March 31, 2014 - 10:04pm EST by
2014 2015
Price: 10.00 EPS $0.00 $0.00
Shares Out. (in M): 127 P/E 0.0x 0.0x
Market Cap (in $M): 1,270 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 1,270 TEV/EBIT 0.0x 0.0x

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  • Gold
  • Sum Of The Parts (SOTP)
  • Large Net Cash Position


Company Overview

Alamos Gold Inc. is a Canadian-based gold producer with assets in Mexico and Turkey. The company currently produces 160,000-180,000 ounces of gold from their Mulatos Mine in Mexico. In Turkey, the company is advancing its project to production. 

Investment Thesis

Alamos is currently trading almost at its 52 week low of ~$10 (CAD). A number of factors contributed to the company’s depressed share price including Mexican tax reform, the injunction in Turkey and lower production. While these events impact near term cash flow the longer term outlook for Alamos has never looked better. By 2016, the company will be producing over 400,000 ounces of gold and the transition to underground mining should bring production and mining costs back to historical levels. Change to contract mining we believe will also mute somewhat the impact of the tax changes in Mexico.

 The Net Asset Value of $1,678 million (CAD) was calculated using a $1,300 gold price. If gold rises, Alamos could see a significant appreciation in its valuation. Alamos is currently trading at 0.9x NAV, this is below the median multiple of 1.2x NAV for mid-tier gold producers. As Espernza and the Turkish properties move from development to production, Alamos share price could trade closer to 1.5x NAV giving the company a share price of $18 (closed at ~$10 on march 31, 2014).

For an investor who views gold as a favourable asset class to have exposure for the long term, and is looking to build a position in a conservative gold producer; Alamos is a safer bet due to attractive valuation, strong balance sheet (no debt), cash in hand to fund the production growth, rising production profile at competitive cost  and a disciplined management team. Company pays a $0.10/share dividend. While in a gold company the dividend sustainability is questionable when gold prices fall, we believe Alamos can maintain dividend even through a temporary dip in gold prices given the strong balance sheet and medium term production growth. 


•             Long Term Production Growth: 2014 is a pivotal year for Alamos as it transitions to underground mining at its Mulatos mine. This has resulted in lower grade mill feed of 5.3 g/t gold, as well as lower grade rock stacked on the leach pad of 0.85 g/t Au compared to 1.07 g/t gold in 2013. By 2016 both of the companies Turkish properties should be operational. At this point Alamos will be producing over 400,000 ounces of gold per year.

•             First Quartile Cash Cost Producer: In 2013, Alamos was producing gold at an industry leading total cost of $496 per ounce of gold. In 2014, the Total Cash Cost is estimated to increase to $700 due to a decrease in grade, higher strip ratio and addition of underground mining. Even with this change the company is moving from a lower cost to a mid-tier cost producer in our estimation.

•             Permitting Issues in Turkey: Last August, the company’s environmental-impact assessment (EIA) was approved for Kirazli. The EIA for Agi Dagi is currently under review. In January 2014, Turkish Court issued an injunction, requiring an impact study considering other projects in the region. The company does not expect the injunction to significantly alter the development timeline for the project.

•             Reserve Growth: Through a number of accretive acquisitions Alamos managed to grow its resource from 4.5 million ounces of gold in 2008 to 12 million ounces in 2012. The most recent acquisition was of the Esperanza property. This increased their resource by 29% and has the potential to grow production in Mexico by more than 50%.

•             Robust Balance Sheet: Alamos has $475 million in cash and no debt on their balance sheet. The company also pays a $0.10/ share dividend. This capital will allow the company to self-finance the majority of upcoming CapEx without accessing the capital markets and diluting existing shareholders. This also allows the company to pick up beaten down assets with attractive economics. 

•             Growth Pipeline: Alamos owns three advanced stage development projects in Turkey, Mexico and the United States. All the properties are projected are expected to generated strong returns at the current gold price.

