Alamos Gold: Deserving of Harsh Treatment?

Investors don't take bad news from gold miners lightly. For proof, look at companies like Allied Gold Nevada  (NYSEMKT: ANV  ) and Alamos Gold (NYSE: AGI  ) , whose stock prices are respectively about 56% and 46% below their 52-week highs.

For Allied Gold Nevada, the negative sentiment is understandable. It has a long list of issues, like rising costs, falling grades, significant debt and negative earnings per share. The company suspended its Hycroft expansion project due to lack of cash flow, and it's facing a class action lawsuit for misleading investors about issues such as a defective leach pad. Allied Gold Nevada also announced problems with its crushing unit, while admitting that it could offer no date for implementing a permanent solution.

Investors' disappointment in Alamos Gold isn't as easy to rationalize. Where the company has issues, it also has plans to resolve them. For example, Alamos recently announced it acquired surface rights for two deposits in Mexico, paving the way for new sources of production. Investors were hardly impressed and the stock continues to linger near the lower end of its 52-week range, raising the question: Is this negative sentiment justified?

Disappointing news
Alamos' stock took a deep dive in January amid disappointing announcements about the company's performance and its outlook.

Alamos reported that production declined 5% and costs edged up 13% in 2013. The company produced 190,000 ounces of gold at a cash cost of $496 per ounce last year compared to 200,000 ounces at $438/oz in 2012. This under-performance was largely attributed to issues in the fourth quarter.

In Q4, Alamos' production fell about 42% to 39,000 ounces compared to 67,800 ounces in Q4 2012. With that, costs soared some 35% to $624/oz from $460/oz during the same period of the previous year. Aggravating matters, Alamos forecasted even lower production and higher costs in 2014, when the company expects to only produce 150,000 to 170,000 ounces at cash costs of $700-744.

Alamos on a downward spiral?
Alamos may seem like a company on a downward trajectory, but investors should focus more closely on what the company has in store.

The backbone of Alamos' flagship Mulatos mine is its leach heap operations, which have performed well and are expected to continue doing so. The disappointing results in Q4 were largely due to falling grades in the Escondida open-pit, which provided high-grade ore to feed the company's gravity mill. Company executives admitted that Escondida grades were lower than anticipated, but Alamos was in the midst of winding down production from Escondida anyway.

And it isn't as if Alamos' is standing by idly; the company already has its next moves mapped out. Since depleting Escondida in March, the company headed underground to Escondida Deep, which is one new source of feed for the gravity mill.

Alamos is also working to finish underground development of San Carlos, another satellite deposit, which is expected to be a high-grade source of mill feed for at least four years. Production is slated to begin in the third quarter and to ramp up in the final months of 2014; company executives expect to see significant costs improvements in 2015.

Sweetening the outlook
Alamos recently announced an agreement for surface rights at the Cerro Pelon and La Yaqui satellite deposits. Over the next 18-24 months the company will work toward permitting and developing the two deposits for open-pit mining.

Alamos expects to only spend about $21 million and in return have the deposits provide combined average production of 33,000 ounces for five years at cash costs below $500/oz. Adding these sources to the mix should drag down Alamos' costs further, and it could boost annual production back to 2013 levels around 190,000 ounces.

Furthermore, these deposits offer positive exploration potential, and Alamos has already planned to start drilling at Cerro Pelon later this year.

Reassessing the outlook
Many mining companies have plans but insufficient funds. Alamos isn't one of them. The company spent about $48 million on acquisitions and over $28 million on dividend payments in 2013. To help counteract the harsh treatment from investors, Alamos also spent over $3 million on share buybacks earlier this year. Still, the company closed Q1 with no debt and $410 million in cash, more than enough to act on its current plans or to go shopping for new assets.

Keep in mind, Alamos achieved these financial results despite lower production, weak gold prices, and spending on the aforementioned development projects. Sure, Alamos production is down and costs are up, but plans are underway to address these issues.

The sharp sell-off Alamos has seen seems too extreme given the circumstances. Investors are treating it like a company on a downward spiral instead of a company navigating the normal cycles of mining.

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  • Report this Comment On June 13, 2014, at 1:27 PM, TigerPack1 wrote:

    You forgot to mention short sellers in Allied (ANV) are disregarding the $30 billion in gold and silver, basically proven resources, with a $300 million stock market value.

    If you ignore the short-term problems which will fade as gold/silver prices rise the rest of the year, buyers/owners are getting $1.00 in gold reserves that can profitably be mined with an expanded mine plan for 1 penny in upfront cost.

    ANV is the cheapest (albeit with some risk) gold/silver leverage available to public investors right now. Having an operating mine in Nevada with one of the largest and undervalued reserves in gold mining history is something to seriously consider if you are bullish on precious metals the next few years.

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