Alamos: Looking for Gold Opportunities
The key to finding a successful gold/silver equity is to realize individual miners have little influence on the price of the metals but as a collective can have an impact. However, chances are you are not financially able to create your own ETF basket of equities in a sector. Therefore, most of you are probably searching for one or two miners and maybe a third speculative one at most. Realize that one thing each miner can attempt to manage are costs. Average production costs are up year after year. Labor costs rise and machinery costs are up, as are fuel costs.
When the price of gold was rising, companies were focused on producing more and funding exploration rather than on cutting their expenditures. With gold $550 off its highs in 2011, times have changed. Most gold miners have started to implement a multitude of cost-cutting measures. One successful miner that I believe is seriously worth your consideration is Alamos Gold (NYSE:AGI) because there is still strong demand for gold. Second, Alamos has managed to keep its costs as low as possible. In this article I will discuss the latest quarter from Alamos, which sparked a near 20 percent selloff stemming from guidance that was less than expected. I view it as an opportunity.
Alamos has two main projects, one in Mexico (Mulatos) and two others in Turkey (Agi Dagi, Kiralzi) – see Figure 1 and Figure 2, respectively.
In Q4 2013, the Mulatos mine produced 39,000 ounces of gold, bringing full-year production to 190,000 ounces, right on the midpoint of 2013 guidance. Total cash costs for the full 2013 year have not been finalized but are expected to be at the low end of guidance at approximately $500 per ounce of gold sold. Total crusher throughput (a measure of the amount of mining activity) in Q4 2013 averaged near record levels of 17,900 tons per day (tpd), above the annual budgeted rate of 17,500 tpd. For 2013, crusher throughput averaged 17,900 tpd, up 12 percent from 16,000 tpd in 2012.
During the fourth quarter of 2013, mill throughput exceeded budgeted levels at 550 tpd. These are large successes. Furthermore, the grade of the crushed ore stacked on the leach pad in the fourth quarter of 2013 was 0.96 grams per ton of gold (g/t Au). For the full year 2013, the grade of crushed ore stacked on the leach pad was 1.07 g/t Au, above the full-year budgeted grade of 0.98 g/t Au.
The grade of the Escondida high-grade zone mined and milled in the fourth quarter of 2013 was 3.46 g/t Au, below the company’s full year budgeted average grade of 11 g/t Au. For the 2013 year, the grade mined and milled from the Escondida high-grade zone was approximately 6.84 g/t Au. The recovery ratio in the fourth quarter was 71 percent and averaged 73 percent for 2013. This was slightly below the company’s annual budget of 75 percent, though an improvement from 70 percent achieved in 2012.
Key operational metrics and production statistics for the fourth quarter and full-year 2013 compared to the corresponding periods of 2012 are presented in Table 1.
- Reported gold production for Q4 2012 and YTD 2012 has been adjusted to reflect final refinery settlement. Reported gold production for Q4 2013 and YTD 2013 is subject to final refinery settlement and may be adjusted.
- Excludes mill tailings stacked on the heap leach pad during the period, which are included within the number of tons of crushed ore milled.
Alamos had a great year. Alamos managed to sell 42,200 ounces of gold in the fourth quarter of 2013 for quarterly revenues of $53.8 million, a 50 percent decrease from revenues of $106.9 million in the same period of 2012 reflecting a lower realized gold price and fewer ounces sold. For 2013, Alamos sold a record 198,200 ounces of gold at a realized price of $1,424 per ounce. Annual revenues of $282.2 million were 14 percent lower than revenues of $329.4 million in 2012 reflecting the decrease in the gold price during 2013. Gold sales were higher than production in 2013, reflecting a drawdown of in-process inventory prior to the Mexican tax reform becoming effective on January 1.
John A. McCluskey, president and CEO of Alamos Gold, had this to say:
“We had yet another strong year at Mulatos, achieving the mid-range of our production guidance, with costs expected to come in at the low end of our guidance. We produced 190,000 ounces of gold in 2014 and sold a record 198,200 ounces at a total cash cost per ounce of approximately $500. Despite realizing lower than expected grades from the Escondida high-grade deposit as production from that zone winds down, our open pit heap leach production, the driver of our Mulatos mine, continued to perform extremely well. 2013 was a challenging year with the sharp decrease in the gold price, yet with our low cost structure we continued to generate strong cash flow. With approximately $410 million in cash, no debt, and a peer leading, fully funded growth profile, we remain exceptionally well positioned in the industry.”
