Alamos Thriving in Gold’s Rout Ready for Value Buys
(Corrects state in 13th paragraph, type of approval in 18th paragraph in story originally published Aug. 29.)
Alamos Gold Inc. (AGI) is the best-performing gold stock since the metal entered a bear market in April as the company benefits from low costs at its Mexican mine and a cash pile that positions it to buy assets.
Alamos announced two acquisitions last month to add projects in Mexico and the U.S. The company with a market value of C$2.2 billion ($2.09 billion) has capacity for more deals and is focused on assets it can buy, build and operate at low cost, said Chief Executive Officer John McCluskey.
“We’re always looking, but we’re very much a value player,” McCluskey, 54, said in an Aug. 26 telephone interview. “We tend to be active when there’s more market uncertainty and we tend to be active when others are less active.”
Alamos has risen 40 percent since April 11, the day before gold entered a bear market, the most among 37 global gold miners bigger than $1 billion, according to data compiled by Bloomberg. The Toronto-based company’s low production costs, strong balance sheet and ability to pay for its growth internally make it a “preferred name” among precious metals stocks, Dan Rollins, an analyst at Royal Bank of Canada, said in a note Aug. 12.
Twelve analysts including Rollins recommend buying the stock, while there are five hold and no sell ratings, according to data compiled by Bloomberg. Alamos rose 1.1 percent to C$17.30 at the close today in Toronto.
Alamos forecasts output of 180,000 to 200,000 of gold ounces this year from its only operating mine, Mulatos in Mexico. So-called all-in sustaining costs are expected to be $785 to $825 an ounce, about 23 percent less than the average $1,046 forecast by the three biggest Canada-based producers.
The company’s low costs mean it’s less affected by lower gold prices, which probably helps Alamos’ share performance, said David West, a Vancouver-based analyst at Salman Partners Inc. Alamos has also avoided the writedowns that have rippled through the sector, he said.
“Even in a situation where we had a falling gold price, things were not really going to be affected at Alamos, Mulatos is a low-cost producer,” West said by phone on Aug. 27. “I think that investors really woke up to that fact: when everything was hitting the fan it was steady as she goes at Alamos.”
Gold miners including Barrick Gold Corp. (ABX) and Greenwood Village, Colorado-based Newmont Mining Corp. (NEM), the two largest producers by sales, have announced at least $26 billion of writedowns in the past two months because assets became less valuable as the price of the metal fell.
To be sure, companies including Centerra Gold Inc. (CG), also based in Toronto, have risen more than Alamos as gold began to climb again, West said. Gold, which reached a 34-month low of $1,179.40 an ounce on June 28, has gained 15 percent in the second half of the year. Gold futures in New York fell 0.4 percent to settle at $1,412.90 today.
McCluskey said he’d like to keep average all-in sustaining costs close to $800 an ounce as Alamos adds production from new mines.
“A good aim is to ramp the company’s production level up into a range between 500,000 and 600,000 ounces and to be able to sustain that from a number of operations,” he said. “I would rather be a highly profitable medium-sized producer than a very high-cost large producer.”
Alamos said July 12 it agreed to buy Esperanza Resources Corp. (EPZ) to gain control of the company’s project in Mexico’s Morelos state. The purchase for 85 cents a share valued Esperanza’s equity at C$69.4 million, Alamos said. Esperanza shareholders will also be issued Alamos warrants. The mine may produce more than 100,000 ounces of gold a year, at average all-in sustaining costs of less than $900 an ounce.
The acquisition appeared uncertain after the state government published a new law this month that refers to restrictions on the use of cyanide, which is needed for the processing plan at Esperanza.
Alamos, which initially said it was discussing the implications with its advisers, is well-positioned to manage the risks because it operates safely and successfully in Mexico already, McCluskey said. The use of cyanide is regulated by the federal government in Mexico, which is supportive of mining, he said.
Alamos will probably need two years to prepare and submit an environmental-impact assessment study for approval for Esperanza, and would only expect to start production from the mine in four or five years, he said.
Alamos received final environmental-impact assessment approval for the first mine, Kirazli, this month and expects the operation will start production in the first half of 2015, McCluskey said. Kirazli and the second project, Agi Dagi, have the potential to raise annual output to more than 400,000 ounces a year, he said.
The company expects to finance both Turkish mines and Esperanza internally, he said. Alamos had cash of $466.4 million at the end of June and no debt.
Since the purchase from Teck, Alamos went three years without a deal before announcing an unsolicited offer of about C$780 million for Aurizon Mines Ltd. in January this year. The bid failed after Aurizon agreed to support an offer from Hecla Mining Co. (HL) instead.
Alamos is focused on development projects rather than producing assets, McCluskey said. He declined to comment further on what he’s looking for in potential deals. The company, which also said July 23 it agreed to buy Orsa Ventures Ltd. for about C$3.5 million, still has room to add more assets, he said.
“We haven’t in any way filled our pipeline, stuffed it so full that we can’t accommodate anything further,” McCluskey said. “It’s just that finding projects that meet our hurdle rates is not easy.”
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