Alamos Gold: Planned Lower Production At Mulatos Is A Drag

Summary

• The company posted revenues of $184.5 million in 1Q22 and a net loss of $8.5 million or $0.02 per share. Revenues were down 18.9% from the 1Q21.
• Alamos Gold said that it sold 98,466 ounces of gold in the first quarter at an average realized price of $1,874 per ounce.
• I recommend buying AGI at or below $7.30.
• Looking for a helping hand in the market? Members of The Gold And Oil Corner get exclusive ideas and guidance to navigate any climate. Learn More »

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Introduction

The Toronto-based Alamos Gold (NYSE:AGI) released its first quarter of 2022 results on April 27, 2022.

1 - 1Q22 results Snapshot

The company posted revenues of $184.5 million in 1Q22 and a net loss of $8.5 million or $0.02 per share. Revenues were down 18.9% from the 1Q21.

AGI declared a quarterly dividend of $9.8 million, or $0.025 per share (annualized rate of $0.10).

AGI: 1Q22 highlights presentation (Alamos Gold)

The quarterly production was 98.9K Au ounces, a 21.4% drop from the first quarter of last year. A solid performance at Island Gold and Young-Davidson could not balance the lower planned production at Mulatos mine.

AGI: Gold production comparison 4Q21 1Q22 (Fun Trading)

The Mulatos mine in Sonora, Mexico, has been a challenging issue for the company, advancing a transitional phase until La Yaqui Grande turns operational in the third quarter of 2022. La Yaqui Grande is expected to produce an average of 123K Au ounces per year beginning in 3Q22 and significantly lower the Mulatos District mine-site AISC.

AGI: The Yaqui Grande project (Alamos Gold Presentation May 22)

La Yaqui Grande is now 90% complete and is expected to produce its first gold in 3Q22. The company expects to produce 130K-145K Au Oz in 2022, including the Yaqui Grande project, with a mine-site AISC of $850-900/oz.

Alamos Gold also owns two other ongoing projects at the moment. Gold production is expected to increase significantly by 2025.

1. The Island Gold expansion Phase III Ontario, Canada.
2. The Lyne Lake project with construction decision expected in H2 2022 (EIS approval & construction decision). The average annual production expected is 143K Au ounces over a 10-year mine life at an average mine-site AISC of $745 per ounce.

AGI: Outlook Production 2022-2025 (Alamos Gold Presentation)

2 - Stock Performance

AGI is tightly following the VanEck Gold Miners ETF (GDX) and is now down 3% on a one-year basis after the recent slide.

Data by YCharts

John A. McCluskey, President and Chief Executive Officer, said in the conference call:

We produced 99,000 ounces of gold in the first quarter in line with guidance. Young-Davidson had another solid quarter with average mining rates exceeding the design rate, offsetting planned lower production from Mulatos. As with production, our costs were consistent with first quarter guidance, and both are expected to improve through the year.

3 - Investment Thesis

The investment thesis continues to be the same as indicated in my preceding article. Alamos Gold is an excellent company with excellent financials, no debt, solid cash on hand even after the Yaqui Grande project, and healthy organic growth, all internally funded. Furthermore, it is a gold producer with assets exclusively in the Americas.

Thus, I recommend AGI as a perfect candidate for long-term investment and use the recent weakness to build up a position.

The gold price has increased significantly in the past few months, with the war in Ukraine and high inflation threatening the world economy. However, the Fed is now about to hike interest significantly in 2022, and it is likely that the gold price will retrace from the $1,900s range and may retest $1,800 per ounce or lower in the next few months.

AGI: Gold and silver 1 year chart (Fun Trading from StockCharts)

Therefore, as I regularly recommend to my subscribers in my marketplace, "The Gold and Oil corner," I strongly recommend trading short-term LIFO about 30%-40% of your long-term position to take advantage of the gold volatility and reduce risks. Trading LIFO is only allowed in the USA and Japan. Please read my final note about it at the end of my article.

Alamos Gold - Financial Snapshot 1Q22 - The Raw Numbers

Alamos Gold	1Q21	2Q21	3Q21	4Q21	1Q22
Total Revenues $ million	227.4	195.1	198.0	203.1	184.5
Quarterly Earnings $ million	51.2	-172.5	25.10	29.5	-8.5
EBITDA $ million	119.6	-129.9	100.0	88.0	70.9
EPS (diluted) $ per share	0.13	-0.44	0.06	0.08	-0.02
Cash from Operating Activities $ million	99.3	86.7	82.4	88.1	46.5
CapEx in $	72.6	86.9	89.2	91.6	87.3
Free Cash Flow	26.7	3.2	-6.8	-3.5	-40.8
Total cash $ million	264.9	256.3	234.3	196.4	145.2
Total LT Debt in $ million	0	0	0	0	0
Dividend $/ share (semi-annual)	0.025	0.025	0.025	0.025	0.025
Shares Outstanding	396.0	392.8	395.9	392.3	402.7*

Click to enlarge

Source: Company press release

* As stated in the MD&A, page 28.

Gold Production Details

1 - First Quarter of 2022 Revenues

AGI: Quarterly Revenue history (Fun Trading)

Alamos Gold posted revenue of $184.5 million in 1Q22. The realized adjusted net earnings were $18.0 million, or $0.05 per share.

