRico Gold (NYSE: AUQ  ) are bound to see meaningful appreciation from this latest 52-week low.

AuRico shares careened as much as 17% lower on Tuesday after back-to-back press releases combined a reduction in anticipated 2012 output from the Ocampo mine in Mexico with news of CEO Rene Marion's looming departure for health reasons. Marion will step down (effective September 3) due to "a non-life threatening degenerative medical condition that will require his full attention as he undergoes treatment." Marion will stay on as a strategic advisor to the board of directors, while executive vice president and CFO Scott Perry will step into the CEO role.

Importantly, the chief operating officers for Canada and Mexico will remain in their respective positions. The company's Ocampo mine struggled with "unusually high turnover of skilled labor" that affected underground production during the second quarter. AuRico has responded with an "aggressive recruiting campaign," and will now look to contractors to assist with accelerated underground development. In light of the challenges at Ocampo, the uninterrupted oversight by COO Russell Tremayne will provide valuable continuity through the impending CEO transition.

Likewise, the ongoing ramp-up to commercial production at the Young-Davidson mine in Ontario will remain under the direction of COO for Canada operations Peter MacPhail. MacPhail has been with the project throughout the development process, having served for eight years as COO to prior owner Northgate Minerals before joining AuRico when they acquired Northgate last year. Young-Davidson remains on track to achieve commercial production during August, and to meet 2012 production guidance during this key phase of project execution.

Rene Marion cemented his reputation as a cunning industry consolidator by snatching Capital Gold and its producing gold mine El Chanate from rival bidder Timmins Gold (NYSE: TGD  ) , even after Capital Gold stakeholder Sprott Asset Management threw its weight behind Timmins with a line of credit from Sprott Resource Lending. Next, Marion swooped in on Primero Mining (NYSE: PPP  ) to block its proposed transaction with Northgate by issuing a superior and ultimately successful bid. Marion made both of these transformative moves during 2011, and in the process dealt his way into one of the industry's strongest production-growth trajectories. In May, AuRico divested its Australia operations for $55 million in cash. And just this week, the company completed the sale of its El Cubo mine and Guadalupe y Calvo development project to Endeavour Silver (NYSE: EXK  ) for total consideration of up to $250 million. Taken together with its prior cash balance, these divestitures will stuff AuRico's treasury with roughly $380 million in cash and equity investments at a moment when additional strategic transactions are prime for the picking. The company also commands a $250 revolving credit facility for total liquidity of more than $600 million. Yamana Gold (NYSE: AUY  ) placed the gold world on notice last month to watch for a major round of consolidation, and AuRico Gold is sitting pretty as a potential strategic buyer.

AUQ Chart

AUQ data by YCharts

But, particularly following Tuesday's brutal sell-off, little reflection of those trailing strategic successes and exciting opportunities for continued growth can be seen in the stock's valuation. As the above year-to-date chart shows, AuRico outperformed its peer group throughout the first half of 2012, but abruptly rejoined the pack this week. Despite the modest setback at Ocampo, I still expect AuRico to produce at least 300,000 gold-equivalent ounces (GEOs) during 2012, and the company this week reiterated its guidance for between 390,000 and 445,000 GEOs for 2013 and between 450,000 and 530,000 GEOs for 2014.

My bullish CAPScall on the stock, issued in early 2010, has underperformed the S&P 500 by 56% amid the ongoing carnage in gold stocks at large. I believe the current share price belies the powerful cash flow potential of AuRico's existing asset base and organic growth outlook, and expect AuRico to add long-term shareholder value through continuation of the company's successful acquisitive growth. I see tremendous opportunity for gold investors adding to their quality share positions amid this ongoing correction, but I spy few Foolish bargains more alluring than these AuRico Gold shares beneath $7 per share.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of AuRico Gold, Endeavour Silver, and Primero Mining. The Motley Fool owns shares of Primero Mining. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (11) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 18, 2012, at 12:05 PM, jslug54 wrote:

    So you're not concerned about the lower guidance? I take it you're interested in this for a long term play?

  • Report this Comment On July 18, 2012, at 2:17 PM, XMFSinchiruna wrote:

    Like so many gold producers, AuRico shares had already retreated to an obscene share valuation before this week's collapse. So in my view a 17% drop on a change in CEO and an 8%-10% reduction in 2012 guidance presents an outrageous opportunity to get into position for the forthcoming growth spurt as Young-Davidson's production increases over the next couple of years.

