Alamos Gold: Firing On All Cylinders (NYSE:AGI)

We’re more than two thirds of the way through the Q4 earnings season for the Gold Miners Index (GDX) and it’s been a decent quarter overall. For starters, most producers enjoyed average realized gold prices at or above $1,970/oz, and while we have seen mixed results from a margin standpoint because of sticky inflationary pressures, the forward outlook is significantly better for Q1 as these companies prepare to lap an average realized gold price of ~$1,890/oz in Q1 2023 with a 7-8% higher gold price (quarter-to-date average gold price: ~$2,040/oz). However, despite the improved outlook and near record gold prices, the GDX has found itself ~20% from its recent highs, with its worst start to the year since 2021. And if there’s any silver lining, the last time we saw a 5% plus decline in January and February in 2021 (typically two best months of the year), the index came roaring back with a 30% gain over the next 60 trading days.

Fortunately, investors in Alamos Gold (NYSE:AGI) have side-stepped the arduous multi-year correction, with Alamos massively outperforming its peer group given its solid execution across the board. This included significant free cash flow generation in 2023 despite being in an investment phase at Island P3+, another year of meaningful reserve growth at its flagship Island Gold Mine, and another year of per share growth across several metrics which is ultimately what is most important to investors. In this update we’ll dig into the FY2023 results, recent developments, and why Alamos is a staple for any precious metals portfolio and a name worth accumulating on sharp pullbacks.

Q4 and FY2023 Results

Alamos Gold (“Alamos”) released its Q4 and FY2023 results last month, reporting quarterly production of ~129,500 ounces of gold at all-in sustaining costs [AISC] of $1,233/oz. This represented a 3% decline in production year-over-year with a softer quarter in Q4 from Island Gold, but this was largely because of being up against difficult comparisons from the prior year period. In fact, Island Gold was lapping a near-record quarter with ~40,600 ounces produced in Q4 2022 because of elevated grades (12.16 grams per tonne of gold). On a positive note, Alamos still crushed its FY2023 guidance of 500,000 ounces of gold, beating its guidance midpoint by ~6% with record annual gold production of 529,300 ounces. Notably, this was the second consecutive beat vs. its annual guidance midpoint, and AISC came in less than 1% above its guidance midpoint despite headwinds from:

• Sticky inflationary pressures, primarily labor
• Persistent strength in the Mexican Peso partially offset by currency hedges
• Unplanned downtime in Q2 from smoke related to wildfires in Northern Ontario and weather related power outages

Looking at the annual results on an annual gold production, gold production per share, operating cash flow and cash flow per share basis, it also was a strong year for Alamos with records across the board. For starters, annual gold production beat its previous record at 529,300 ounces, gold production per share remained near record levels despite significant organic growth in the pipeline (Island P3+, Lynn Lake), and operating cash flow hit a new all-time high at $518.9 million before working capital or $1.31 per share. These impressive results allowed Alamos to finish the year with ~$225 million in net cash up from ~$130 million in the year-ago period, and nearly $750 million in liquidity, providing it with flexibility to maintain a strong balance sheet in its investment phase over the next two years as it expands Island Gold into a much larger operation (~300,000+ ounces of gold per year at ~$700/oz all-in sustaining costs when adjusting for inflationary pressures).

Digging into the operations a little closer, the standout performer in 2023 was the Mulatos Complex with a phenomenal year from its new La Yaqui Grande [LYG] Mine, which produced ~212,800 ounces, a 58% increase from the year-ago period at significantly lower costs ($967/oz vs. $1,241/oz). Notably, this was achieved despite an abnormally strong Mexican Peso and higher sustaining capital spend year-over-year, with the operation stacking ~3.94 million tonnes at 1.55 grams per tonne of gold vs. ~2.15 million tonnes at 1.38 grams per tonne of gold in the year-ago period. And while Alamos saw positive grade reconciliation, which contributed to higher grades, recoveries were below the annual budget at 78% (FY2022: 71%) with the higher grade ore stacked late in the year, meaning it will be recovered this year. As for 2024, the asset will lap tough comparisons, but FY2024 production is expected to be 165,000 ounces at $1,025/oz AISC per the guidance midpoint, still a very solid year with costs miles below the industry average.

Moving to Young-Davidson, it was another strong year for the Ontario mine with ~185,100 ounces of gold produced, albeit down from ~192,200 ounces in the year-ago period. During the year, Young-Davidson processed ~2.88 million tonnes at 2.20 grams per tonne of gold, translating to higher throughput vs. the ~2.86 million tonnes at 2.31 grams per tonne of gold in the year-ago period. And while mining rates were lower in Q4 because of maintenance on the headframe ore bin apron feeder, mining rates were up year-over-year to ~7,900 tonnes per day, while AISC were up year-over-year to $1,208/oz. Despite the higher costs (inflationary pressures plus lower gold sales), the mine generated a record $117.6 million of mine site free cash flow, marking its third consecutive year of $100+ million in mine site free cash flow and 2024 certainly looks like it will be a record if the gold price can continue holding above $2,000/oz.

