Alacer Gold (OTCPK:ALIAF) (OTC:ALACF) is one of the (if not the) largest gold producers in Turkey, and the company wanted to strengthen its position in Turkey as Alacer has started to develop the sulfide phase of the large Copler gold project. This requires quite a bit of cash, and the company might not be fully appreciated by the market anymore after the recent Erdogan-coup in Turkey. That being said, it's 'business as usual' at its mines, but the adjusted free cash flow remains quite low.
The company's average daily volume on the US exchange is relatively low, and that's why I would recommend to trade in the company's shares using the facilities of the Toronto Stock Exchange, where Alacer is listed with ASR as its ticker symbol. Considering the average daily volume is 1.2 million shares, the TSX should be your preferred trading venue.
Boring but reliable; Alacer's operating and financial results
The total gold production in the second quarter of this year was approximately 30,000 ounces, of which just over 24,000 ounces were attributable to Alacer Gold, considering it has an 80% ownership in the mine. This gold production rate was pretty much in line with the expectations, as Alacer is expecting the production rate to increase in the second half of the year.
Source: press release
Even though Alacer is a Canadian company, it does report its financial results in US Dollar, making my life quite a bit easier! The total revenue in the second quarter was almost $38M, indicating Alacer got a really good price for the gold it sold. The mining gross profit was $4.6M which was indeed slightly lower than the $6.7M generated in the first quarter but there's nothing to worry about as Alacer's production rate (and financial performance) will improve in the second half of the year. The main 'culprit' of the lower gross mining profit were the higher strip ratio, and the lower average grade which means the company had to process more tonnes to recover a slightly lower amount of gold.
Despite the contraction of the gross margin, Alacer remained profitable and the attributable net income came in at $12.2M, or approximately 4 cents per share. That's substantially better than the first half of the year thanks to the lower administrative expenses and share-based compensation.
Source: financial results
The cash flows were also pretty much in line with the expectation, as Alacer's operating cash flow in the second quarter of the year was approximately $9.5M (versus almost $14M in the first quarter), which was more than sufficient to cover the (almost negligibile) sustaining capital expenditures of $600,000. Indeed, the majority of the $40M+ capex bill was associated with the expansion plans at Copler (see later), although the sustaining capex bill will undoubtedly increase in the second half of the year, as the production from the oxide ore will continue to increase.
The majority of the capex was sent on the Copler expansion, doubling down on Turkey
Back in May of this year, Alacer's board of directors has approved the expansion of the Copler project, which would allow Alacer to process the sulfide ore and recover several additional million ounces of gold, at an all-in sustaining cost of just $645/oz. This would result in an all-in margin of approximately $650-700/oz, so the approval of the expansion wasn't really a huge surprise.
Source: company presentation
However, building the sulfide expansion does come with a relatively high price tag as Alacer estimated the total capital expenditures to build it at almost $750M. Approximately $71M has already been spent with an additional $130M+ having been committed to purchase long lead items, which means Alacer isn't really wasting any time. The company is still expecting to be able to start commissioning the new production facility in the second quarter of 2018, where after it will be (slowly?) ramped up toward the name place capacity.
What's interesting is the fact the quarterly report, the financial statements and the Management Discussion & Analysis didn't include a single word about the recent turmoil on the political front in Turkey. After a coup (which, according to Western countries, was staged to grant president Erdogan more power), I would have expected to see the company's management team doing its best to reassure the investors. Even though the mine is an important employer and contributor to Turkey's tax system, some sort of additional reassurance on top of the short press release issued earlier in July would have been very welcome.
Even though I would expect the $350M project financing facility provided by BNP Paribas, SocGen, UniCredit and ING Bank to remain in good standing, it would be nice to see a firm confirmation on this, from Alacer Gold, as pulling the credit line would be absolutely negative for the investment thesis of this company.
Source: company presentation
Alacer remains extremely committed to Turkey and plans to source more oxide ore from nearby zones that could potentially act as satellite deposits. On top of that, it has already stockpiled millions of tonnes of sulfide rock, containing 700,000 ounces of gold (for an in situ value of $900M) which will very likely be used as a strategic stockpile for the sulfide expansion, considering the mining costs for these ounces have already been incurred.
Despite the failed/succeeded coup (depending on whether you believe respectively Turkish or Western version of the facts), everything seems to be business as usual at Alacer Gold, and the company is moving forward with the sulfide expansion phase of its Copler gold project in Turkey. As it should, considering the economics of the expansion definitely make sense at $1300+ gold. Even if the coup has been staged, it's likely the company's asset won't be touched. A good comparison in this case might be Centamin's Sukari gold mine in Egypt, which is still up and running despite a political situation that could be described as 'shaky' at best.
Alacer's current enterprise value is indeed just $400M, but keep in mind the company will very likely have to spend its entire cash position on the sulfide expansion, so investors shouldn't rely too much on the net cash position, as this will evaporate pretty fast.
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