Alamos shares punished over disappointing results

Alamos Gold (TSX:AGI; NY0SE:AGI) shares continue to slide on the back of disappointing 2014 production results from its Mulatos gold mine in Sonora, Mexico.

Quarterly production from the company’s sole producing mine came in at 42,500 oz. gold, bringing full year output to 140,500 oz. gold, missing the low end of the 2014 guidance of 150,000 oz.

John McCluskey, Alamos’ president and CEO, admits 2014 was a “challenging year” as it transitioned between orebodies at Mulatos. While it started underground mining at the San Carlos deposit in the third quarter, the slower-than-expected commissioning of the upgraded mill circuit lowered production in the fourth quarter. Not helping matters was the severe rain, which affected the processing of the deferred leach pad production from the third quarter. Alamos expects to recover those ounces in the first quarter of 2015.  

Phil Russo, an analyst at Raymond James, says Alamos’ fourth quarter and full year production were respectively 13% and 4% below his estimates.

Last year, Alamos experienced lower mill throughput due to equipment delays. This affected the processing of the high-grade San Carlos ore. 

While the mill operated at targeted throughput rates in December, recoveries were still below the budgeted 75%. (The recovery ratio in the fourth quarter was 74% and averaged 65% in 2014.)

Two factors impacting recoveries were the large grind size of the Carlos ore and reduced concentrate processing due to capacity constraints at the intensive leach reactor (ILR).

Alamos is currently working to reduce the grind size, and should install a second ILR by the end of February.

BMO analyst Brian Quast notes the firm has been struggling with commissioning at the San Carlos underground operation. While the problem is “fixable,” he estimates it should take at least six months to solve. “Indeed, AGI is currently evaluating the need for additional equipment as part of the solution. Timing and costs are currently unknown.”

Meanwhile, Alamos forecasts 2014 total cash costs to come within the target range of US$700 to US$740 per oz., compared with an average analyst estimate of US$679 per oz.

Full year revenue was US$169.9 million, down 40% from a year ago, as the miner sold fewer ounces and at a lower realized gold price.

The prospects for this year appear flat. The company, which says it’s focusing on the long-term viability of the Mulatos operation and not short-term profits, forecasts 2015 production of 150,000 to 170,000 oz. Total cash costs are estimated at US$865 per oz. and all-in sustaining costs at US$1,100 per oz. Analysts on average had expected 160,000 oz. at total cash costs of US$702 per oz. this year.

The higher costs, Alamos says, are due to an increased strip ratio of 1.27-to-1, longer haul distances from the new El Victor and San Carlos pits, and lower budgeted grade for the leach pad of 0.80 gram gold.   

“A transitional year in 2014 appears set to continue at the commencement of 2015 as a combination of lower recoveries, higher strip [ratio] and elevated input costs drive Mulatos’ break-even cash flow point higher this year — a notable change from recent years,” Raymond James’ Russo writes.  

Alamos is also sorting through permitting obstacles at its Kirazli and Agi Dagi gold projects in Turkey. It expects a ruling from the Turkish High Administrative Court regarding Kirazli’s environmental impact assessment (EIA) within three to four months.

Russo has trimmed his price target to US$10.50 from US$11.75, and rates the stock as a “market perform.” BMO’s Quast has lowered his target by $1.50 to $12 per share, but maintains an “outperform” rating.

Alamos shares recently closed at $6.94, down 28.5% since the company released its 2014 results on Jan. 22. It has US$360 million in cash and no debt.