[Update] AuRico cuts 2012 production guidance

AuRico Gold (AUQ-T, AUQ-N) has revised its 2012 production guidance after a high turnover of workers at its Ocampo gold-silver mine in Mexico dragged down output in the second quarter.

The Toronto-based producer says the shortage of workers at Ocampo in Chihuahua State slowed down the underground development at the northeast mine and caused the developed ore inventories to dwindle.

During the second quarter, the underground mining at Ocampo averaged 1,613 tonnes per day grading 5.38 grams per tonne, a 30% drop in tonnage and a 13% increase in grade over the previous three months.

AuRico explains in a July 16 press release that because fewer tonnes were mined from the underground, the grade processed at the mill dropped as workers supplemented the mill feed with lower-grade ore from surface.

The mill churned out 37,579 gold eq. oz. at total cash costs of US$515 per oz.

Given the disappointing quarter, AuRico downgraded Ocampo’s 2012 guidance to 155,000-170,000 gold eq. oz. at cash costs of US$540-$570 per oz., from 180,000-200,000 gold eq. oz. at US$469-$495 per oz.

As a result, its company-wide guidance for the year decreased by 8% to 298,000 to 333,000 gold eq. oz., while cash costs rose 9% to US$497-$542 per oz.

On a July 17 conference call, AuRico’s president and CEO Rene Marion, who will be stepping down early September due to health reasons, explained the company first started experiencing the high turnover during the end of the first quarter. But, it wasn’t until May that the shortage of workers significantly impacted operations.

He adds the company lost some of its workforce to new mines starting up in the area, but to compensate has been recruiting and training new employees.

To date, he says AuRico has filled 90% of the previously open positions, including those of miners, supervisors and key management roles.

For the remainder of the year, the producer estimates it needs to increase underground development by 4,000 metres to allow ore inventories to return to targeted levels by early 2013. Marion says the company aims to engage contractors to support its accelerated underground development and to increase developed ore inventories.

“We expect that it may take several quarters to ramp-up to targeted underground development or mining rates at Ocampo, with downside risks remaining if the labour issues were to continue or worse,” Canaccord Genuity’s analyst Rahul Paul commented in a note.

On the call, AuRico’s management reiterated plans to ramp-up underground throughput at Ocampo to 3,000 tonnes per day starting in 2014.

The company estimates the cost of ore and waste development by contractors to be around US$10 million and expects to fall near the high end of its 2012 capex guidance for Ocampo.

The mid-tier producer saw lower production at its other Mexican mine, El Chanate, where it completed the sixth phase heap-leach expansion in late June. “Slightly behind schedule, thereby deferring a few thousand ounces into the third quarter,” Marion notes.

In the second quarter, El Chanate, located in Sonora State, generated 17,882 oz. gold at cash costs of US$432 per oz. Marion says ore is now under leach in phase six and should produce as guided.

At the Young-Davidson gold mine in northern Ontario, the company saw pre-commercial production of 11,950 gold oz., which fell below the anticipated 15,000 to 17,000 oz. range.

“Although Q2/12 production from Young Davidson was lower than guided to during the beginning of the year, the variance was largely expected since management had previously indicated that lower grade material would be used during the pre-commercial stage,” indicates Paul in the note.

The company outlines that it has completed mechanical commissioning of the flotation and gravity circuits required to put Young Davidson into commercial production. As a result, it anticipates mill recoveries to reach the targeted 90% level in the third quarter, up from the second quarter’s average recoveries of 82%.

AuRico’s management says Young-Davidson, which started up on April 30, is on track hit commercial production in August.

The mine is slated to produce 65,000 to 75,000 gold oz. at US$450-$550 per oz. in 2012.

However, the company cautions capex at Young-Davidson for the year is set to increase by US$40 million because of EPCM construction costs, which includes US$13 million in labour costs and US$27 million in materials or scope changes.

For the second quarter, AuRico’s core three assets produced a combined 51,101 gold oz. and 894,414 silver oz. or 67, 411 gold eq. oz., which is slightly below consensus.  

As a result, Rahul of Canaccord cut his target by US$4 to US$8 and reduced the stock’s rating to hold from buy, while National Bank Financial analyst Paolo Lostritto maintained his $9 per share target and sector perform rating.

In a separate press release, the company announced CEO Marion, is resigning due to a serious but non-life threatening illness. He will be replaced by Scott Perry, the current vice-president and CFO, effective Sept. 3.  

Marion has been at the helm of the company for five years and he and his team have transformed AuRico into a sizeable mid-tier producer with a low cost production profile.

Most notably, he led AuRico’s acquisitions of Northgate Minerals and Capital Gold, which added the Young-Davidson and the El Chanate mines, as well as he sold off the company’s high-cost, non-core assets, the company’s chairman Colin Berner said on the recent call.

Though Marion will be resigning to focus on his health, he will remain on the board as a strategic advisor.

Most analysts note while Marion’s departure is unfortunate, they consider Perry as a good fit to take on the lead role.

Prior to joining AuRico as CFO in 2008, Perry worked as the CFO for Highland Gold Mining (HGM-L) and has also held senior roles at Barrick Gold (ABX-T, ABX-N). 

On the news of Marion’s resignation, AuRico tumbled 13% to close July 17 at $6.60 in Toronto, the next day the stock lost another 6% to end at $6.20.