Alamos Gold steady as she goes (October 28, 2005)

Alamos Gold (AGI-T) has built a solid reputation by simply following through on what it says it will do.

As a small Toronto-based producer with mining assets in northwestern Mexico, the company has managed to draw the attention of the Street and expand its operations as its shares continue on an overall upward trend.

Company shares have consistently traded between $4.00 and $5.00 since July. A steady 2-year gain from the $1.00-range they were trading in during the summer of 2003.

Alamos president and chief executive John McCluskey explains his company’s steady growth in plain terms.

“I don’t think there’s a magic formula,” McCluskey says, “we’ve had a very simple business plan.”

That plan revolves around quickly establishing cash flow from operations, expanding those operations, and then building resources and reserves.

Alamos has thus far been following the plan to a tee.

Construction of the crusher-conveyor system at the Mulatos gold project will be completed in December and will allow for what the company says will be 150,000 oz. gold per year for 10 years.

Those numbers are based on ore deposits at the Estrella open-pit mine, where measured and indicated resources stand at 36 million tonnes grading 1.6 grams gold per tonne for roughly 1.4 million oz. gold. Ore from Estrella is already being heap-leached – though not yet at commercial levels.

But Alamos isn’t content with sitting on its reserves. The company has been aggressively drilling off other parts of its wholly owned concession.

The El Salto and Mina Vieja development program is in its final stage of resource and reserve estimation. Twenty-six drill holes were recently added to the project to trace extensions to mineralization. An Oct. 19 release says mineral blocks are currently being defined and results are “expected shortly.”

McCluskey, however, is most optimistic about inadvertent drill results from the Escondida and El Victor zones.

Potential landslides and highly fractured material resulted in Alamos deciding to drill a drift – a 1.7-km-long tunnel — from which underground drilling could be launched. The drift was built for pragmatic reasons, not as an exploration hole, but the “muck” taken from it was tested and revealed an average grade of 1 gram of gold per tonne.

“We drilled in a straight line, we weren’t twisting and turning trying to follow an ore zone,” McCluskey explains. “The implications are that there is a very consistent mineralization.”

While there is currently only one drill rig on-site, McCluskey says there will be three by the end of the year, and a fourth added in 2006, with the intention of drilling off a resource.

“Even with three rigs we could have all the drilling in Escondida completed by the end of the first quarter (2006),” McCluskey says.

Thus far a ventilation hole drilled from surface through a tabular high-grade zone overlying the underground development drift returned 12.2 grams gold per tonne over 10.67 metres.

These promising signs, combined with Alamos’ reputation of reliability, has caught the eye of Bay Street.

The most bullish coverage comes from Scotia Capital analyst Michael Durose who, on Sept. 13, issued a report rating Alamos as a “sector outperform” with a 12-month target of $6.50.

Durose wrote: “There is aboveaverage potential to expand the existing gold reserve and increase production rate at Mulatos.” He went on to say that a 700,000 oz. increase in recoverable gold reserves and a doubling of the mining rate at Mulatos are “assumed.”

Another analyst, Paul Burchell of Dundee Securities, writes in an August report that Alamos is one of the “most predictable companies that we follow…it has consistently met expectations throughout the development of the Mulatos deposits.”

At the time of the report, Burchell had Alamos rated as sector under-perform with a target of $4.10, citing the premium at which Alamos’ shares were trading relative to its peers.

Since then, Burchell has raised his recommendation to “neutral” and set a target of $4.60.

Burchell says the turn came as a result of both a more bullish take on long-term commodity prices, and his belief that Alamos can increase production. While Alamos currently estimates production at 10,000 tonnes of ore per day, Burchell says Alamos can take that number to 15,000 tonnes per day by 2009.