AuRico Fumbles a Golden Opportunity

It's a good thing my No. 1 pick among gold miners for 2012 -- Primero Gold (NYSE: PPP  ) -- has rocketed halfway to the moon over recent weeks. Most unfortunately, meanwhile, my No. 2 pick has left much to be desired.

AuRico Gold (NYSE: AUQ  ) decimated its already embattled shareholders this week by announcing a substantial downward revision of production estimates at its flagship Ocampo mine. When the company first warned of emerging challenges this summer -- after suffering some "unusually high turnover of skilled labour" during the second quarter that hindered underground development -- I reduced my own expectation for AuRico's consolidated 2012 production to roughly 300,000 gold-equivalent ounces (GEOs).

This week, however, newly appointed President and CEO Scott Perry dispatched the unwelcome news that AuRico will now yield between 248,000 and 278,000 GEOs in 2012, and between 335,000 and 395,000 GEOs during 2013 (or roughly 13% beneath prior 2013 production guidance). With only a slight adjustment to the target for initial production from the company's exciting Young-Davidson mine, the shortfall here is really all about Ocampo. As contractors swoop in to reinvigorate Ocampo's underground development, cash costs are expected to spike sharply in the near term before beginning to trend lower next year.

Unexpected pitfalls and hiccups of the sort are unfortunately par for the course in this challenging and risk-laden industry, but a shortfall of this magnitude and duration from this company's flagship operation is certainly cause for concern. Given AuRico's prior struggle with labor issues at the recently divested El Cubo mine, as a long-standing shareholder I am displeased to see such issues returning to the fore. Moreover, the speed with which Endeavour Silver (NYSE: EXK  ) identified a sweeping set of major operational enhancements for El Cubo -- after purchasing the mine from AuRico this year -- inevitably leads investors to question the effectiveness of AuRico's management team for Mexico operations. Because AuRico only recently streamlined its asset portfolio down to just three producing mines, AuRico missed a golden opportunity here to maximize shareholder value in the near-term by executing effectively on each of these three mines.

On the other hand, the company's new CEO appears to have taken decisive measures to position Ocampo for a more reliable long-term-production outlook by accelerating underground development beyond even the previously conceived pace in order to "increase developed underground inventory for production to ensure flexibility and reliability of future operations." Ironically, increasing the number of available production stopes happens to form part of Endeavour Silver's enhanced mine plan for El Cubo. And as the remarkable trailing trajectory of Primero Mining reminds us, there's no time like the present to take the decisive and predictably unpopular measures that may occasionally be required to maximize the long-term profitability of a mining operation. Although I am naturally disappointed to see the stock languishing here beneath $6 per share, I have every intention of holding my stake to await meaningful long-term profit from AuRico's trio of producing mines. In the meantime, my hopes for nearer-term strength transfer to alternate picks from my top 10 gold stocks for 2012. I consider Eldorado Gold (NYSE: EGO  ) an attractive bargain here, and encourage readers to bookmark my article list or follow me on Twitter to track all my precious metal picks.

Looking for more ideas? Download The Motley Fool's special free report "The Tiny Gold Stock Digging Up Massive Profits." Our analysts have uncovered a little-known gold miner that we believe is poised for greatness; find out which company it is and why we strongly believe in its future -- for free!

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, Eldorado Gold, Endeavour Silver, and Primero Mining. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (14)

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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 September 10, 2012, at 11:18 AM, skypilot2005 wrote:

    Sinchi,

    Have you taken a look at Defiance Silver?

    Impact Silver owns 16.5% of the company.

    http://www.defiancesilver.com/i/pdf/CorporatePresentations/D...

    Corporate Presentation Aug. 2012

    http://www.defiancesilver.com/s/Home.asp

    Defiance Silver Corp. (DEF:TSX.V) is a near term silver producer engaged in the acquisition, exploration and development of advanced projects in Mexico.

    Defiance has two significant projects in the Zacatecas silver district in Central Mexico. The 200tpd Santa Gabriela processing plant is in the process of being refurbished. The newly acquired San Acacio mine has an NI 43-101 Indicated resource of over 18 M oz of Ag. With these two projects working in conjunction, Defiance is set up to be a silver producer in the near term, as well as becoming one of the districts dominant silver producer.

    • Defiance Silver Corp. is a near term silver producer engaged in the acquisition, exploration, and development of advanced silver projects in Mexico

    • Option to purchase the 200tpd Santa Gabriela Processing Plant in Zacatecas, Mexico

    • Option to purchase San Acacio mine in Zacatecas, Mexico

    • To commence production within a 12-15 month timeframe

    • San Acacio has a historical NI 43-101* Inferred resource of 18 M oz of Silver

    • Tight share structure, 15.5M million shares outstanding

    • Proven Mine Operators

    Future Growth

    • Commencing Production at the Veta Grande Project by mid 2013:

    – Refurbish and bring back into production the Santa Gabriela processing plant

    – Defining feed from the San Acacio mine for the Santa Gabriela plant

    • Consolidating the many “orphan” silver projects and mines within a 150km radius of the plant

    • Actively pursuing undercapitalized silver projects with existing resources throughout Mexico

    Sky

    Your Official Web Link Assistant

  • Report this Comment On September 10, 2012, at 11:52 AM, skypilot2005 wrote:

    Fellow Fools,

    see above.

    Impact Silver

    I recently "pulled the trigger" on Impact due to reading Sinchi's comments.

    I performed my own D. D. and like what I see there.

    ISVLF

    ISVLF.PK

    http://www.impactsilver.com/s/Home.asp

    Sky

  • Report this Comment On September 10, 2012, at 1:40 PM, Jbay76 wrote:

    also check out what speedybure had to say about ISLVF

  • Report this Comment On September 11, 2012, at 2:22 PM, stikkelorum wrote:

    Sorry for my englisch.

    I know auq for a year.

    The shareprice is going down en down.

    Nowbody seems to worry at auq.

    Hecla support there shareprice having difficulties.

    Its easy, You buy your own stock cheap an sell them when the shareprice is oke.

    Its simpel. Making profit, much more than at the bank.

    But auq sit en wait.................

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