  • Disciplined Management: The team, led by John McCluskey, has a track record of executing on only high value opportunities. In 2013, the company closed two acquisitions, Orsa Ventures and Esperanza Resources. Esperanza Resources was acquired for $69 million or a 38% premium to their 30 day VWAP. The two acquisitions added, 3.9 million ounces and were accretive to the company’s valuation. Another example of discipline is when Alamos walked away from Aurizon Mining bid when Hecla came with a very rich offer as opposed to engaging in a value destructive bidding war (from the view of Alamos shareholder). 


The Company

Alamos Gold Inc. (TSX: AGI) is a Canadian mid-tier gold producer involved in the acquisition, exploration, development and production of gold and silver. It has a portfolio of mining assets including the flagship Mulatos mine and other satellite fields in Mexico, Agi Dagi, Kirazli and Çamyurt gold development projects in Turkey, recently acquired 100% owned Esperanza Gold Project in Mexico and Quartz Mountain Gold Project in Oregon, USA. The company is in production stage and generated $282 million in revenue and $39 million profit from the sale of 198,198 ounces of gold. The company trades on Toronto Stock Exchange (TSX: AGI) and New York Stock Exchange (NYSE: AGI).

Reserves and Resources

The proved and probable reserve and Measured and Indicated resources data for the company are provided below:

Proven And Probable Reserves 
Area Tonnes (000s) Grade
(g/t Au)
Contained Oz
Mulatos Mine 59,683 0.9 1,728,059
UG Reserve 1,169 5.04 189,663
Existing stockpiles 3,721 1.9 227,364
La Yaqui 1,574 1.58 79,826
Cerro Pelon 2,673 1.64 140,525
Total 68,820 1.07 2,365,437

Measured and Indicated Mineral Resources 

Area Tonnes (000s) Grade
(g/t Au)
(g/t Ag)
Contained Au Oz Contained Ag Oz
Mulatos 78,235 0.99 0.00 2,481,018 0.00
San Carlos UG 433 4.55 0.00 63,294 0.00
El Realito 1,200 1.35 0.00 52,020 0.00
Carricito 1,915 0.76 0.00 46,944 0.00
Esperanza 50,336 0.91 9.9 1,473,437 16,014,769
Total       4,116,713 16,014,769
Agi Dagi 93,944 0.56 3.56 1,698,975 10,762,590
Kirazli 32,330 0.71 8.61 738,914 8,953,576
Çamyurt 0        
Total 126,274 0.6 4.86 2,437,889 19,716,166



  Mexican Tax Reform
In December 2013, the Mexican government approved the new tax reform (effective January 1, 2014). Some of the important aspects of the tax reforms are:
  • The tax rate has been raised to 30%.
  • 10% withholding tax on dividend is now payable for the non-residents.
  • A new Extraordinary Mining Royalty of 0.5% on gross revenue is now applicable.
  • A new Special Mining Tax of 7.5% on EBITDA is now applicable (only exploration and prospecting costs are deductible).
  • The Extraordinary Mining Royalty and special mining tax are deductible for income tax purpose.
Effect on Company
This new tax reform put immediate tax burden (the company recognized $9.8 million non-cash deferred tax expense in 2013) and will negatively impact the profitability of the company. Over time as the company moves to contract mining the impact can be mitigated to some extent as the mining tax is applied to EBITDA.  So companies like Alamos have an incentive to shift capex to opex and contract mining can help in achieving this.   
Core Areas