Looking ahead to 2014
The company anticipates producing between 150,000 and 170,000 ounces of gold in 2014 at cash operating costs of $630 to $670 per ounce of gold sold, excluding royalties. Assuming a $1,250 gold price, total cash costs are expected to be between $700 and $740 per ounce of gold sold. All-in sustaining costs are expected to be between $960 and $1,000 per ounce of gold sold (Table 2).
The 2014 production forecast and operating cost estimates are based on a few assumptions. First, Alamos sees combined gold recovery of 75 percent (heap leach ore, 73 percent recovery; mill ore, 80 percent ultimate recovery). Second, it sees throughput of 17,700 tpd (includes an average 700 tpd from the gravity mill ramped up through the year). Third, it sees average grade heap leach ore 0.85 g/t Au; mill ore 5.3 g/t Au. Finally, it sees a Mexican peso/U.S. dollar foreign exchange rate of 13:1. Take it with a grain of salt though, because management expects these parameters to fluctuate during 2014. Accordingly, they should be treated as full-year average estimates that will not necessarily reflect quarterly operating results.
Addressing the lower guidance from original estimates
The lower gold production planned for 2014 relative to 2013 is primarily attributable to the lower budgeted grade for the mill feed of 5.3 g/t Au in 2014 due to the transition to Escondida Deep and San Carlos in 2014, as well as a lower budgeted grade stacked on the leach pad of 0.85 g/t Au in 2014 compared to 1.07 g/t Au in 2013. Alamos expects to transition to underground mining at Escondida Deep in the second quarter and then to San Carlos in the second half of 2014. With the transition to San Carlos, Alamos expects to increase mill throughput rates to an average of 700 tpd in 2014 to help offset the decrease in grade.
Underground throughput rates at San Carlos are expected to gradually ramp up to the expanded mill capacity through the second half of 2014. The higher cash operating cost guidance for 2014 compared to 2013 is attributable to four factors: the transition to higher cost underground mining to supply high grade ore to the mill; a lower budgeted grade for the mill feed of 5.3 g/t Au in 2014; a higher waste-to-ore ratio; and the transition to contractor mining at Mulatos.
Move to contract mining
Alamos has made the decision to transition to contract mining effective at the start of 2014 and was successful in negotiating unit mining rates competitive with its owner mining rates. This combined with the tax savings associated with the Mexican tax reform becoming effective January 1 supported the decision to transition to contract mining.
Contract mining will shift sustaining capital spending required to maintain an owner-operated mining fleet into operating expenses, lowering the amount of tax payable under the new 7.5 percent special mining tax calculated based on earnings before interest, taxes, depreciation, and amortization. This reduction in sustaining capital spending will also allow the company’s all-in sustaining costs to remain among the lowest in the industry.
Manley Guarducci, vice president and chief operating officer of Alamos Gold, had this to say:
“We have demonstrated numerous productivity improvements over the years at Mulatos including achieving record crusher throughput in 2013. Our dedication to optimizing every aspect of our operation will continue as we transition underground at Escondida and San Carlos. With the recent additions to our team we have significantly strengthened our underground expertise and look forward to accessing additional high grade targets that could not be fully drill defined from surface. Our focus in the second half of 2014 will be on ramping up underground throughput rates while continuing to operate in accordance with our sustainable development commitments including those relating to health and safety.”
Looking beyond 2014, Alamos expects that development of the Cerro Pelon and La Yaqui satellite deposits will bring on additional low-cost production, which will help drive annual production and operating costs closer to the levels achieved over the past two years. Both deposits are higher grade than Mulatos and are expected to be developed with independent heap leach pads to ensure production is not displaced from the main Mulatos heap leach pad. The company has an extensive exploration budget planned for 2014 and beyond, as well.
Conclusion: The risk is to the upside
Alamos Gold is a fantastic low-cost gold mining play that can weather the storm if gold prices decline. Although guidance disappointed, I think this stock is set to move much higher into 2014, with the potential for dividend increases. With the company’s expansion efforts, phenomenal cost controls, and rising metal prices, this stock could deliver outsize returns in the coming months.
I think the stock easily will recoup its losses of the last two sessions. Assuming prices of gold hit $1,500 and climb higher, with current production numbers (likely increasing), cash costs remaining flat, and acquisition costs now behind, earnings per share could double into 2014. I surmise a conservative upside potential of 25 percent in the next 12 months should these assumptions prove correct. If not and gold holds its current $1,250 price and cash costs remain the same, I still see the stock approaching $13-14, which still offers 15-20 percent upside. 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, and I think with a little support from gold prices, the stock will climb.
Disclosure: Christopher F. Davis holds no positions in Alamos Gold and has no plans to initiate a position in the next 72 hours.
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