Aurico Gold: What Happens When The Experts Go Against Simple Logic ...

| About: AuRico Gold (AUQ)

At the end of January, I penned this article which suggested 30% returns for the long gold/short Aurico Gold (NYSE:AUQ) trade. Since that point, AUQ is down 15.3% and gold is down 13.5%, so the return would have been 1.8% (a far cry from the 30%). Fear not: the underlying factors haven't changed. What has changed, however, is a slew of "experts" who have stepped in and tried to shepherd traders who haven't done their research into AUQ.

A few days after, in an article published in Barrons, Fred Hickey pumped Aurico Gold with fluff statements like "If the gold price is at $2,000, their cash margin would be $1,500 an ounce." If gold were 2000/oz there are plenty of companies that are more highly levered to gold (and that have been lagging as of late) that would be performing much better than AUQ [for example, Allied Nevada Gold (NYSEMKT:ANV), which has been hammered recently]. The problem with any pure-gold argument in favor of Aurico is that those arguments would apply equally well to other miners which are more heavily levered to gold, and those would outperform if gold price did go up.

My favorite example of wishful thinking is the statement

"AuRico will produce about 200,000 ounces of gold this year. That could grow to 310,000 ounces by 2015, a 55% increase."

Sorry, but it won't. Estimates have been slashed so many times, and given its recent investments in deep-shaft mining I would expect the grade to be very low (which should force analysts to cut their production estimates). And given the numerous times in which production estimates were slashed, there should be real questions regarding its ability to mine.

Note that it was 8.08 at the time the buy recommendation was made. Following his recommendations would have cost you more than 25% at the time of this writing. Ouch!

Next, Tocqueville Asset Management added 260K shares according to its latest 13-F filing. What's not known is how many shares it tendered into the recent Dutch auction at $8.30 (and, based on the timing, it seems that it got in specifically to flip into the auction)

Finally, the company announced a dividend. It has enough cash on hand to pay a few cycles of dividend, but if it has significant negative operating cash flow (which it has had for the last few quarters) the dividend is unsustainable unless it sells more core assets. More importantly, it said back in January that it would give a dividend update in March. Why did it step it up to mid-February? I suspect it saw its stock's overall performance and decided to give a short-term boost to share price.

The net recommendation is that nothing has improved with AUQ vis-a-vis gold and the 30% recommendation still stands, implying a fair price around $4.02

Disclosure: I am short AUQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Still short AUQ, long physical gold