Alamos posts solid Q3 results

Alamos Gold (TSX: AGI; NYSE: AGI) had a relatively good run in the third quarter with adjusted earnings of US$9.2 million, or US$0.07 per share, in line with analysts’ expectations.

Alamos Gold (TSX: AGI; NYSE: AGI) had a relatively good run in the third quarter with adjusted earnings of US$9.2 million, or US$0.07 per share, in line with analysts’ expectations.

The Toronto-based miner produced 43,000 oz Au in the quarter, a little below what many analysts had predicted but consistent with production in the year ago period.

“The slight miss in production was offset by higher sales (48,000 oz) and better cash costs,” writes BMO Nesbitt Burns analyst Brian Quast, who has upgraded his $20 price target to $22.50 while maintaining an outperform rating.

Total cash costs were US$491 per oz with all-in sustaining costs of US$810 per oz Au sold in the quarter, both within the company’s annual guidance. Alamos generated quarterly revenues of US$63.8 million by selling 48,000 oz at an average realized price of US$1,329 per oz.

“The gold price continued to trend lower in the third quarter; however, with our low cost structure we continue to generate strong margins with operating cash flow of US$25.7 million (after changes in non-cash working capital),” John McCluskey, the company’s president and CEO, said in a statement.

Quast notes Alamos has already achieved 75% of its full year production guidance with 151,000 oz at total cash costs of US$461 per oz produced to date. He believes the company is well positioned to beat its 2013 target of 18,000 to 20,000 oz Au at total cash costs of US$500­ to US$520 per oz Au sold.

Strong throughput and grade from Alamos’ heap leach operation at Mulatos, its sole producing mine in Sonora, Mexico, offset the noticeably lower grade from the mine’s high grade Escondida pit in the quarter, notes Desjardins Capital Markets analyst Adam Melnyk.

Average throughout for the heap leach was 18,000 t/d, above the company’s guidance of 17,500 t/d, while the heap leach grade averaged 0.99 g/t Au, above Melnyk’s forecast of 0.90 g/t and Alamos’ full year budgeted grade of 0.98 g/t.

The grade from the Escondida pit averaged 6.73 g/t Au compared to the company’s full year guidance of 11 g/t Au. Alamos explained the drop in grade resulted from a change in the mine plan to expedite access to the Escondida Deep portal to develop the underground zone. The company intends to transition mining from Escondida in the first quarter of 2014 to Escondida Deep in the second quarter. It then will move to process ore from the San Carlos deposit in mid-2014, but at lower than anticipated recoveries. The Escondida pit should become depleted in early 2014.

The gold producer cautions that changes to the existing tax regime in Mexico, which are set to come into effect on Jan. 1, 2014, could increase its tax burden in the country. Some proposed changes include a 7.5% royalty on earnings before interest, taxes, depreciation and amortization, and a 0.5% additional royalty on revenues.

Noting the firm’s only producing mine is in Mexico and lower recoveries expected at San Carlos, Melnyk has trimmed his target price to $19 from $20. He has kept his buy-above-average risk rating on the stock and continues to view Alamos “as a premium, low cost producer.”

During the quarter, Alamos says it has advanced its development pipeline. It received an environmental impact assessment (EIA) approval for its Kirazli project and has submitted an EIA report for the Agi Dagi project, both in Turkey. It now is waiting for forestry and operating permits at Kirazli, expected later this year or early next year, and is guiding first production from the project in the first half of 2015.

Moreover, it completed the acquisitions of Esperanza and Orsa Ventures in quarter. The US$88.1-million takeover of Esperanza gave Alamos the Esperanza gold project in Mexico’s Morelos State. The deposit, envisioned as a heap leach operation, could deliver low cost gold ounces due to its “simple metallurgy, low strip ratio and nice silver credit,” writes Haywood Securities analyst Kerry Smith in a note.

Alamos believes Esperanza has the potential to boost its Mexican output by 50% and is currently working on resubmitting an EIA report for the project.

Smith adds the US$3.5 million takeover of Orsa gave Alamos a 2.85 million oz resource in Oregon “at a valuation well below the finding cost.”

Smith has bumped his target to $17 from $16 and has a buy-medium-high risk rating on the stock.

On the third-quarter results, Alamos closed Oct. 31 flat at $16.61 per share, but dropped 7% the following day to $15.44 in Toronto.

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