0816gold.jpg

Alamos Gold completes AuRico takeover, but risk remains

Alamos Gold Inc. a week ago completed its purchase of AuRico Gold Inc., an offer that makes it a mid-tier gold producer. Alamos presently has much greater scale, which should help it withstand a rough gold price environment. An optimistic re-rating from investors can also be possible.

However, the combined company faces numerous challenges, TD Securities analyst Steven Green said.

Most significantly, he noted that Alamos has relatively high operating costs, with estimated all-in sustaining costs in excess of US$1,000 an ounce in 2016. That\’s above most of its mid-tier peers, and Green expects the company’s Young-Davidson and Mulatos mines will operate at near to breakeven at current metal prices.

One of the strengths of Alamos is its nutritious balance sheet. But Green noted the organization will be spending much of its war chest on ramping up the Young-Davidson mine, as well as advancing its Lynn Lake project in Canada and numerous projects in Turkey.

“At spot metal prices, we expect the organization to generate negative free cash flow for the next two years, and potentially longer depending on the timing of Turkey,” he explained in a note.

The biggest catalyst for the company is the Young-Davidson mine. Alamos expects to accomplish the production ramp-up by 2017, but Green thinks there is still lots of execution risk.

Put it all up, and he thinks the share price of the “new” Alamos is fully valued. He maintained a hold rating and cut his target price to $8.50 a share (from $9).