As the price of gold remains well below the levels seen at the beginning of the year, most gold miners remain under significant pressure. However, shares of Alamos Gold (AGI +0.70%) have dropped just 6% this year. The company is outperforming almost all of its peers. Why is this the case, and should you add Alamos Gold to your portfolio?
Costs are crucial
Gold miners have little influence on the price of gold. One thing that they can manage, however, is their costs. All in all, the industry has not been performing well on this front. When the price of gold was rising, companies were focused on producing more rather than on their expenditures. Now times have changed, and gold miners have started to implement a multitude of cost-cutting measures.
Alamos Gold has managed to keep its costs as low as possible. The company has stated that its second quarter all-in sustaining costs were just $682 per ounce. This is the reason why Alamos Gold has outperformed other miners.
Another gold miner whose assets are situated in Mexico, Primero Mining (PPP +0.00%), has also been performing relatively well this year, down only 12%. The company stated that it expects its full-year all-in sustaining costs to average $1050-$1150 per ounce. These numbers put the company in the low-cost territory as well.
Gold Resource Corp (GORO 1.57%), which holds assets in Mexico too, has not been as lucky as previously mentioned miners. Its stock is down 44% year to date. Gold Resource Corp does not report all-in sustaining costs, but it does report total cash costs, which averaged $645 per ounce in the second quarter. In comparison, Alamos Gold's total cash costs were $448 per ounce. Primero Mining expects that its total cash costs will average $620-$640 per ounce for the full year 2013.
Growth prospects
Alamos Gold has recently finished the completion of its acquisition of Esperanza Resources for $69 million in cash. The company believes that in perspective, this small investment would bring 50% growth to its Mexican operations. Cash costs of gold production at Esperanza are estimated to be below $900 per ounce, in line with Alamos Gold's strategy to remain a low-cost producer.
In addition to that, Alamos Gold has announced the acquisition of Orsa Ventures, an exploration company with properties located in the western United States. Alamos Gold has still $445 million in cash on its balance sheet after these transactions.
Primero has stated that it is going to use $130 million of its cash on developing the recently acquired Cerro Del Gallo and other projects. Gold Resource Corp, which has just $30 million of cash available, has decided to play it safe. During the most recent earnings call, the company has stated that it would consider lowering the dividend and making additional cuts to its exploration budget.
Bottom Line
Alamos Gold is a low-cost play that would help you to weather the storm should gold prices continue to fall. The company has plenty of cash to spend on growth projects and has no debt. The management shows good strategy to focus on costs rather than on the quantity of ounces. When the gold prices return to higher levels, Alamos Gold would be in a perfect position to profit from that.
