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Summary

  • AuRico Gold reported its second quarter production data showing a 17% year over year increase in production, but costs rose 22%.
  • I anticipated both rising production and costs in my July, 2013 "sell" thesis on the company.
  • I continue to remain bearish despite the strengthening gold market and rising production, as the company's cash-flow is insufficient to support the current valuation.

AuRico Gold (NYSE:AUQ) recently announced its second quarter production data. While the company reported a 17% year over year increase in quarterly production (56,200 oz. vs. 48,000 oz.) it also reported a 22% increase in cash-costs ($655/oz. vs. $801/oz.). This is a consequence of the company's ramp-up of its underground operation at its Young Davidson Project, which is increasing production but at a high cost.

As I argued last July I don't think the company's production growth is sufficient to support the company's valuation despite the fact that the stock is down 12% and the gold price is up about 2.5%. The reason for this is that the company's production costs are simply too high. The company's cash-costs are by no means its total costs, and this is evidenced by the fact that the company failed to turn a profit in Q1 and in Q4 of last year. With the gold price consolidating in the second quarter the company unlikely turned a profit in that quarter as well, especially with costs rising. The company's total costs have been especially high as it has been expanding its production at the Young Davidson Project.

Even if you believe that the gold price will rise, and even if we assume that the company can successfully achieve its production goals I think there are much better places to put your money in the sector. It does have the potential to grow production and even to bring production costs down, but $1.1 billion is too much to pay for a 300,000 ounce producer in this market, especially if it has relatively high costs. Even if the company can turn, say, a $200/oz. profit ($60 million total) it trades with a 17 price to earnings multiple, and with cash costs at $801/oz. and all-in costs at least $1,100/oz. the gold price will have to rise to at least $1,400 for the company to achieve this level of profitability after taxes. Thus it is no wonder that the stock is underperforming, and gold bulls should look for opportunities elsewhere.

Source: Update: AuRico Gold Earnings; Q2 Production Rises But So Do Costs