Seeking Alpha
Long only, value, contrarian, gold & precious metals
Profile| Send Message|
( followers)  

Summary

  • Alamos’s costs on both a core and a core non-tax basis have risen significantly compared to its first quarter costs.
  • The company's gold production continues to drop from its Mulatos mine and it is one pace for its third year of declining production.
  • The company needs to increase production by either improving Mulatos results or through development of its Turkish properties.

Introduction

In our previous complete Q3FY13 cost analysis, we went over a number of the industry's all-in costs to mine an ounce of gold in 2013 and discussed one of the most important metrics to analyze the gold industry, the actual cost of mining an ounce of gold, which can help an investor figure out whether it is time to buy GLD and/or the gold miners. In that analysis, we used the 2013 financials to calculate the combined results of publicly traded gold companies and come up with a true all-in industry average cost of production to mine each ounce of gold.

We're still working on completing and publishing a complete FY2013 and first half 2014 all-in costs for the industry, so if you are interested in receiving it and keeping up-to-date on consider following me (clicking the "Follow" button next to my name) or join our free email list where we send out a weekly email summarizing all the important events in the gold and silver industry, which includes our latest articles and research pieces and all of our all-in pieces as they are published.

In this analysis, we will calculate the real costs of production of Alamos Gold (NYSE:AGI), a junior miner with operations in Turkey and Mexico. Alamos's major producing mine is the Mulatos mine in Mexico, and the company is developing two mines in northwest Turkey.

How to Use Our All-in Costs Analysis with Your Investments

In the previously mentioned article, we gave a thorough overview of the current way that mining companies report their costs of production and why it is inaccurate and significantly underestimates total costs. Then we presented a more accurate methodology for investors to use to calculate the true costs of mining gold or silver. Please refer to that article for the details explaining this methodology, which is an important concept for all precious metals investors to understand.

The best way to use this analysis for individual companies is to compare the different production cost metrics with the company's profits to look for any anomalies (e.g. large net profits but high costs). Also, we provide historic data to allow investors to check out any trends in regards to costs or production totals that may be an early warning to future successes or failures for the company. Ultimately, this analysis is best used as a first step to further investigative work, and that is our purpose with releasing this series.

Explanation of Our Metrics

For a detailed explanation of the metrics and each metric's strengths and weaknesses please check out our previous full quarterly all-in costs gold report where we discuss them in detail.

All Costs per Gold-Equivalent Ounce - These are the total costs incurred for every payable gold-equivalent ounce, which includes everything. This is the broadest measure of costs, and since it includes write-downs, it is essentially the "accounting cost" of producing gold-equivalent ounces.

Costs Per Gold-Equivalent Ounce Excluding Write-downs and S&R -This is the cost to produce each gold-equivalent ounce when subtracting write-downs and smelting and refining costs, but including everything else.

Costs Per Gold-Equivalent Ounce Excluding Write-downs - This is similar to the above-mentioned "Costs per Gold-Equivalent Ounce Excluding Write-downs and S&R" but includes smelting and refining costs. That makes this measure one of the best ways to estimate the true costs to produce each ounce of gold, since it has everything (including taxes) except for write-downs.

Costs per Gold-Equivalent Ounce Excluding Write-downs & Taxes -This measure includes all costs related to gold-equivalent production excluding all write-downs and taxes. Essentially this is the bottom dollar costs of production with an artificial 0% tax rate (obviously unsustainable) which works well because it removes any estimates of taxation due to write-downs or seasonal fluctuations in tax rates, which can be significant. The negative to this particular measure is that since it does not include taxes, it will underestimate the true costs of production.

True Costs of Production for Alamos Gold

Let us use this methodology to take a look at the company's results and come up with the true cost figures for each ounce of production.

(click to enlarge)

Observations for Investors

As investors can see, Alamos Gold has gone from one of the lowest cost producers in terms of its core costs to one of the higher mid-tier producers as it has gone from core costs that were $1057 per ounce in FY2012 to $1314 per ounce in Q2FY14. In the first quarter, Alamos lowered its costs to $1042 per ounce, but in the second quarter they jumped back up and it was probably one of the reasons for the stock's underperformance versus its competitors.

Even when we take a look at the company's core non-tax costs (core costs removing taxes) we see the same pattern as Q1FY14 provided a stellar $988 per ounce only to see costs rise to $1200 per ounce. While these costs aren't the highest of the companies we cover, they certainly are not what we'd like to see from a mid-tier producer.

On a comparative basis, we've only published the analysis from a few other competitors with Goldcorp (NYSE:GG) registering core non-tax costs of under $1050 per gold-equivalent ounce, Yamana Gold (NYSE:AUY) registering core non-tax costs of under $1200 per gold-equivalent ounce, Barrick Gold (NYSE:ABX) registering core non-tax costs of under $1300 per gold-equivalent ounce, Agnico-Eagle Mines (NYSE:AEM) registering core non-tax costs of under $1200 per gold-equivalent ounce, Eldorado Gold (NYSE:EGO) registering core non-tax costs of under $1000 per gold-equivalent ounce, and Newmont Mining (NYSE:NEM) registering core non-tax costs of under $1150 per gold-equivalent ounce. As investors can see, Alamos Gold is on the higher end of the range and that is one of the reasons why we think the company's stock has underperformed.

Conclusion for Investors

We've already covered it pretty thoroughly, but the company's costs have risen primarily due to a drop in mined ounces and the company is on its way to its third straight year of declining gold production.

Obviously, this is not good but we always like to balance a negative (or positive) with something that is positive (or negative) for investors so that we don't weigh too heavily on one side. We've covered Alamos Gold in a prior piece and emphasized some of the catalysts for the company and those catalysts still remain. First, Alamos still has a very clean balance sheet with a lot of cash and no debt, which allows quite a bit of flexibility for the company. Secondly, the company has a major property in Turkey that it can develop and if/when they receive the necessary permitting, then investors can see a significant boost in production (and hopefully lower costs).

The conclusion is that the company's costs have risen as its production has fallen and this has been reflected in the underperformance of the stock price, and second quarter results were not good in terms of the company's core and core non-tax costs. The company needs to boost production either through better results from Mulatos or the development of its Turkish properties - either one will give investors some optimism about the company.

Disclosure: The author is long AGI, EGO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: What It Really Costs To Mine Gold: The Alamos Gold Second Quarter Edition