It's been a rough year thus far for the Gold Miners Index (GDX), with the ETF sliding nearly 40% from its Q3 2020 highs and some producers falling as much as 50%. One name that's held up relatively well the past couple of months is Alamos Gold (NYSE:AGI), with the stock remaining above its March 2021 lows and only down 5% in Q3 vs. a ~13% decline in the GDX. The outperformance may be attributed to the fact that the stock is already dirt-cheap at current levels and has a very bright future with meaningful growth looking out to FY2026. So, with Alamos trading at barely 12x FY2023 earnings estimates and a P/NAV ratio of ~0.70x, I see this correction as a low-risk opportunity.
Alamos Gold, Company Presentation
Alamos Gold is preparing to release its Q2 2021 results in the next month and should have no problem meeting its FY2021 production guidance, with ~240,000 ounces produced in H1 2021 (~49% of guidance mid-point). The company has recently been taking advantage of its share price weakness to repurchase shares, repurchasing ~600,000 shares in August alone. If this weakness persists, I would not be surprised to see the company buy back over 1.3 million shares this year, or close to ~0.35% of the float. However, the most exciting news continues to come from the company's Island Gold Mine, which was acquired for ~$600 million in 2017. In June, Alamos published another exploration update at Island, announcing a record intercept of 21.33 meters of 71.21 grams per tonne gold. This represents one of the best intercepts drilled this year in the sector, coming in at over 1,500 gram-meters. Let's take a closer look below:
Island Gold Reserves, Company Filings, Author's Chart
Even before this year's impressive exploration updates, Island Gold has been the gift that keeps on giving, acquired for ~$600 million in 2017 with the acquisition of Richmont Mines, and currently sporting an After-Tax NPV (5%) of ~$1.5 billion, or double the price paid. Notably, this is after already producing more than 400,000 ounces of gold from the asset since it was acquired, translating to well over $600 million in revenue. As the chart above shows, the growth in the resource/reserve base is nowhere near done, with inferred resources soaring to ~3.2 million ounces in the December 2020 update (+39% year-over-year), and reserves up nearly 10% to ~1.31 million ounces. However, with two major exploration updates this year, the reserve base looks like it is set to grow even further, which could lead to even higher annual production rates than anticipated in the Phase III Study (~236,000 ounces per annum).
Island Gold Technical Report, Alamos Gold
Digging into the exploration update a little closer, we can see Alamos continues to define meaningful resources (blue shaded areas) below its reserve base and current mining areas, and these resources continue to increase in grade at depth. This is evidenced by last year's Technical Report, which showed meaningful resource gains 1,000 to 1,5000 meters below surface, with ~580,000 tonnes added at ~16 grams per tonne gold, and ~1.19 million tonnes added at 18.74 grams per tonne gold. The most recent resource update showed that total resources (measured, indicated, inferred) jumped to a grade of 13.77 grams per tonne gold (~7.63 million tonnes), up from ~6.27 million tonnes in the 2019 update, which helped to inform the Phase III Expansion Study. However, the most recent results are easily the most exciting to date, with 71.21 grams per tonne gold intersected in MH25-08, confirming the grades in the previous blockbuster hole of 21.76 meters of 28.97 grams per tonne gold (MH25-04).
Island Gold Exploration, Company Website
In addition to the exceptional results released in MH25-08 (more than quintuple the average inferred resource grade of 14.43 grams per tonne gold and nearly quadruple the nearest inferred resource block of 18.26 grams per tonne gold), MH25-07 hit 34.87 grams per tonne gold over 5.98 meters. This intercept was more than double the average inferred resource grade at Island. These intercepts not only confirm the presence of mineralization further east of the inferred resource block shown above (right next to the planned shaft), but they suggest that the zone could be widening in this area. Moving west, Alamos also hit 4.78 meters of 6.52 grams per tonne gold and 3.41 meters of 4.97 grams per tonne gold at depth below this resource block. While these grades are lower than the grade of this resource block, further step-outs at mineable grades are quite encouraging.
