Alio Gold Is Banking On The Future

Dec. 17, 2019 12:06 PM ETAlio Gold Inc. (ALO)GORO19 Comments12 Likes

Summary

  • Revenues were $27.01 million in 3Q'19. Net loss was $127.14 million or $1.50 per share due to impairment charges related to the San Francisco Mine and Ana Paula project.
  • Alio Gold closed a 3-year $15 million loan facility with Sprott to fund the construction of the new Phase II leach pad at Florida Canyon.
  • ALO is an excellent tool for short term trading based on the price of gold.

Image: Florida Canyon mine. Alio Gold

Investment Thesis

The Canadian-based Alio Gold (NYSEMKT:ALO) - formerly known as Timmins Gold - is a small mid-tier gold and silver producer which operates two mines in Mexico and Nevada, US. Also, the company owns one development project in Guerrero, Mexico, called Ana Paula and one exploration project called Ejutla.

Note: Alio Gold and Rye Patch Gold merged on March 25, 2018.

The investment thesis is quite straightforward with this small gold producer.

I do not recommend the stock as a long term investment, for different apparent weaknesses that I will explain later in my article. However, it is a perfect candidate for a short term trading strategy based on the price of gold.

Furthermore, the company presents a clear opportunity for a possible M&A down the road. After looking at the location of the assets, a merger could eventually make sense with another miner specialized in the same regions like Gold Resources (GORO).

Source: ALO Presentation

Alio Gold - 3Q'19 Financial and history - The raw numbers

Alio Gold 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19 3Q'19
Total Revenues in $ Million 20.59 23.34 26.23 27.94 27.02 31.41 28.46 27.01
Net Income in $ Million -2.85 3.23 3.28 -3.72 -16.84 1.60 -3.83 -127.14
EBITDA $ Million 1.39 5.54 8.45 -0.61 n/a 2.77 -2.10 -127.37
EPS diluted in $/share -0.06 0.07 0.05 -0.04 -0.20 0.02 -0.05 -1.50
Operating Cash flow in $ Million -2.18 -1.83 -8.29 -3.53 -4.74 2.53 -0.37 -1.57
Capital Expenditure in $ Million 17.33 10.03 8.12 1.93 9.45 5.08 0.70 1.46
Free Cash Flow in $ Million -19.52 -11.86 -16.41 -5.46 -14.19 -2.56 -1.06 -3.03
Total Cash $ Million 51.56 39.26 29.73 24.47 21.98 18.91 17.50 13.17
Total Long term Debt in $ Million 1.7 1.7 16.61 15.31 2.26 5.88 5.49 5.10
Shares outstanding (diluted) in Million 44.58 44.72 60.15 83.78 84.71 84.71 84.71 84.71

Data Source: Alio Gold document and Morningstar/YCharts

1 - Revenues were $27.01 million in 3Q'19 Revenues were $27.01 million in the third quarter of 2019. The company posted a net loss of $127.14 million or $1.50 per share for Q3 2019.

Through the Company's assessment on September 30, 2019, the company concluded that a non-cash impairment was justified for the San Francisco Mine and the Ana Paula Property. A total of $119.161 million has been indicated.

Mark Backens, President and CEO, said in the press release:

In the third quarter, the Company was challenged by the continued low overall equipment availability of the aged mine fleet at the Florida Canyon Mine. We announced in early October the acquisition of a new loading and haulage fleet for Florida Canyon. This new equipment, a significant portion of which is already in operation, will have an immediate, meaningful positive impact on operations. Mine fleet availabilities in the third quarter were below 50%, and frankly, we did well to operate at roughly an operating cash flow neutral position,

2 - Free Cash Flow was a loss of $3.03 million in 3Q'19

The generic free cash flow is cash from operating activities minus CapEx. It is an excellent financial component to evaluate the company's ability to survive.

I always include the free cash flow in my analysis. Yearly free cash flow is a loss of $18.65 million and a loss of $3.03 million in 3Q 2019.

3 - Debt and Cash

It's probably the only positive in these overall grim results.

Note: After the sale to Coeur Rochester, the company paid off the outstanding Macquarie debt.

