Alamos Gold hit by heavy rains during Q3

VANCOUVER — It’s the rainy season in Mexico, and that’s not great news for producer Alamos Gold (TSX: AGI; NYSE: AGI) at its wholly owned Mulatos heap-leach mine, 220 km east of Hermosillo in Sonora state. On Oct. 23 the company released its third-quarter results, which were affected by “sharply lower recoveries” owing to severe rainfall.

During the quarter Alamos cranked out 28,000 oz. gold, or 35% less than in the same period in 2013 when the company produced 43,000 oz. gold. Rainfall hit a new record in September, which contributed to dilution of the gold-bearing solution on the leach pad, thereby deferring a significant part of production to the fourth quarter.

Alamos benefitted from higher grades during the quarter, with ore stacked on leach pads averaging 1.08 grams gold per tonne, which is 27% higher than annual guidance of 0.85 gram gold. Despite the lower recovery ratio caused by the heavy rains, contained ounces stacked to the leach pad of 51,900 oz. in the quarter were the year’s highest. All-in sustaining costs were up at US$1,148 per oz., however, which is a 42% jump from the same period in 2013.

Not surprisingly, Alamos’ operating margins were weighed down by the lower production, as well as weaker gold prices. The company recorded a loss before taxes of US$3.7 million, or 3¢ per share during the quarter, compared to earnings of US$15 million, or 12¢ per share in the third quarter of 2013. The realized gold price was down US$45 at US$1,284 per oz.

“Despite the difficult conditions, we delivered a solid quarter, operationally, with strong crusher throughput and higher-than-budgeted grades,” president and CEO John McCluskey noted during a conference call. “Our third quarter coincides with the rainy season in Mexico, and this year was more severe than most. On top of above average rainfall through July and August, we were impacted by the residual effects of two hurricanes late in the season, leading to record levels precipitation in September.”

Alamos reported cash from operating activities of US$10 million, or 8¢ per share, and ended the quarter with US$375 million in cash and equivalents. The company announced a semi-annual dividend of 10¢ per share payable at the end of October, which means it has returned over US$102 million to shareholders over the past four years.

Meanwhile, Alamos spent US$11 million on development in Mexico during the quarter, with a focus on the San Carlos high-grade underground deposit. The company advanced 600 metres during the period, with total development to date pegged at 1,050 metres.

Alamos is developing three primary headings to support mining stopes. The mill began processing ore from San Carlos at the beginning of October. The company is targeting 500 tonnes per day from the underground deposit by year-end.

“We’re more comfortable in what we’re seeing underground, and also what the mills can do,” McCluskey added. “We’ll be ramping-up the high-grade production from San Carlos through the fourth quarter, and combined with the deferred production from the leach pad, we expect a significant improvement moving forward.”

BMO Capital Markets analyst Brian Quast — who has a stock “outperform” rating on Alamos — dropped his price target by $1 to US$13.50 per share after the news. Quast wrote on Oct. 23 that “results for the quarter were generally in line with BMO Research expectations. [Fourth-quarter] production should be much stronger, as [the company] stacked 52,000 oz. gold and shocked the leach pad with extra cyanide after the rainy season, which should significantly enhance recoveries.”

Alamos has traded within a 52-week range of $8.58 to $17.06, and closed down 4.4%, or 42¢ after its quarterly report, en route to a $9.14-per-share close. The company has 127.4 million shares outstanding for a $1.2-billion market capitalization.