Where Gold and Silver Mines Go to Die

Somewhere outside their corporate headquarters in Halifax, Nova Scotia, AuRico Gold (NYSE: AUQ  ) needs to build a cemetery to honor the memory of its dearly departed mines and development opportunities. To the long list of casualties, you can now add its former flagship operation: the Ocampo mine in Chihuahua, Mexico.

While the would-be mourners of Ocampo's departure are consoled by the allure of fast cash -- to the tune of $750 million -- a few years from now they may be singing a different tune. And although AuRico can now avoid the substantial near-term headwinds and headaches associated with a major overhaul required at Ocampo after the company's fumbled opportunity, I believe that a longer-term outlook designates Ocampo's buyer -- Mexican billionaire Carlos Slim through his company Minera Frisco -- as the real winner here. I don't suspect that Slim became the world's richest man by forging unattractive deals, and indeed I think he scored a golden bargain here!

Cash for gold
Back when it was called Gammon Gold, I celebrated AuRico's acquisitive victory when the company scored the El Chanate mine and the Orion development project for about $280 per gold-equivalent ounce of reserves at Chanate. Now, in disposing of its flagship, AuRico will receive just $315 for each ounce of reserves at Ocampo, while tossing in two large and highly strategic exploration properties adjacent to the mine and a 50% interest in the Orion project acquired from Capital Gold. For another frame of reference -- though Extorre's ultra-high grades make for a messy comparison -- consider that Yamana Gold (NYSE: AUY  ) saw fit to pay $290 for each ounce of "Indicated" resource on a project where no mine has yet been built.

When I spoke with former AuRico CEO Rene Marion last year, he was quick to point out several attractive early discoveries on the Venus and Los Jarros properties, including the Gaby project at Los Jarros, and "...some very high grades within the La Balleza vein, located only 3km from the Ocampo property boundary" (on the Venus property). In concert with the El Concheno mine that Minera Frisco already operates within a land package that is surrounded by the Los Jarros property, Carlos Slim has built a major district-scale presence with this transaction, featuring two operating mines and immense potential for exploration upside. Suddenly, Agnico-Eagle Mines (NYSE: AEM  ) must be feeling like the small fry on the block with its Pinos Altos mine flanked on either side by the Venus and Los Jarros properties.

As a long-standing shareholder and vocal supporter of AuRico Gold, it pains me to say this; but AuRico Gold is where quality gold mines and development projects go to die. Six years after acquiring the El Cubo mine and the Guadalupe y Calvo development project in a deal valued at $451 million, AuRico handed them over to Endeavour Silver (NYSE: EXK  ) earlier this year for $250 million. Here again, the market may not know it yet because the full value of the assets has not yet been realized; but I've been to visit El Cubo in person, and I am confident that Endeavour Silver scored a precious deal there.

Cash for consolation
By opting to offload challenging operations rather than fixing them to realize far greater long-term value for shareholders, AuRico has proved a very major disappointment to this Fool. My selection of the stock to my top-10 list of gold stocks for 2012 was therefore misplaced, and I now intend to meaningfully downsize my holding over time. In its place, I'll look to build my stake IAMGOLD (NYSE: IAG  ) because I consider that stock a far stronger mid-tier growth vehicle at this juncture. I strive to counteract my less fortunate calls with plenty of runaway successes like this one, and I invite you to follow my ongoing coverage by bookmarking my article list or following me on Twitter.

AuRico's Young-Davidson mine in Ontario remains an absolute treasure trove, and as long as former Northgate COO Peter MacPhail remains in charge of that operation, I may retain some modest exposure to the uncommon potential of that operation. Although I have removed the "top pick" designation from my bullish CAPScall on AuRico Gold, I will keep the pick open for now in hopes that I'll eventually be able to book even a modest gain as gold prices advance.

I am pleased that AuRico CEO Scott Perry intends to disburse a major portion of the proceeds to shareholders, through a one-time payment in the neighborhood of $300 million. After the stock has failed to deliver shareholder value over the trailing five years of a powerful bull market in gold, I believe AuRico's embattled investors well deserve the cash consolation prize.

Young-Davidson isn't the only buried treasure in Ontario! To find your own pot of gold, download The Motley Fool's special free report "The Tiny Gold Stock Digging Up Massive Profits." 

