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Alamos focus remains on self-funded growth

Alamos Gold expects higher production and lower costs to drive strong free cash flow in the second half of 2020, with key self-funded growth projects set to enhance its longer-term outlook.
Alamos focus remains on self-funded growth Alamos focus remains on self-funded growth Alamos focus remains on self-funded growth Alamos focus remains on self-funded growth Alamos focus remains on self-funded growth

Alamos Gold will build La Yaqui Grande near its Mulatos operation in Mexico

CEO John McCluskey this week characterised the June quarter as one of the "most challenging" to date, given the COVID-19 pandemic's various impacts. However, the company had "adapted well" and by June both Island Gold, in Ontario, and Mulatos, in Mexico, had safely returned to normal operating levels.

Headline earnings for the three months ended June 30 fell 45% year-on-year to US$9.8 million, or 3c per share, which was 2c short of average consensus forecasts calling for 5c per share on revenues of $167 million.

Despite 30% year-on-year rise in the realised gold price offsetting lower production because of mandated mine closures, revenues dipped 25% to $126.2 million.

Production for the period came in at 78,400oz, compared with 125,200oz the previous year, at AISC of $1,276/oz, up 38%.

With the planned downtime of the Northgate shaft as part of the lower mine tie-in, which began in early February and ended in early July, the Young-Davidson mine, in Ontario, produced 23,100oz in the quarter, a circa 49% year-on-year decrease.

Mulatos produced 35,900oz gold and generated mine-site free cash flow of $19.3 million, with the operation benefiting from the ongoing recovery of gold from the leach pad during the temporary suspension. Island Gold produced 19,400oz and generated mine-site free cash flow of $9.2 million.

Alamos reinstated its 2020 production guidance, calling for 405,000-435,000oz from 425,000-465,000oz previously, at AISC of $1,030-$1,070/oz compared with prior guidance of $1,007-$1,047/oz. The higher cost outlook partially reflects the delayed completion of the lower mine expansion at Young-Davidson due to COVID-19.

Laurentian Bank Securities equity research mining analyst Ryan Hanley said results came in broadly "as expected", and now that operations had fully resumed, he expected free cash flow generation to remain robust through the second half.

FCF is expected to cover the cost of the Island Gold phase three expansion to 2,000t/d and construction of the La Yaqui Grande project, in Mexico, which the board greenlighted this week. 

"We believe that Alamos is now entering a self-funded period of growth, with the tie-in of the lower mine at Young-Davidson now complete, and the advancement of the phase three expansion at Island Gold and construction of La Yaqui Grande at Mulatos now underway," Hanley said.

"We expect each of these expansions to be well funded through the cash flow generated by each asset, while the company's $201 million cash position and $400 million in available credit ($100 million in long-term credit) should act as a very strong buffer.

"With a strong portfolio of long-life assets in top tier jurisdictions, we believe that Alamos should be trading at a minimum of one-times NAV, particularly as mid-tier gold producers are currently trading closer to an average multiple of about 1.2-times."

The analyst maintains a ‘buy' rating on the stock with a target of C$16.22.

Despite falling more than 5.5% on Thursday, Alamos shares (TSX:AGI) are still trading 60% higher over the past 12 months at $14.08, which capitalises it at $5.5 billion (US$4 billion).