Mulatos, Mexico
The Mulatos mine is located in Salamandra group of concessions, Sonora State, Mexico. It is an open pit mine and is producing since 2006. By the end of 2013, the mine has produced approximately 1.25 million ounces of gold. As at December 31, 2012, the company has proven and probable reserves of 2.4 million oz of gold in 68.8 million tonnes of ore at an average grade of 1.07 grams per ton of gold (g/t Au).Expansion plans
  • Underground mining: In 2014, the company plans to commence underground mining along with open pit mining to extract higher grade ore. The company is targeting Escondida Deep (~11,700 oz) and San Carlos (177,900 oz), both underground mining and high grade (5.04 g/t Au). The reserves are sufficient to ramp up the production by over 35,000 ounces (after recovery) for four year starting in 2014.
  • Cerro Pelon & La Yaqui Satellite Projects: In 2016, the company plans to bring online its Cerro Pelon & La Yaqui Satellite Projects (combined reserve of 220,351 oz). The reserves are sufficient to ramp up the production by over 41,000 ounces (after recovery) for four year starting 2016.
Esperanza, Mexico
The company acquired 100% of the Esperanza Gold Project, Morelos State, Mexico in August 2013. The project is under development, has excellent infrastructure and has the potential to increase the production from Mexico by 50% with relatively low cash costs, low capital expenditure and low technical risk.The Esperanza gold mine contains 50.3 million tonnes ore grading 0.91 g/t Au and 9.9 g/t Ag in the Measured and Indicated category (~1.5 million oz of gold and 16 million oz of silver). The Preliminary Economic Assessment (PEA) study completed on Esperanza mine in 2011 outlines a six year mine life with annual production of 103,000 ounces gold and a total cash operating cost of $499 per ounce (net of by-product credit).  A third party has 3% royalty on production from this mine.
Agi Dagi and Kirazli, Turkey
The company acquired Agi Dagi and Kirazli gold project in 2010. The projects are located in Turkey and have excellent infrastructure such as paved roads, power lines, power grids, sea port etc in place.  The Agi Dagi and Kirazli mine contains 2.4 million ounces of gold and 19.7 million ounces of silver in measured and indicated category and 0.4 million contained ounces of gold and 3.3 million contained ounces of silver as inferred resources. The preliminary feasibility study estimates annual production of 166,000 ounces of gold for nine years (1.5 million ounces of gold total) at cash operating cost of $544 per ounces of gold (net of by-product credits).  Additionally, the company discovered Çamyurt project nearby Agi Dagi which has approximately 640,000 ounces of gold and 3.8 million ounces of silver in inferred category.
Quartz Mountain, U.S.
The company has right to earn 100% interest in the Quartz Mountain property, Oregon, United States. The project is under advanced exploration stage and has 2.85 million ounces of gold under inferred resource category. It is low cost and has low strip ratio.  The acquisition cost is $3.5 million and additionally the $3 million is due on completion of feasibility study. The project is also subject to 2% NSR or C$15 million upon successful permitting. 

Operational and Financial Overview


Year ended December 31, 2013

The company earned $282.2 million revenue (14% decline from 2012) by selling 198,198 ounces (0.3% increase from 2012) of gold and reported earning of $38.8 million or $0.30/share (67% decline in from 2012). The income statement incorporates a non cash, non-recurring deferred tax charge of $9.8 million (0.08/share) and charge associated with severance payments (also non-recurring) during transition to contract mining was $1.5 million ($0.01 per share).

The company increased its mill throughput to a record level to 17,900 in 2013 but the decrease in grade of gold ore, high strip ratio and addition of underground mine have offset this increase and caused the production to decline slightly to 190,000 ounces as compared to 200,000 ounces over the same period last year. The decrease in grade also caused the “total cash cost per ounce” to increase to $496/oz in 2013 from $438/oz in 2012. The company expects the gold grade to decrease further to 0.85 g/t Au in 2014 as compared to 1.07g/t Au in 2013 and as a result estimates the “Total Cash Cost” to mark up to ~$700-$740 in 2014 from $496 in 2013 (~45% increase).

