Should we be buyers of Alamos Gold ($AGI)?

Bill Cara

A mining analyst who knows I hold a position in Alamos wrote to me as follows:<blockquote>Bill,

I took a shot at the AGI earnings projection for 2020. We will have a better read on production and costs after the financial release on April 29. But, in the interim, here are my views.

The average Q1 London gold price close was about $US1580/oz so that should be close to AGI receipts in Q1. I adjusted for production suspensions in March at Island Gold. Suspensions at both Mulatos and Island Gold mines were announced in April. At this time, I am not aware of suspensions at Young-Davidson, but this may yet occur.

AGI realized an average gold price of $US1381/oz in 2019. If the current price of $US1710/oz is maintained for the rest of the year, AGI could average $US1674/oz in 2020, which is an increase of almost $300/oz.

The Company earned US$96.2 million (US$0.25/sh.) in 2019. I think they could come in somewhere in the region of US$140 million or US$0.31/sh. in 2020. It is still a tricky call because the Company to-date has not made guidance on any loss of production or cost of suspensions. This should come out in the Q1 financial report.

The GDX ETF P/E ratio is about 23x. Alamos has a trailing 12 months P/E of about 30x. However, this ratio has ranged between 24x-36x. Based on the GDX and AGI P/E ratios, a share price target range of CAD11.75-15.30 (USD8.35-10.85) is implied.

As a matter of conjecture, if the gold price were to maintain $2000/oz starting July 1, the AGI share price could range from CAD15.75-$20.50/share (USD11.20-14.55). Keep in mind that an exponential rise in the bullion price might imply a rapid inflationary cost-push. The earnings projection would not be linear. However, as diesel fuel is a major cost component, and the price is presently collapsing, that too will be a factor.

Alamo’s operations should look very good in 2021 as Young-Davidson production ramps up. In the coming years, the Company still has Turkey and Lynn Lake to come on stream.

I will refine the input data as the financials become available at the end of the month. I will also begin to look ahead at the 2021 financial outlook. Its a bit risky to estimate earnings during the suspension shutdowns. If the shutdowns last a month or more, the weekly costs may be significant. And there is no information on what the wages deal is with the miners.

In the meantime, amid bullion price volatility the share price represents excellent short-term trading opportunity and longer-term investment potential.

However, I believe the share price can advance from here particularly if the Price of Gold maintains its current level. The shares are sensitive to any +/- $40-$50/oz moves, which creates a good trading opportunity below CAD9.00 (USD6.40). A drop in bullion to $1500/oz will bring the shares under CAD8.00 (USD5.70).

Regardless of the bullion price, any investor panic for liquidity and subsequently forced selling in margin accounts could bring the share price down to even more attractive price levels. I would be looking to be a buyer on dips because the Price of Gold is likely headed much higher in 2021 and Alamos Gold is a well managed, stable producer.</blockquote>

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