Alamos Gold (NYSE:AGI) has recently reported its third-quarter results. The company’s shares have previously been under intense pressure following Turkey’s failure to renew mining concessions for the Kirazli project that the company is developing in the country. In this light, the company’s financial results and comments made by the management team during the earnings call were especially interesting.
Alamos Gold reported revenues of $172.9 million and net earnings of $17.7 million or $0.05 per share. The company produced 121,900 ounces of gold at all-in sustaining costs of $950 per ounce. Operating cash flow was $67.9 million, fully covering Alamos Gold’s current investment needs. As a result, the company ended the third quarter with $202.5 million in cash and equity securities on the balance sheet and no debt. While the company’s results missed analyst estimates, the high gold price served as a major support for Alamos Gold’s financing at times when its investment needs are elevated.
The most important driver for Alamos Gold's share price right now is, of course, the situation in Turkey. The company commented: “We’re disappointed by the delays we’re experiencing in Turkey, but we’re confident that our mining concessions will ultimately be renewed […] We believe the delay in the concession renewal is related to the recent protests, which followed a misinformation campaign on the social media. We can successfully correct misinformation by outlining the facts.”
The management team sounded very optimistic on the perspectives for the Turkish project. According to Alamos Gold, the project is supported by the locals and the government while it is opposed by NGOs and opposition parties. As per the company, 58% of mining concessions renewed since February 2019 were renewed after expiration date, so Alamos Gold is not in a unique situation. The company promised to update the timeline and budget once the concessions are renewed, but the exact timing is uncertain: “It’s almost impossible to guess when our licenses will be renewed […] It’s a political decision, it’s nothing other than that.”
At this point, it looks like it will take some time for the pressure from the locals (who are losing job opportunities) to build and tip the scales in favor of Kirazli project. If the company’s representation of the main actors of this drama is correct, the project has very good chances to go forward in a rather timely fashion, but this will still take at least a couple of months. I’m not surprised by the market’s positive reaction following the report:
In 2020, the company will complete the lower mine expansion at Young-Davidson mine, deliver initial production at Cerro Pelon and present the Phase III expansion study for Island Gold. Kirazli is likely out of the list of potential positive contributors for 2020, but the project can emerge as a catalyst even in 2019 if Alamos Gold gets the required documentation before the end of this year. With no debt and solid cash flow, the company is in a good position to wait out the situation around Kirazli – the Turkish mine costs $1 million per month right now, and the company promised to trim costs further if no progress is made in the coming weeks.
The gold price is consolidating around $1500 per ounce, showing strength after a major upside move which took gold from $1300 per ounce to $1550 per ounce in a short period of time. In my opinion, the gold price environment is favorable and will remain such, so I’m rather optimistic on the company’s perspectives for cash flow performance even if Kirazli gets pushed to the right side of the timeline. In the short term, I’d look for a momentum trade above $5.50. While early August highs are out of reach without positive news on Kirazli, the company’s shares may be ready for more rebound after a major sell-off in the August–October period.
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