On November 14, 2019, Alio Gold signed and closed a three-year, $15 million loan facility with Sprott Private Resource Lending II to fund construction of the new Phase II leach pad at Florida Canyon.

Key Terms of the Facility are:

  • Principal Amount of $15 million;
  • Maturity date of October 31, 2022;
  • Interest rate of 8% plus the greater of LIBOR and 2%;
  • Amortization of the Facility in eight equal quarterly payments commencing January 31, 2021;

On November 24, 2019, Alio Gold indicated that the dispute with Maverix was finally settled.

The Agreement clarifies the definition of "Allowable Deductions" in calculating the royalty, reduces the royalty amount to 3.0% from 3.25% and provides for a one-time payment by Alio Gold to Maverix of $300,000 in either cash or shares within one-year of closing.

4 - Gold production details, trend, and discussion

Detailed production gold/silver per mine

The company sold 18,267 Au Oz and 10,513 Ag Oz and produced 17,787 Au Oz and 9,527 Ag Oz during 3Q 2019. One concerning issue is the very high AISC (co-product basis).

Alio Gold 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19 3Q'19
AISC (co-product) 1,104 1,357 1,262 1,314 1,293 1,458 1,278 1,307 1,369
Gold Price realized 1,278 1,274 1,332 1,293 1,271 1,233 1,300 1,301 1,375

Source: Fun Trading.

1 - Florida Canyon mine

The Florida Canyon Mine produced 9,620 ounces of gold and 6,793 ounces of silver at cash costs and AISC of $1,263 per gold ounce and $1,281 per gold ounce, respectively, during Q3 2019.

2 - San Francisco gold and silver Mine (open pit heap-leach).

The San Francisco Mine produced 8,166 ounces of gold and 2,734 ounces of silver, at cash costs and AISC of $1,210 per gold ounce and $1,254 per gold ounce, respectively, during Q3 2019.

3 - Ana Paula Project is still suspended since August 2018 because of a lack of cash.

4 - Guidance for 2020 announced on December 3, 2019

Our new loading and haulage fleet is nearing full commissioning and we are seeing our ore stacking rates steadily increasing, as per our plan. The second heap leach pad is under construction and remains on-budget and on-time for completion in the second quarter of 2020 [Florida Canyon]. With San Francisco now in residual leach, activities at Ana Paula curtailed, and corporate expenses greatly reduced, we are very well positioned to deliver for all our stakeholders. Said the CEO Mark Backens.

Source: Press release

Conclusion and Technical Analysis

Alio Gold's recent earnings results were something that we should all forget, with a massive non-cash impairment as a final blow to common shareholders. However, every cloud has a silver lining, even though it is not immediately visible.

Florida Canyon is now operating with a new fleet, and mining tonnage is already up substantially from 3Q'19, but the real effect on gold production will have to wait for H2 2020 to show real progress.

Thus, patience is still required, and it is still not a time to accumulate for the long haul because we may experience a great deal of volatility.

Technical Analysis

ALO is not showing any real trading visible pattern right now.

However, I do not agree with Finviz's interpretation, and I believe the support is more $0.55, which is a double bottom.

Based on the new top just above $0.75, we can potentially see an intermediate ascending channel pattern with line resistance at $0.77 and line support at $0.64.

The basic idea in terms of trading is to sell a large part of your position around $0.77 or above. Conversely, I recommend waiting for a retracement at $0.64 to accumulate again.

In case of a bearish gold price, the stock is likely to break out support and retest $0.55. However, if the gold price turns bullish and trades above $1,500 per ounce, then we may eventually trade above $0.85.

Of course, this is just a mental model that will have to be adapted with the price of gold, which is of paramount importance, and new development.

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This article was written by

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As an experienced investor, I will help you stay on task more efficiently.

I am a former test & measurement doctor engineer (geodetic metrology). I was interested in quantum metrology for a while.

I live mostly in Sweden with my loving wife.

I have also managed an old and broad private family Portfolio successfully -- now officially retired but still active -- and trade personally a medium-size portfolio for over 40 years.

“Logic will get you from A to B. Imagination will take you everywhere.” Einstein.

Note: I am not a financial advisor. All articles are my honest opinion. It is your responsibility to conduct your own due diligence before investing or trading.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I trade short term the stock occasionally.

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