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 IAMGOLD. 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 (12) | Recommend This Article (24)

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 October 12, 2012, at 2:55 PM, Jbay76 wrote:

    I have to say, when I saw the news Tuesday, and the incredible gains, I was left flabbergasted and disappointed. The only thing they have left is Y-D and El Chanate. Yet the market celebrated that news with almost a 20% gain. I feel so disappointed here.....

  • Report this Comment On October 12, 2012, at 3:24 PM, MajorBob04 wrote:

    Yep, this news was enough to convince me to sell the stock. I will miss the cash disbursement but I think the stock will suffer even more. There was a nice bump on the announcement, but I think it will continue it's downward trend until the cash is disbursed, thus I think I would lose even more by holding until I get cash.

    I lost a bit on this one - probably got in too late. I have other precious metal stocks (and many other industries) that I think are much better investments.

  • Report this Comment On October 12, 2012, at 4:26 PM, ubernut wrote:

    Hi Sinch,

    Just wondering where you got this info?

    "I am pleased that AuRico CEO Scott Perry intends to disburse a major portion of the proceeds to shareholders, through a one-time payment in the neighborhood of $300 million."

    I didn't see a dollar figure anywhere if that is the case is that not around 15% of the current market cap and would be equivalent to around $1 a share. Someone please correct me if I am wrong.

    I am not currently an investor in this company but if these numbers are correct then one way I may play it is to buy shares and then right a deep in the money covered call on it so that it protects my downside until the dividend is paid out.

    Anyone have any thoughts on that strategy? Am I of uber nuts or is that good way to lock in 15% if that is what the dividend is going to be.

  • Report this Comment On October 12, 2012, at 4:45 PM, XMFSinchiruna wrote:

    Ubernut, It was in the conference call.

    Read here before diving for a one-time dividend:

    http://www.fool.com/investing/dividends-income/2010/07/16/th...

  • Report this Comment On October 12, 2012, at 11:01 PM, ubernut wrote:

    Thanks Sinch that was a good read I am glad I asked.

  • Report this Comment On October 15, 2012, at 12:46 PM, johnybottom wrote:

    Chris,

    Any recent thoughts on Cardero? Not much new news, but price just keeps diving.

  • Report this Comment On October 15, 2012, at 1:30 PM, hdotmom wrote:

    I am interested in Cardero too. I don't usually worry to much short term but this one is in my roth and I bought it for both my daughters. We are down 60%. Thanks for anything on this one. :)

    Rose

  • Report this Comment On October 15, 2012, at 5:29 PM, XMFSinchiruna wrote:

    Johny and hdot, please find my forthcoming reply here:

    http://caps.fool.com/Blogs/where-gold-and-silver-mines-go/76...

  • Report this Comment On October 16, 2012, at 1:25 AM, MoneyWorksforMe wrote:

    While I understand your concerns I do think your pessimism is overdone. I think the market was correct in its initial reaction.

    Aurico has had a history of management issues; and for this reason, a leaner, more focused operation may be exactly what they need.

    The Young-Davidson mine was key to this decision--this isn't just any mine. They see huge potential in this, in terms of both cash costs per ounce, and rapidly expanding production. After selling Ocampo, they can now focus on ramping up production well beyond what was previously estimated. The life and size of the mine provide solid growth for years to come.

    I also like the change in attitude towards shareholders. I don't believe this dividend is a one-off.The cash flows coming from young-davidson and El Chanate should be enough to sustain a meaningful dividend for the foreseeable future.

  • Report this Comment On October 16, 2012, at 7:39 AM, Noneleft01 wrote:

    I sold out my AUQ position at a loss a month or two back, so missed this recent mini spike in price.

    I couldn't wait any longer as I needed to reallocate into the rising metals market which has been on a rip during recent QE3/infinity developments.

    The capital I had left went into SAND and SLW and I caught most of their recent gains. Glad I did AUQ was a dead loss. I also sold out my BRD position too, as I see that as another punt which isn't likely to pay off any time soon.

  • Report this Comment On October 16, 2012, at 2:23 PM, hdotmom wrote:

    Thanks Chris!

  • Report this Comment On October 22, 2012, at 11:20 AM, goldminingXpert wrote:

    I'm glad you finally agree with me that "Gammon (AuRico) is a joke." You were a little testy about my comments when I wrote that back at $12.75 a share last year. http://caps.fool.com/Blogs/aurico-gold-is-a-beast/627506

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