Investors have generally been afraid of investing in Turkey over the past year or so due to high inflation and political upheaval. As a result, the Turkish stock market has lost around half of its value in dollar terms.
Towards the end of January, I suggested that investors bite the bullet and make a contrarian bet on Turkey. While the market hasn’t soared, Turkish stocks seem to have found a bottom just a couple days after my article was published. I think there is still opportunity in Turkey. Here, I want to highlight one company in particular. While it is headquartered in the United States and primarily traded in Canada, Alacer Gold (OTCMKTS:ALIAF) is a Turkish gold miner. It owns 80 percent of the Copler mine in Turkey and it owns several exploration properties in Turkey. Furthermore, it recently sold the last of its Australian properties, making it purely a Turkish gold miner.
This has made Alacer Gold shares incredibly inexpensive because investors are afraid to invest in Turkey. While there is risk in mining in Turkey there is substantial reward potential, especially if you believe that the gold price is going to rise.
Alacer Gold trades with a $786 million market capitalization. However, it had $222 million in cash. It probably has more today given that it sold its Australian assets for $40 million Australian (about $35 million U. S.), and it operates the highly profitable Copler mine, which probably generated about $20 million in cash flow despite the weak gold price. Thus, the company has closer to $275 million or $280 million in cash. It also has no debt.
The company’s one producing mine — Copler — is a low cost producer generating 175,000 ounces of gold attributable to Alacer. The company anticipates that it will produce with all-in sustaining costs between $730 and $780/ounce, which means that it is going to generate nearly $80 million in post-tax cash flow. Given that the company has a $500 million valuation with the cash backed out, this is a lot of cash flow. Furthermore, the mine has plan in place to produce through 2025, and in its most recent mine plan, the company estimates that Copler’s value is nearly $1.5 billion with the gold price above $1,300. Given its 80 percent share, the value of Alacer’s share of Copler alone is more than double its market capitalization with the cash backed out.
This is pretty impressive, and therefore it seems like a no-brainer addition to any gold miner portfolio. However, there are a couple of things investors need to keep in mind before investing in Alacer Gold. First, as previously mentioned, the Copler mine and Alacer’s exploration properties are in Turkey. Even if you believe as I do that the risk of investing in Turkey is overblown, this is not the prevailing opinion. Therefore, this fact will keep Alacer shares somewhat depressed relative to the rest of the sector despite everything else the company has going for it.
Second, up until now the company has produced mostly oxide ore. Most of the Copler’s ore and most of the ore that will be produced going forward is sulfide ore, which is more difficult and more costly to process. While the company has done metallurgical analysis and come to the conclusion that this ore will still be very profitable to mine, we haven’t seen this on a large, commercial scale. There is consequently a slight risk that the company will encounter trouble such as lower production and lower margins, at least during the beginning stages of sulfide production over the next couple of years. With investors already antsy when it comes to Turkish investments, any slip-up on Alacer’s part could lead to a decline in the company’s share price.
Despite these risks, I think that Alacer Gold deserves a place in most gold mining portfolios. It is one of a select group of gold miners that generate a lot of cash at the current gold price, but aren’t appreciated by the market for doing so as a result of exogenous circumstances. Given that the shares are already up more than 60 percent this year, we can expect a pullback, but there is little doubt that the shares are highly undervalued.