Alacer Gold: Too Cheap To Ignore

Aug.29.14 | About: Alacer Gold (ALIAF)

Summary

Alacer Gold owns 80% of the world-class Copler Gold mine in Turkey, which produces gold at all-in costs less than $800.

The company is flush with nearly $300 million in cash and zero debt; a feasibility study on the sulfide ore project was positive.

Alacer Gold is undervalued and a strong takeover or merger candidate, as the company will operate a profitable gold mine for years to come.

Alacer Gold (OTCPK:ALIAF) is a Turkey-based gold miner with an 80% interest in the world-class Copler gold mine, forecasted to produce 160,000 to 180,000 ounces of gold at super-low all-in costs of $730 to $780 an ounce in 2014. The company's Sulfide definitive feasibility study showed that the mine will be highly economic for many years to come, extending the Copler mine life to 20 years with expected production of 3.2 million ounces of gold at $801 all-in costs for the life of mine.

With a current market cap of $628 million, $300 million in cash and zero debt, Alacer Gold has an enterprise value of roughly $328 million. With 3.8 million ounces of gold proven and probable and far more in resources, profitable gold production at sub $800 all-in costs, and the potential for a 20+ year life of mine at Copler, I think Alacer Gold is stupid cheap at current prices, and the company remains a strong takeover or merger candidate.

Alacer Gold

Recent Stock Price: $2.17

Shares Outstanding: 290 million

Market Cap: $628 million

52-Week Range: $1.87 - $3.47

Alacer Gold has lagged the benchmark Gold Miners Index (NYSEARCA:GDX) in 2014, but I expect this to change in the future as investors realize the true value of the company's assets.

(Credit: Yahoo Finance)

Why Invest in Alacer Gold?

Alacer Gold owns and operates the Copler gold mine in Turkey. The deposit contains 57.9 million tonnes at 2.06 g/t gold, for 3.8 million ounces of gold (as of Dec. 31, 2013). However, Copler also contains 152.9 million tonnes at 1.59 g/t gold, for 7.8 million ounces of gold measured and indicated (inclusive of reserves), in addition to 2.3 million ounces inferred at 1.39 g/t gold.

Copler is an epithermal gold-silver-copper deposit. The mine is expected to produce 160,000 to 180,000 ounces of gold at all-in sustaining costs of $730 to $780 an ounce in 2014. This is among the lowest costs in the gold industry.

For the second quarter of 2014, production was close to 40,000 ounces of gold, at all-in costs of $806 an ounce. This was a decrease from $916 a year ago. The low costs lead to solid profit margins and allowed the company to produce operating cash flow of $12.5 million.

At the end of the quarter, the company's total current assets were $359 million, compared to just $34 million in current liabilities, which means the company is very healthy financially and at little risk of default. Cash stood at $292 million, but should increase in the coming quarter as one-time payments were made in the first half of the year (dividend paid, Lidya profit distribution, royalty payment, etc.).

The Transition to Sulfide Will Mean Big Profits

Copler contains both oxide and sulfide ore. The company is currently producing gold from its low cost oxide heap leach deposit, but is transitioning to its next phase of sulfide production.

In June of 2014, Alacer completed its feasibility study on processing sulfide ore from the mine. While pre-production capex is high at $633 million, the company should have half of that in cash and could easily take on a line of credit or alternative financing like a gold stream to secure the remaining required funds.

Payback from the start of initial sulfide production is just 1.7 years, so the project is very economically sound. In fact, the feasibility study says that all-in sustaining costs should come in under $600 per ounce, net of by-products (40,000 ounces of silver and 3.7 million ounces of copper produced annually) with total all-in costs around $800. Production of sulfide ore would start in late 2017.

Over the life of the mine, Alacer estimates $1.6 billion in free cash flow - which is almost three times its current market cap and nearly 8 times its current enterprise value. The project carries a net present value (5% discount) of $926 million, which is 80% higher than Alacer's current market cap.

Peak production would be reached in 2019, with estimated gold production of 269,000 ounces. Keep in mind that these estimates use a gold price of $1,300 per ounce, copper price of $3.29 per lb. and silver price of $22; of course, there is potential that gold could be far higher than $1,300 over the next few years, which only makes the Copler project that more attractive. For example, the company estimates that with a gold price of $1,500 an ounce, the project would produce total cash flow of $2.1 billion and carry a net present value of $1.28 billion, with payback of just 1.1 years.

However, the potential for larger production is pretty obvious in my opinion - the Copler resource base now contains well over 8 million ounces from measured, indicated and inferred categories, but the sulfide feasibility only models for production of proven and probable reserves. If resources can be converted into reserves, then production could be increased and the life of mine extended.

Alacer Gold is a Strong Takeover Target

I believe Alacer Gold makes perfect sense for a buyout or merger. In my opinion, the most likely candidate is Alamos Gold (NYSE:AGI), which has several development projects in Turkey.

Alamos Gold carries a market cap of $1.16 billion. The company recently received its final signature for the approval of its Agi Dagi gold project in Turkey, which is a big step towards final approval of the project. Alamos expects first gold production from the project in 18 months following receipt of the outstanding forestry and operating permits, which could come later this year.

The Agi Dagi project only requires $278.3 million in pre-production capex and should produce 143,000 ounces of gold a year at cash operating costs of $569 an ounce, according to the 2012 pre-feasibility study. With $390 million cash and no debt, Alamos Gold is in a great financial position and could easily take on further projects - even its advanced stage Kirazli gold project in Turkey, which would require just $146 million pre-production capex and produce 99,000 ounces of gold annually.

A merger with Alacer would be highly beneficial for both parties in my opinion; the new company would have close to $700 million in cash, three exciting gold development projects in Turkey (Kirazli, Agi Dagi, and the currently producing Copler), an exciting development project in Mexico (Esperanza), and the low-cost producing Mulatos mine in Mexico. That might not be enough cash to fund all its development projects, but it's close and I don't think the new company would have any trouble raising equity or debt should it need to.

The Bottom Line: Alacer Gold is Undervalued

With nearly $300 million cash and no debt, a profitable gold mine with potential for further expansion, and significant exploration potential on its properties, Alacer Gold is not getting the valuation it deserves. I am using each dip in the share price as a buying opportunity. In the meantime, investors can sit back and collect its annual dividend of $.02 per share. I also believe a takeover or a merger is likely, and it would have to be at a premium to the current share price.

Disclosure: The author is long ALIAF.

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.

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