Alamos Gold: Quality Small-Cap Miner Has Upside
Gold mining stocks have had a good run over the past six months as inflation reared its ugly head and geopolitical conflict ramped up to crisis levels. These issues have not gone away and gold may have continued tailwinds, which will benefit gold mining stocks. Alamos Gold Inc. (NYSE:AGI) is a quality small-cap gold mining company. Based in Canada, the company is engaged in gold exploration, development and mining. It has three key producing assets: the Young-Davidson and Island mines located in Ontario, Canada and Mulatos in Sonora, Mexico.
Alamos Gold was formed in 2003 through the merger of Alamos Minerals and National Gold. It currently has a market capitalization of $3 billion.
Operating mines
The Young-Davidson mine is a low-cost, long-life operation and one of Canadas largest underground gold mines. The mine has a large mineral reserve base and strong ongoing free cash flow generation and is a key source of growth for Alamos. 2022 guidance for this particular mine is production in the range of 185,000 to 200,000 ounces of gold and all-in sustaining costs of approximately $1,150 per ounce.
The Island Gold mine is one of Canadas highest-grade and lowest-cost gold mines. Through ongoing exploration success, its mineral reserves and resources have continued to grow. This has supported a multi-phase expansion of the operation, driving production higher, costs lower and strong free cash flow growth. 2022 guidance for this mine is production in the range of 125,000 to 135,000 ounces of gold with all-in sustaining costs of approximately $875 per ounce.
The Mulatos mine in Sonora, Mexico is the companys founding operation. It was acquired for $10 million in 2003 and started producing gold in 2005. It has produced over 2 million ounces of gold and generated more than $400 million in free cash flow since then. Mulatos remains a solid gold producer and significant cash flow generator with strong exploration potential. 2022 guidance for this mine is production in the range of 130,000 to 145,000 ounces of gold with all-in sustaining costs of approximately $1,350 per ounce.
The company also has developmental mine projects in Lynn Lake, Canada, three exploration opportunities in Turkey and an interest in a potential project at Quartz Mountain in Oregon.
Gold
2022 has seen the highest level of inflation in over 40 years. The U.S. Labor Department report came out in early April and showed an inflation rate of 8.5% in March. Largely driven by government liquidity and other supply chain issues, investors are seeking protection from these rising prices. Physical gold as well as gold mining equities are often seen as a primary hedge against inflation.
The gold standard was often utilized in monetary policy in the U.S. and other countries off and on since the 1870s. But in 1971, this concept was abandoned for a fiat or paper currency that stands today. Gold is still considered a rare element and a precious metal that has been used for currency, jewelry and other industrial uses for thousands of years.
Cryptocurrencies such as bitcoin were once thought to be an inflation hedge and perhaps as a substitute for gold. Yet that concept has not come to fruition in any meaningful way as bitcoin prices are off 44% from their 2021 highs.
Gold prices rose to over $2,000 per ounce in August 2020 due to government stimulus ramped up to fight the negative effects of the Covid-19 pandemic. The price eventually retreated to below $1,700 as the worst of the pandemic faded away, only to be followed by rampant inflation and global military conflict. This briefly spiked gold prices to over $2,000 again and have recently traded in the $1,900 range.
Financial review
The company reported first-quarter results that were largely in line with expectations. The miner reported 98,900 ounces of gold were produced, which created revenue of $184.5 million. The Young-Davidson mine is responsible for just over half of that production. Free cash flow was negative in the quarter based on operating cash flow of $46.5 million and capital expenditures of $87.3 million.
The company maintains a strong balance sheet and is one of the few gold miners with no long-term debt. Cash balances as of March 31 totaled $124 million with an additional $22 million in equity securities that are classified as short term.
Valuation
The companys guidance calls for 460,000 ounces of gold production at the midpoint of the outlook range. With total company cash costs of approximately $900 per ounce, the company should generate strong operating cash flow in 2022. Even with levels of capital expenditures, Alamos should generate free cash flow this year.
The company is currently trading 1.16 times book value per share and 0.95 times net asset value. Gold miners have typically traded in a range 1 to 3 times net asset value. Small-cap gold producers typically trade at the lower end of the range.
Guru trades
Gurus who have recently added to their Alamos Gold positions include First Eagle Investment (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies. Gurus who have reduced their positions include Chuck Royce (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Conclusion
Alamos Gold is trading 16% below its 52-week highs despite ongoing inflation issues and no major reductions in geopolitical conflict, particularly the Russia-Ukraine war. Additionally, the recent surge in the U.S. dollar has kept gold prices stable as the two usually trade inversely. The dollar strength may not continue. In addition, as a well-managed, debt-free small-cap gold miner with valuable long-term mining assets, Alamos would make a great acquisition candidate.
This article first appeared on GuruFocus.