Moving over to Island West, Alamos intersected 2.43 meters of 31.58 grams per tonne gold 50 meters below the nearest inferred resource block, with this beginning to fill the gap between the two resource blocks that lie below current infrastructure (hole 740-471-41). Notably, this hole is well above the average grade of the main resource block in this area which contains ~450,000 ounces at 15.83 grams per tonne gold. In summary, these results continue to be very encouraging, solidifying Alamos' spot as one of the most exciting exploration stories in Canada.
So, what does this mean for the Island Gold Mine?
The immediate benefit to Alamos Gold is likely another exciting resource/reserve update in Q1 2022 for Island Gold and confirmation that the best could be yet to come at depth. From a cash flow and NPV (5%) standpoint, the bigger potential news is that Alamos's Phase III Expansion Study is now looking conservative and is based on a very dated and smaller resource. If Alamos were to do an updated study in Q2 2022 based on the 2022 reserve/resource update, it would likely show a 21+ year mine life and a higher average processed grade (Phase III Study head grade: 10.45 grams per tonne gold).
This suggests that Alamos could potentially look into increasing its mill throughput rate from a planned 2,000 tonnes per day to up to 2,400 tonnes per day. In the case that Alamos could get the necessary permits for this expansion, this would bring forward ounces in the mine plan, translating to a significant boost in the mine's After-Tax NPV (5%). It's important to note that the company has not guided towards a possible mill expansion at this time. This is entirely hypothetical in nature and would require an increase in capital expenditures and the receipt of necessary permits. Having said that, with the resource/reserve base growing as it is at Island Gold, it is putting this potential on the table long-term (2025-2026).
Island Gold Mine, Company Website
For those unfamiliar, the Phase III Study contemplated sinking a shaft to an initial depth of ~1,400 meters, with the capacity to hoist up to 4,500 tonnes per day. However, Alamos envisioned mining ~3.1 million ounces of gold over a 16-year mine life, with planned mill throughput of 2,000 tonnes per day, which was based on a mineable resource of ~3.2 million ounces of gold. This included ~1.2 million ounces of reserves, and 80% conversion of measured, indicated, and inferred resources. As it stands, the total resource base at Island (before recent high-grade drill results) is ~4.68 million ounces of gold, with a meaningful boost in the resource grade. Suppose we apply the same 80% conversion rate (historical conversion rate 83%). In that case, this would translate to a mineable resource of ~4.01 million ounces of gold, almost 30% higher than the mineable resource used in the 2020 Phase III Expansion Study.
As noted above, the average grade of the inferred, measured, and indicated resource has jumped from 12.31 grams per tonne gold (6.27 million tonnes) in 2019 to 13.77 grams per tonne gold (7.63 million tonnes) in 2020, which should already have a slight positive impact on the projected production profile of ~236,000 ounces per year at $534/oz. However, if we combine a likely grade improvement with a conceptual mill expansion to 2,400 tonnes per day, the results could be significant. If we assume a throughput rate of 2,400 tonnes per day (~870,000 tonnes per annum) and a slightly higher average head grade of 11.10 grams per tonne gold with a 96% gold recovery rate, Alamos' annual production could jump to ~298,000 ounces per annum. This would make Island Gold one of the most impressive mines in Canada from a production/cost standpoint, nearly rivaling Kirkland Lake Gold's (KL) Macassa, which is projected to produce ~400,000 ounces at ~$600/oz beginning in 2023.
Island Gold Production & Forward Estimates, Company Filings, Author's Chart & Estimates
Looking at the above chart, we can see the base case (gold bars) with forward estimates and the mill expansion case (green bars), and how this would dramatically improve the production profile. As it stands, Island Gold is already expected to increase production by nearly 60% from FY2021 to FY2026 (~235,000+ ounces vs. ~155,000 ounces), with the potential for even higher production rates due to a slight lift in grades relative to the Phase III Study projections. However, under the mill expansion case, production would nearly double looking out to 2026 at Island, with the mine's costs expected to plummet to levels nearly 50% below the industry average ($525/oz vs. 1,025/oz). This would dramatically improve Alamos' consolidated cost profile, helping to push company-wide costs closer to $825/oz.
