| 2014 | 2015 | ||||||
| Price: | 10.00 | EPS | $0.00 | $0.00 | |||
| Shares Out. (in M): | 127 | P/E | 0.0x | 0.0x | |||
| Market Cap (in $M): | 1,270 | P/FCF | 0.0x | 0.0x | |||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 1,270 | TEV/EBIT | 0.0x | 0.0x | |||
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Company Overview
Alamos Gold Inc. is a Canadian-based gold producer with assets in Mexico and Turkey. The company currently produces 160,000-180,000 ounces of gold from their Mulatos Mine in Mexico. In Turkey, the company is advancing its project to production.
Investment Thesis
Alamos is currently trading almost at its 52 week low of ~$10 (CAD). A number of factors contributed to the company’s depressed share price including Mexican tax reform, the injunction in Turkey and lower production. While these events impact near term cash flow the longer term outlook for Alamos has never looked better. By 2016, the company will be producing over 400,000 ounces of gold and the transition to underground mining should bring production and mining costs back to historical levels. Change to contract mining we believe will also mute somewhat the impact of the tax changes in Mexico.
The Net Asset Value of $1,678 million (CAD) was calculated using a $1,300 gold price. If gold rises, Alamos could see a significant appreciation in its valuation. Alamos is currently trading at 0.9x NAV, this is below the median multiple of 1.2x NAV for mid-tier gold producers. As Espernza and the Turkish properties move from development to production, Alamos share price could trade closer to 1.5x NAV giving the company a share price of $18 (closed at ~$10 on march 31, 2014).
For an investor who views gold as a favourable asset class to have exposure for the long term, and is looking to build a position in a conservative gold producer; Alamos is a safer bet due to attractive valuation, strong balance sheet (no debt), cash in hand to fund the production growth, rising production profile at competitive cost and a disciplined management team. Company pays a $0.10/share dividend. While in a gold company the dividend sustainability is questionable when gold prices fall, we believe Alamos can maintain dividend even through a temporary dip in gold prices given the strong balance sheet and medium term production growth.
Highlights
• Long Term Production Growth: 2014 is a pivotal year for Alamos as it transitions to underground mining at its Mulatos mine. This has resulted in lower grade mill feed of 5.3 g/t gold, as well as lower grade rock stacked on the leach pad of 0.85 g/t Au compared to 1.07 g/t gold in 2013. By 2016 both of the companies Turkish properties should be operational. At this point Alamos will be producing over 400,000 ounces of gold per year.
• First Quartile Cash Cost Producer: In 2013, Alamos was producing gold at an industry leading total cost of $496 per ounce of gold. In 2014, the Total Cash Cost is estimated to increase to $700 due to a decrease in grade, higher strip ratio and addition of underground mining. Even with this change the company is moving from a lower cost to a mid-tier cost producer in our estimation.
• Permitting Issues in Turkey: Last August, the company’s environmental-impact assessment (EIA) was approved for Kirazli. The EIA for Agi Dagi is currently under review. In January 2014, Turkish Court issued an injunction, requiring an impact study considering other projects in the region. The company does not expect the injunction to significantly alter the development timeline for the project.
• Reserve Growth: Through a number of accretive acquisitions Alamos managed to grow its resource from 4.5 million ounces of gold in 2008 to 12 million ounces in 2012. The most recent acquisition was of the Esperanza property. This increased their resource by 29% and has the potential to grow production in Mexico by more than 50%.
• Robust Balance Sheet: Alamos has $475 million in cash and no debt on their balance sheet. The company also pays a $0.10/ share dividend. This capital will allow the company to self-finance the majority of upcoming CapEx without accessing the capital markets and diluting existing shareholders. This also allows the company to pick up beaten down assets with attractive economics.
• Growth Pipeline: Alamos owns three advanced stage development projects in Turkey, Mexico and the United States. All the properties are projected are expected to generated strong returns at the current gold price.
The Company
Alamos Gold Inc. (TSX: AGI) is a Canadian mid-tier gold producer involved in the acquisition, exploration, development and production of gold and silver. It has a portfolio of mining assets including the flagship Mulatos mine and other satellite fields in Mexico, Agi Dagi, Kirazli and Çamyurt gold development projects in Turkey, recently acquired 100% owned Esperanza Gold Project in Mexico and Quartz Mountain Gold Project in Oregon, USA. The company is in production stage and generated $282 million in revenue and $39 million profit from the sale of 198,198 ounces of gold. The company trades on Toronto Stock Exchange (TSX: AGI) and New York Stock Exchange (NYSE: AGI).
Reserves and Resources
The proved and probable reserve and Measured and Indicated resources data for the company are provided below:
| Proven And Probable Reserves | |||
| Area | Tonnes (000s) | Grade (g/t Au) |
Contained Oz |
| Mulatos Mine | 59,683 | 0.9 | 1,728,059 |
| UG Reserve | 1,169 | 5.04 | 189,663 |
| Existing stockpiles | 3,721 | 1.9 | 227,364 |
| La Yaqui | 1,574 | 1.58 | 79,826 |
| Cerro Pelon | 2,673 | 1.64 | 140,525 |
| Total | 68,820 | 1.07 | 2,365,437 |
Measured and Indicated Mineral Resources
| Area | Tonnes (000s) | Grade (g/t Au) |
Grade (g/t Ag) |
Contained Au Oz | Contained Ag Oz |
| Mexico | |||||
| Mulatos | 78,235 | 0.99 | 0.00 | 2,481,018 | 0.00 |
| San Carlos UG | 433 | 4.55 | 0.00 | 63,294 | 0.00 |
| El Realito | 1,200 | 1.35 | 0.00 | 52,020 | 0.00 |
| Carricito | 1,915 | 0.76 | 0.00 | 46,944 | 0.00 |
| Esperanza | 50,336 | 0.91 | 9.9 | 1,473,437 | 16,014,769 |
| Total | 4,116,713 | 16,014,769 | |||
| Turkey | |||||
| Agi Dagi | 93,944 | 0.56 | 3.56 | 1,698,975 | 10,762,590 |
| Kirazli | 32,330 | 0.71 | 8.61 | 738,914 | 8,953,576 |
| Çamyurt | 0 | ||||
| Total | 126,274 | 0.6 | 4.86 | 2,437,889 | 19,716,166 |
Operational and Financial Overview
Income
Year ended December 31, 2013
The company earned $282.2 million revenue (14% decline from 2012) by selling 198,198 ounces (0.3% increase from 2012) of gold and reported earning of $38.8 million or $0.30/share (67% decline in from 2012). The income statement incorporates a non cash, non-recurring deferred tax charge of $9.8 million (0.08/share) and charge associated with severance payments (also non-recurring) during transition to contract mining was $1.5 million ($0.01 per share).