Note: Total cash cost per ounce incorporates mining and processing cost plus royalty

Three Years Projection for Revenue and Gold Production

  2012 2013 2014 2015 2016
Revenue (million $) 329 282 233 398 451
Gold production (000s oz) 200 190 179 306 347

In the table above, the revenue decline from 2012 to 2014 is mainly due to the declining gold grade. Since 2014, the company will increase production from its underground reserves in Mulatos mine. The steep jump in revenue and gold production in 2015 is mainly due to improved gold grade and production addition from Kirazli project, Turkey. In 2016, we expect gold Production from Cerro Pelon & La Yaqui.

Liquidity and Capital Expenditure

As at December 31, 2013, the company has $417.5 million of cash & cash equivalent and short-term investments and $452,763 as working capital. The cash and investments of the company in 2013 increased by 15% from $364 million to $ 419,351 million primarily due to positive cash flow from operations.

For 2014, the company plans to spend $54.8 million in operating and development capital spending in Mexico, $11.3 million at the Esperanza Gold Project, and $4.8 million in Turkey. The total exploration spending is budgeted at ~19.0 million. The company has sufficient cash to meet these requirements and to further develop its undeveloped mines.

Capital Structure

The company has 127.4 million shares, 4.7 million options and 7.2 million warrants outstanding as in March 2014. Market capitalization is $1.46 billion, based on its share price of $11.47, as on March 12, 2014.


We have used the Net Asset Value (NAV) method to compute per share value of the company. Our valuation is based on the information provided in the Annual Information Report, Feasibility Studies of company’s assets, management discussion and Ubika Research’s analysis and assumptions.

In our valuation we have incorporated Mulatos Mine and its satellite fields “La Yaqui & Cerro Pelon”, Agi Dagi & Kirazli mines in Turkey and Esperanza Gold Project, Mexico.


Net Asset Value Breakdown
NPV per Project   $ Million   $/Share 
Mulatos Mine (at 5% discount rate) $607.54 $4.36
Esperanza Gold Project (at 5% discount rate) $110.98 $0.80
Agi Dagi Project (at 5% discount rate) $203.02 $1.46
Kirazli Project (at 5% discount rate) $184.26 $1.32
Unadjusted Net Asset Value $1,105.81 $7.94
Proceeds from Exercise of Options/Warrants $0.00 $0.00
Cash on hand (as at Dec 31, 2013) $419.35 $3.01
Total Cash $419.35 $3.01
LT Debt (as at Dec 31, 2013) $0.00 $0.00
Adjusted Net Asset Value ($ Million) $1,525.16 $10.95
Adjusted Net Asset Value (C$ Million) $1,677.67 $12.05

At 1.2x to NAV the stock should trade at ~$14, where as the stock closed at ~$10



The company has strong potential, but is exposed to certain risks due to the nature of its business. The following risk factors apply:

Fluctuation in gold price

Gold price is highly volatile in recent times, affected by several macro and micro economic factors. Any reduction in the gold price will reduce the profitability of the company and may render company’s reserves/resources economically unviable.

Changes in laws and regulations

Any unfavourable regulation in mining industry has a huge impact on company’s profitability. The recent tax reform in Mexico imposed new taxes on mining activities and immediately resulted in a non-cash deferred tax charge of $9.8 million.

Currency Risk

The company is based in Canada, has operations in Mexico and Turkey and its functional currency is US$. As a result it is exposed to four different currency fluctuation risks.

Technical Risks

Mineral exploration and development involves high risk, as not all properties can become commercially viable. The company has two other major projects under development, Esperanza and Agi Dagi and Kirazli. Although we do not foresee any challenges in the development of projects, unforeseen circumstances could delay development.

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.


Actual production results of the company -  is better than estimated by analysts  and production guidance causing a rerating of the stock
Better Actual Tax rate - when shift to contract mining gives market comfort that the tax rate won't be as high as anticipated by analysts.  Couple of quarters of lower tax rate will cause analysts to rerate the stock.
Any acquisition of an attractive project will boost the resource life.
Gold Price sentiment shift
Positive news from Turkey project on the judicial side leading to rerating of the stock based on future production growth
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