The company indicated a net loss of $8.5 million, or $0.02 per share, down from $51.2 million or $0.13 per share in 1Q22. The company reported first-quarter results broadly in line with analysts' expectations.

2 - Free cash flow was a loss of $40.8 million in 1Q22

AGI: Quarterly Free cash flow history (Fun Trading)

Trailing 12-month free cash flow was a loss of $75.3 million, and the company posted a loss of $40.8 million in 1Q22. In the press release, the company said:

Growth capital of $21.7 million related to construction activities at La Yaqui Grande. Given the significant level of spending on La Yaqui Grande and a build-up of leach pad inventory, Mulatos generated negative mine-site free cash flow of $37.4 million in the quarter. With the completion of La Yaqui Grande in the third quarter, Mulatos is expected to generate significant mine site free cash flow in the second half of the year.

3 - The company is debt-free (net cash) and had total cash of $145.2 million in 1Q22

AGI: Quarterly Cash versus Debt history (Fun Trading)

4 - Total Quarterly Production was 98.9K Au ounces

AGI: Quarterly Gold Production history (Fun Trading)

Alamos Gold said that it sold 98,466 ounces of gold in the first quarter at an average realized price of $1,874 per ounce for revenues of $184.5 million.

Alamos Gold posted first-quarter production of 98,900 ounces, with solid performances at Island Gold and Young-Davidson offsetting lower output at the Mulatos mine. Below is the 1Q22 production per mine.

AGI: Quarterly Gold production per mine (Fun Trading)

The price of gold realized for the fourth quarter was $1,874 per ounce.

AGI: Quarterly Gold Price history (Fun Trading)

All-in sustaining costs, AISC, were high this quarter at $1,360 per ounce due to the lower production at the Mulatos mine.

AGI: Quarterly AISC history (Fun Trading)

Note: No progress with Kirazlı (Çanakkale, Turkey). Alamos Gold incurred $0.7 million in the first quarter related to ongoing holding costs and legal costs to progress the Treaty claim.

3 - Guidance 2022 and Beyond

As indicated in my previous article, Alamos expects a stable production in 2022, with a 4% growth expected in 2023.

Production is expected between 440K oz and 480K oz in 2022 and an increase of 4% (mid-point of guidance) to between 460K and 500K oz in 2023 and 2024.

AGI: 2022 Guidance Presentation (Alamos Gold)

The company's all-in sustaining costs guidance is expected to be $1,190 to $1,240 per ounce in 2022, improving to $950 to $1,050 per ounce in 2024.

AISC is expected to decrease approximately 18% from 2022 to 2024 (based on the mid-point of guidance), reflecting lower costs at Mulatos and Island Gold.

4 - Reserves as of December 31, 2021

Alamos Gold indicated a mineral reserves P1 + P2 of 10.257 Moz in 2021, an increase of 3.9% from 9.870 Moz in 2020. Total mineral resources are 3.440 Moz.

AGI: Mineral Reserve as of Dec. 31, 2021 (Alamos Gold)

Technical Analysis (Short Term) And Commentary

AGI: TA Chart short-term (Fun Trading/StockCharts)

Note: The chart has been adjusted for the dividend.

AGI chart shows an ascending channel pattern with resistance at $9.20 and support at $7.50. AGI dropped precipitously since mid-April and shed almost 20% in a few days of trading.

The general strategy that I usually promote in my marketplace is to keep a core long-term position and use about 30%-40% to trade LIFO while waiting for a higher final price target for your core position between $10 and $10.50.

The trading strategy for this quarter has not changed much since my preceding article. However, it is reasonable to take partial profit at $8.10 (50MA) with the recent drop, which I call the mid-target sell/buy. I suggest selling about 30%-40% of your position between $9.10 and $9.25.

The gold price will fluctuate widely in 2022 due to the action of the Fed battling inflation and other geopolitical issues (e.g., the Ukraine conflict). The Fed is about to hike interest 50-point and will repeat it the next month. I see some selling pressure coming the gold way.

I believe it is safe to accumulate AGI below $7.3. However, if the Fed turns hawkish again, AGI could probably retest $6.60, an excellent value for long-term investors.

I highly recommend keeping a core long-term position and using about 30%-40% to trade LIFO while waiting for a higher final price target for your core position between $9.50 and $10.50.

Watch the gold price like a hawk.

Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States to generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stocks, one for the long term and one for short-term trading.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AGI either through stock ownership, options, or other derivatives. 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.

I trade short-term AGI as well.

Comments

[BeaBaggage]

Like so many gold miners, $AGI is stuck.. like AUY w GFI, I believe it may be attractive to an acquirer looking for more safe country assets- not a reason to buy for sure..it will move with the POG and ETF buying (and selling) for the most part imo so there are other better options in the current selloff.

Maybe Northern Star ($NESRF) will come along as it ended talks w/ Osisko on the Windfall Project and could still be looking to buy into Canada like its Aussie sister Newcrest did w Red Chris and Pretium. Again not a reason to buy. I expect mergers/buyouts to increase to help cut G&A expenses to offset somewhat the rise in energy/material/labor costs the miners are facing now. Nothing like firing a lot of folks to help AISC sadly.

Interesting to see Young Davidson pumping out the gold and having a long life, from the good old Northgate Minerals days it still provides low cost and stability to AGI. Bea