The company increased its mill throughput to a record level to 17,900 in 2013 but the decrease in grade of gold ore, high strip ratio and addition of underground mine have offset this increase and caused the production to decline slightly to 190,000 ounces as compared to 200,000 ounces over the same period last year. The decrease in grade also caused the “total cash cost per ounce” to increase to $496/oz in 2013 from $438/oz in 2012. The company expects the gold grade to decrease further to 0.85 g/t Au in 2014 as compared to 1.07g/t Au in 2013 and as a result estimates the “Total Cash Cost” to mark up to ~$700-$740 in 2014 from $496 in 2013 (~45% increase).
Note: Total cash cost per ounce incorporates mining and processing cost plus royalty
Three Years Projection for Revenue and Gold Production
| 2012 | 2013 | 2014 | 2015 | 2016 | |
| Revenue (million $) | 329 | 282 | 233 | 398 | 451 |
| Gold production (000s oz) | 200 | 190 | 179 | 306 | 347 |
In the table above, the revenue decline from 2012 to 2014 is mainly due to the declining gold grade. Since 2014, the company will increase production from its underground reserves in Mulatos mine. The steep jump in revenue and gold production in 2015 is mainly due to improved gold grade and production addition from Kirazli project, Turkey. In 2016, we expect gold Production from Cerro Pelon & La Yaqui.
Liquidity and Capital Expenditure
As at December 31, 2013, the company has $417.5 million of cash & cash equivalent and short-term investments and $452,763 as working capital. The cash and investments of the company in 2013 increased by 15% from $364 million to $ 419,351 million primarily due to positive cash flow from operations.
For 2014, the company plans to spend $54.8 million in operating and development capital spending in Mexico, $11.3 million at the Esperanza Gold Project, and $4.8 million in Turkey. The total exploration spending is budgeted at ~19.0 million. The company has sufficient cash to meet these requirements and to further develop its undeveloped mines.
Capital Structure
The company has 127.4 million shares, 4.7 million options and 7.2 million warrants outstanding as in March 2014. Market capitalization is $1.46 billion, based on its share price of $11.47, as on March 12, 2014.
Valuation
We have used the Net Asset Value (NAV) method to compute per share value of the company. Our valuation is based on the information provided in the Annual Information Report, Feasibility Studies of company’s assets, management discussion and Ubika Research’s analysis and assumptions.
In our valuation we have incorporated Mulatos Mine and its satellite fields “La Yaqui & Cerro Pelon”, Agi Dagi & Kirazli mines in Turkey and Esperanza Gold Project, Mexico.
| Net Asset Value Breakdown | ||
| NPV per Project | $ Million | $/Share |
| Mulatos Mine (at 5% discount rate) | $607.54 | $4.36 |
| Esperanza Gold Project (at 5% discount rate) | $110.98 | $0.80 |
| Agi Dagi Project (at 5% discount rate) | $203.02 | $1.46 |
| Kirazli Project (at 5% discount rate) | $184.26 | $1.32 |
| Unadjusted Net Asset Value | $1,105.81 | $7.94 |
| Proceeds from Exercise of Options/Warrants | $0.00 | $0.00 |
| Cash on hand (as at Dec 31, 2013) | $419.35 | $3.01 |
| Total Cash | $419.35 | $3.01 |
| LT Debt (as at Dec 31, 2013) | $0.00 | $0.00 |
| Adjusted Net Asset Value ($ Million) | $1,525.16 | $10.95 |
| Adjusted Net Asset Value (C$ Million) | $1,677.67 | $12.05 |
At 1.2x to NAV the stock should trade at ~$14, where as the stock closed at ~$10
Risks
The company has strong potential, but is exposed to certain risks due to the nature of its business. The following risk factors apply:
Fluctuation in gold price
Gold price is highly volatile in recent times, affected by several macro and micro economic factors. Any reduction in the gold price will reduce the profitability of the company and may render company’s reserves/resources economically unviable.
Changes in laws and regulations
Any unfavourable regulation in mining industry has a huge impact on company’s profitability. The recent tax reform in Mexico imposed new taxes on mining activities and immediately resulted in a non-cash deferred tax charge of $9.8 million.
Currency Risk
The company is based in Canada, has operations in Mexico and Turkey and its functional currency is US$. As a result it is exposed to four different currency fluctuation risks.
Technical Risks
Mineral exploration and development involves high risk, as not all properties can become commercially viable. The company has two other major projects under development, Esperanza and Agi Dagi and Kirazli. Although we do not foresee any challenges in the development of projects, unforeseen circumstances could delay development.
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