- Alamos Gold Consolidated Production & Forward Estimates, Company Filings, Author's Chart & Estimates
As shown in the chart above, even without the mill expansion case or an improvement in grade, Alamos Gold is set up to increase production at a compound annual growth rate of 8.9%, looking out to FY2026 (750,000 ounces vs. 490,000 ounces). In the mill expansion case, Alamos would boast an even more impressive compound annual production growth rate of 10%, with production set to grow to 790,000+ ounces in FY2026. This makes Alamos a rarity in the intermediate producer space, given that few names have the potential to increase production by up to 60% from within the company's portfolio. Most importantly, consolidated costs are expected to plummet in the same period, moving Alamos' costs from ~2% above the industry average to 20% below the industry average ($1,050/oz to ~$820/oz). The 2026 estimates in the chart assumes growth at Island Gold, the addition of La Yaqui Grande (completion Q3 2022), and a positive construction decision on Lynn Lake in Manitoba. Let's take a look at the valuation:
Alamos Gold Earnings Per Share, FactSet.com, Author's Chart
Looking at Alamos' earnings trend above, we can see that annual earnings per share [EPS] are expected to increase yet again in FY2021, despite the volatility in the price of gold. Based on current estimates of $0.48, Alamos should report 23% growth on a year-over-year basis, which is lapping ~85% growth last year. These are impressive growth metrics, and further growth is expected in FY2022, with costs expected to dip at Mulatos, helped by La Yaqui Grande. Based on a current share price of $7.20, this leaves Alamos trading at just 12.2x FY2023 annual EPS estimates, a very reasonable valuation for a high-margin organic growth story.
On a P/NAV basis, the valuation is even more compelling, with Alamos currently sitting at a market cap of ~$2.88 billion based on ~400 million fully diluted shares. This compares very favorably to the company's net asset value of ~$4.25 billion, based on a combined NPV (5%) of ~$3.60 billion at Island, Mulatos, and Young-Davidson, an NPV (5%) of ~$350 million at Lynn Lake, and an estimated $300 million in year-end cash & investments. If we divide the market cap into this figure, we come up with a P/NAV of just 0.68, and I would argue that Alamos can easily command a valuation of 1.05x P/NAV, given its future status as a mostly Tier-1 jurisdiction low-cost gold producer. This would translate to a fair value of more than $11.15 per share, assuming a static share count of ~400 million shares. It's important to note that I've valued Island Gold at ~$1.50 billion, which looks conservative given the exploration. Therefore, I would argue there is further upside to this NAV figure.
AGI Stock Chart, TC2000.com
Moving over to the technical picture, Alamos Gold is currently hugging strong support at $7.00, where the stock found support in March of this year. This is also a major previous resistance level for the stock (Q4 2017, Q3 2019, Q3 2020), and typically, major resistance levels morph into new support levels when there's been a positive change in the fundamentals. In Alamos Gold's case, the positive change is a much more exciting organic growth profile, a higher gold price, much higher annual earnings per share, and continued exploration success at Island Gold. With no meaningful resistance until the $10.40 level and strong support just 3% below at $7.00, the reward/risk is quite compelling at current levels.
Young Davidson Operations, Company Presentation
It's easy to be negative on the sector, and Alamos Gold, after a more than ~40% correction, but when the majority have turned bearish, and many are throwing in the towel, it often creates the best buying opportunities in this sector. Of course, this is contingent on buying quality since the worst companies can be value traps in cyclical bear markets, raising capital at 52-week lows and significantly diluting shareholders. This is not the case with Alamos Gold, and in fact, the company has been buying back shares this year, repurchasing nearly one million shares or ~0.25% of the float, with further buybacks likely before year-end. Given the company's attractive organic growth profile combined with a dirt-cheap valuation of ~0.70x P/NAV, I see this violent correction as a low-risk buying opportunity, and I may look to add to my position if this weakness continues.