AuRico Gold (AUQ) is now trading for prices it hasn't seen in the last 20 months after it announced a reduced production rate and resignation of its CEO. The stock is down 18% in the last 2 days and this may provide a good opportunity to buy for gold bugs.
Last year, gold (GLD) had a massive rally when its price rallied all the way up to $1,900s per ounce at one point. Many people were expecting gold to pass $2,000, but it didn't happen since Fed refused to launch a new quantitative easing since then. Now gold is trading in a range between $1,500 and $1,600, which is significantly lower than its 52-week high price, however it is still significantly higher than its historical price. There are 2 things that determine profitability of gold companies: 1) gold price, 2) production rate. While gold price is still decently high, production rates may play a big role how well a gold company will do.
AuRico gold announced on Monday that it is experiencing an unusually high turnover rate for high skilled employees in northern part of Mexico which is affecting the company's production rate significantly. Ocampo mine in the region has been able to deliver 69,000 ounces of gold as opposed to expectations of 90,000 this year. The company is expected to produce between 155,000 and 170,000 ounces of gold this year. Each ounce of gold is expected to cost the company between $540 and $570. Given the current price of gold, the company is looking at an operating profit around $1,000 per ounce of gold. Compared to historic standards, this is very impressive. Apart from gold, the company produces other materials such as silver.
The CEO of the company René Marion will be replaced by Scott Perry who is the CFO of the company. It is said that the disappointing production results have nothing to do with the departure of the CEO as he is leaving for health reasons. Under Mr. Marion's leadership, AuRico gold acquired Northgate Minerals Corp. and Capital Gold Corp among others. He will continue to advise the board of directors as a chairman and the company's transition will likely to be smooth as long as no other executive resigns during this time. Mr. Marion believes that the company's new CEO is well capable of being successful in his new role: ""Scott and I have worked together over the past 12 years, so I know that he has the talent, the drive, and the experience required to take on this challenge and move the company forward."
Recently, analysts reduced their earnings estimates for the company for 2012 and raised their expectations for 2013 and 2014. This year, the company is expected to earn between 53 and 81 cents per share. Next year, the analyst expectation range is much wider as the lowest expectation is 62 cents per share and the highest is 1.62 per share. The average earnings estimate for 2013 is 92 cents per share. In 2014 and 2015, the company is expected to perform similar to its 2013 performance unless it gets access to additional gold fields either through acquisitions or new findings. Of course, these estimates are based on the idea that gold price will not move much in either direction. The numbers can change as often as gold price does.
The company's P/E will be around 10 this year and 7 next year. Even though the company may not post much growth between 2013 and 2015, it can still have plenty of upside. It's hard to predict the exact fair P/E ratio for a gold mining company, however, 7 is pretty low for most companies in most industries. AuRico's 52-week high is $14 and the company's share price could easily move above $12 if Fed launches another quantitative easing. The analyst price targets for the company range between $9.50 and $15 with average price target being $12. This indicates a nearly 100% upside potential for the company.
I don't invest in gold because it is incredibly difficult to predict the fair value of gold. The precious metal has no P/E, no earnings growth, no cash, no debt, and it could go any direction any day. Of course, I am not saying that gold is a bad investment; I am just saying that I don't prefer to invest in gold as I personally like more predictable investments. On the other hand, I am more open to the idea of buying gold mining stocks. One has to be very careful with gold mining stocks as many gold mining companies have very little to no proven reserves and many of these gold mining stocks are purely speculative play. AuRico seems to have sustainable gold reserves for the time being and it may be one of the good gold mining stocks to own. If you are hoping to initiate a long position in a gold mining stock, now may be a good time to get in AuRico. The investors have overreacted to the departure of the CEO. The issue of low production rates is a temporary problem and it is already baked in the share price of the company. It should not scare long term investors off.
I may initiate a long position with AuRico soon and if I do, I will make sure to protect myself by writing calls. I suggest many of you do the same as this is the conservative thing to do.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AUQ over the next 72 hours.