Finally, Island Gold had a decent year with ~131,400 ounces of gold produced (FY2022: ~133,700 ounces) at all-in sustaining costs of $1,017/oz vs. $918/oz in FY2022. The lower production was related to a decline in throughput and grades to ~439,000 tonnes at 9.48 grams per tonne (FY2022: ~457,000 tonnes at 9.64 grams per tonne of gold) offset by higher recoveries of 97%. Alamos noted that higher costs were related to inflationary pressures (primarily labor) and also was impacted by sustaining capital being up 20% year-over-year. Still, any mine operating at ~$1,000/oz AISC is doing phenomenal in this environment and 2024 will be a far better year with expectations for 152,500 ounces produced at $900/oz at the midpoint. Besides, as those that follow Island Gold know, this is an asset that’s going to be producing ~300,000 ounces at ~$650/oz AISC in 2027, so what the mine is doing last year or this year is hardly a reflection of its true potential to be one of the highest margin mines globally post-2026.

Costs and Margins

Moving over to costs and margins, Alamos reported Q4 AISC of $1,233/oz, an 8% increase from the year-ago period. Fortunately, this was more than offset by a higher average realized gold price of $1,974/oz, resulting in revenue of $254.6 million and AISC margins of $741/oz (38%) vs. $603/oz (35%) in the year-ago period. On a full-year basis, all-in sustaining costs came in just above its guidance midpoint at $1,160/oz and actually declined 4% year-over-year on the back of a monster year from Mulatos and solid cost control relative to its peer group. This resulted in AISC margins of $784/oz (40%) vs. $595/oz (33%) due to the higher average realized gold price of $1,944/oz and it’s certainly looking like AISC margins could improve to ~$900/oz this year if the gold price can continue cooperate based on its FY2024 guidance of $1,150/oz and the fact that Alamos is generally one of the most conservative producers when it comes to guidance.

Looking at the company’s financial results above, Alamos generated $14.4 million in free cash flow in Q4 despite a significant increase in capital expenditures related to Island Gold P3+ where the company spent ~$178 million in growth capital for the year. Meanwhile, annual operating cash flow came in at ~$473 million (~$519 million before working capital changes), while free cash flow was positive at ~$124 million, a very impressive result given the elevated capital expenditures in 2023 (~$349 million vs. ~$314 million). And despite a higher budget in 2023 as Island Gold spending increases further, the company should see another year of meaningful free cash flow generation, helping it to maintain its pristine balance sheet.

Recent Developments

As for recent developments, Alamos noted that shaft sinking began in December at its Island Gold Mine and that paste plant detailed engineering is 75% complete after the company came off a busy year with ~$300 million of a $756 million budget now spent on the P3+ Expansion. For those unfamiliar, this expansion will increase annual production by over 220% from FY2023 levels to ~300,000 ounces per annum with what I expect to be an optimized mine plan given the addition of high-grade resources/reserves near existing infrastructure from its continued exploration success. And speaking of exploration success, Alamos delivered one of the 50 best intercepts that I’m aware of on a gram-meter over the past 15-plus years shown in the below chart, intercepting 2.90 meters at ~1,390 grams per tonne of gold (4,030 gram-meters) in an unknown zone at Island East, just 12 meters from existing infrastructure. Notably, this was in addition to other impressive intercepts at Island West up plunge of reserves/resources like 2.38 meters at 106.04 grams per tonne of gold.

Not surprisingly, the company’s continued exploration success at Island led to another year of reserve growth at this high-grade Ontario mine, with ~260,000 ounces added net of depletion, bringing Island’s total reserve base to ~1.73 million ounces at 10.3 grams per tonne of gold. However, the exceptional results didn’t just come from Island Main, with the company stepping out regionally and hitting 0.67 meters at 3,441 grams per tonne of gold at its Pine Zone target, in addition to separate intercepts of 9.31 meters at 29.77 grams per tonne of gold and 4.06 meters at 79.44 grams per tonne gold. These results continue to affirm that Island is one of the best deposits globally not held by a major when it’s hitting 300 – 2,000 gram-meter gold intercepts that some companies would kill for outside of its main zone that already has a top-10 reserve base by grade globally.

