Update: AuRico Gold's Earnings

Aug. 8.14 | About: AuRico Gold (AUQ)


AuRico Gold lost $17 million as soaring production costs offset rising production.

This confirms my initial thesis that the company will under-perform as costs remain high and production isn't high enough to justify the current valuation.

AuRico Gold will continue to be a loser in the sector and I continue to avoid it.

AuRico Gold (NYSE:AUQ) just reported its second quarter earnings. Despite the headline, which boasted that production hit a new record, I think it gives investors reason to be concerned. The company lost $17 million on $76 million of revenue versus losing $103 million on $58 million in revenue in the second quarter last year. If we adjust for one-time items the two earnings figures improve to a loss of $15 million for 2014 and a gain of $6 million for 2013. Cash-flow came in at $12 million or $0.05/share vs. $19 million or $0.08/share in the second quarter last year.

The reason for the decline in earnings and cash-flow is rising production costs. The company reported cash-costs of $801/oz. in the second quarter vs. cash costs of $655/oz. for the second quarter of 2015. The company did not report all-in sustaining costs - a relatively new metric that mining companies use in order to account for additional costs that don't reflect the day-to-day operations of mining (e.g. exploration and equipment repairs/replacement) which I see as a red flag.

The one positive about the report is that production is rising rapidly from 38,000 in the 2nd quarter of 2013 to 56,000 in the most recent quarter. The company expects to get to production of 300,000 ounces in the next couple of years, and this is one of the reasons investors like the name. But total production doesn't mean much if the company can't make money, and there are several companies that are significantly cheaper that are going to produce 300,000 ounces of gold or more in the next few years, and I think these are better options.

Ultimately this report illustrates the points I brought up in my article last July. Production may be rising, but high production costs mean that the company cannot generate the cash-flow needed in order to justify the current valuation. This is despite the fact that the stock is down about 14% while the gold price is flat. Ultimately very little has changed and AuRico Gold is a stock to avoid and possibly short if you think gold will hit a new low.

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