    I am a long-term investor, but I play close attention to market reactions for signs of compelling entry points to press my existing positions and reduce my cost basis.

  • Report this Comment On July 18, 2012, at 4:17 PM, goldminingXpert wrote:

    "Gammon is a joke. There stock is flat today in a huge up market on these supposedly great earnings. Get out before they get any more strikes going at their mines."

    --GMX when AUQ was at $12.75.

    http://caps.fool.com/Blogs/aurico-gold-is-a-beast/627506

    "If this were such a good deal for AUQ, which it's not, the stock wouldn't have dropped $2/share upon announcement. Once again, a poor management team proves itself by overpaying for an asset." -- GMX when AUQ was at $12 following the terrible NXG acquisition http://www.fool.com/investing/general/2011/08/31/the-new-gre...

    Too early for an "I told you so"? :)

  • Report this Comment On July 18, 2012, at 4:29 PM, goldminingXpert wrote:

    As a note, I should add that despite this company's consistent track record of ineptitude, I do agree that AUQ looks kind of cheap here. The whole mining sector is way oversold.

  • Report this Comment On July 19, 2012, at 9:03 AM, XMFSinchiruna wrote:

    Another fly-by assassination attempt by the above CAPS member, who fails to recognize that AuRico Gold has moved in concert with its intermediate peers since his 8/31/11 post above. In fact, before Tuesday's overdone fall, the stock had mirrored the less dreadful decline of the majors.

    http://media.ycharts.com/charts/66700a83399c6b079e8095fb7d38...

  • Report this Comment On July 19, 2012, at 12:16 PM, goldminingXpert wrote:

    Since 8/31/11: AUQ Down 47%, GDX Down 33%.

    I'd say my avoid call was right on. Unless you like underperforming GDX by 14% and SPX by 51%, in which case AUQ has been a winner!

    Seriously though, now with the old CEO out, maybe AUQ can get a new management team and start performing in line with its sector peers? Time will tell.

  • Report this Comment On July 19, 2012, at 4:02 PM, XMFSinchiruna wrote:
  • Report this Comment On July 20, 2012, at 11:56 AM, goldminingXpert wrote:

    TMFSinchiruna: "I do hold a small stake in [Jaguar's] shares." May 20, 11 at $4.59 http://www.fool.com/investing/general/2011/05/20/has-golds-j...

    (In the interest of full disclosure, I bought a stake in JAG at $1.49 earlier this year, sold at $1.40, and repurchased at $.78 this week)

  • Report this Comment On July 24, 2012, at 12:20 AM, SilverSqueeze wrote:

    Chris -

    The company may be a shrewd acquirer of other mining companies, but I think there might be some red flags about the company as a mine operator and optimizer.

    If you read any of Bradford Cooke's comments following their finalization of the transaction to acquire the El Cubo Mine and the anticipated changes in mining approach and step-up in equipment and employee education, it seemed to cast an unintentional, but maybe deserved, bad light on AUQ's mining practices and non-optimization of the property.

    In addition, the company's disclosure on the unusually high turnover of skilled labor at the Ocampo mine suggests a management weakness in their inability to either retain those employees or muddle through their departure without a significant drop in operating results.

    It is like a professional sports team assembling a dream team of players but lacking the coaching to maximize their individual talents.

  • Report this Comment On July 27, 2012, at 3:31 PM, easyavenue wrote:

    OK, so for a Fool like me who is not educated in gold or silver markets and is looking for suggestions, who do you, that is all 3 of you, think is the best buy right now? If you had to pick just one or two, please.

    Thanks, Guys!

    EA

  • Report this Comment On July 27, 2012, at 8:04 PM, SilverSqueeze wrote:

    EA -

    On 7/27/12 I would choose -

    New Gold, Inc. - NGD (gold)

    and

    First Majestic Silver - AG (silver)

    Management stands out for both companies, both are generating significant cash flow and both have above average growth profiles. As of now, their mines are located in reasonably safe jurisdictions.

    Good luck with your investments. You are looking in the right sector and your timing to get in is very good!

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