Lastly, outside of Island Gold, Alamos had a solid year at Mulatos with nearly 1.0 million ounces of gold reserves at PDA which should help to extend the mine life here. And while not as high-grade as PDA, Alamos has hit several impressive intercepts at the Capulin target with hits like 82.45 meters at 2.01 grams per tonne of gold, 120.9 meters at 2.73 grams per tonne of gold, and 13.8 meters at 1.0 gram per tonne of gold, an oxide and sulphide target just northeast of the Mulatos Mine. This asset is truly the property that keeps on giving, with it already having generated over $500 million in free cash flow, it looking like it could extend its mine life into the 2030s with PDA and having been acquired for a song for just $10 million two decades ago.

The final point worth noting is that while Alamos is expecting to see similar costs year-over-year, the gold price continues to be a nice tailwind from a margin standpoint and the technical setup certainly suggests that higher prices are likely here to stay. This is because past resistance levels appear to be morphing into new support, a positive sign that emboldens the view that a breakout is likely on deck sooner rather than later. In fact, gold continues to look very constructive as shown in the above chart, with a clear change in character as gold has given up ground grudgingly vs. past visits to the $1,970/oz level that saw immediate downside reversals. Plus, with Alamos likely to report an average realized gold price of $2,025/oz or better in Q1, we should see meaningful margin expansion year-over-year in Q1 with AISC margins likely to come in above $800/oz, a 10% plus increase vs. the $720/oz reported in Q1 2023.

Long-Term Outlook

Based on a current market cap of ~$4.67 billion and an enterprise value of ~$4.44 billion, some investors may not see meaningful upside in Alamos with it trading at a premium multiple to its peer group at over 8.5x FY2024 cash flow per share estimates. This is a premium to some of the larger producers in the sector today, and certainly one of the highest market caps among its peer group of 500,000 to 600,000 ounce per annum producers. However, it’s important to note that the FY2024 production profile (~510,000 ounce estimates at $1,150/oz AISC does not do Alamos justice), with the company capable of growing into an ~800,000 ounce per annum producer at sub $1,000/oz AISC with no any additional acquisitions. This would bring it closer to being a mini Agnico Eagle (AEM) with industry-leading costs and over 80% of production coming from Tier-1 ranked jurisdictions, and it’s one of the few producers that’s continuously grown its per share metrics with help from its capital discipline and very successful M&A track record.

This distinction as an organic growth story with a unique combination of production growth and significant margin expansion with a consistent track record of creating value for shareholders should allow Alamos to justify a premium, and why it trades where it does today. Just as importantly, it may not be evident today (P3+ construction still underway), but Alamos will be the proud owner of one the most profitable mines in Canada post-2025, with Island capable of producing 300,000 ounces per annum at ~$700/oz AISC, making this the current decade’s version of a mini Fosterville, another asset that earned its previous owner Kirkland Gold a massive premium. In summary, I don’t think Alamos is nearly as expensive as it might look relative to mid-tier peers when adjusting for per share growth and overall quality. In fact, I see it as a top-3 producer from a quality score standpoint sector-wide, and like Agnico Eagle, it need not only be owned by investors that want gold exposure, but also generalists as it’s simply a brilliantly run company that can thrive in any gold price environment.

So, how does it get to 800,000 ounces per annum?

As Alamos has discussed, the company is working to optimize its Lynn Lake Project in Manitoba to maintain a higher production rate for longer with the potential to maintain a ~10,000 ounce production rate over most of the mine life by displacing stockpiles with material from Linkwood and Burnt Timber. And while this is a 176,000 ounce per annum operation in the first two years, annual production in Year 2 and 3 is expected to average over 250,000 ounces. Meanwhile, the company has seen continued exploration at PDA, with reserves climbing to just shy of 1.0 ounces at a higher average grade of 5.61 grams per tonne of gold. So, with PDA likely able to extend Mulatos Complex production and Lynn Lake having the potential to move into production by H2 2027 on top of organic growth at Island Gold (2400 tonnes per day vs. 1,200 tonnes per day) and an optimized mine plan given exploration success here as well, 800,000 ounces looks quite doable in 2028, which would translate to over $450 million in annual free cash flow.

Summary

Alamos Gold continues to fire on all cylinders and there are few producers have come close to its consistency and track record, with the company being one of the few miners that surprises to the upside across multiple facets of its business. And given this track record, I would not be surprised to see Alamos produce closer to 515,000 ounces of gold in 2023 at industry-leading costs of $1,140/oz which would beat its FY2024 guidance midpoint of 505,000 ounces at $1,150/oz. So, for investors looking for leverage to gold without the headaches from companies that consistently under-deliver like First Majestic (AG) and Coeur Mining (CDE), I see Alamos as a solid buy-the-dip candidate and I would view sharp pullbacks as buying opportunities.