Alamos Gold Inc (TSX: AGI) is a Canada based intermediate gold producer with diversified production from three operating mines in North America. This includes the Young-Davidson and Island Gold mines in northern Ontario, Canada and the Mulatos mine in Sonora State, Mexico. Additionally, the company has a significant portfolio of development stage projects in Canada, Mexico, Turkey, and the United States. Alamos employs more than 1,700 people and is committed to the highest standards of sustainable development.

Investment Rationale

• Solid Start to 2021, 14% Production growth in Q1FY20 on a YoY basis: The group had a strong start to 2021 with gold production exceeding guidance for the first quarter ended March 31, 2021. Canadian operations performed particularly well, with Young-Davidson ramping up to record mining rates, and there was yet another quarterly production record at Island Gold. Production of 125,800 ounces of gold was above the top end of quarterly guidance and 14% higher from the first quarter of 2020. Young-Davidson produced 48,000 ounces of gold, and Island Gold produced a record 42,200 ounces of gold.

• Continue to Generate Solid Free Cash Flow: During the first quarter of Q1FY20, the group generated a free cash flow of USD 9.9 million, a 75% increase compared to the first quarter of 2020. This was largely driven by the solid run-up in the yellow metal price in 2020, which led to an increase in the average realization prices and strong margin expansion. Average gold realized prices jumped by 14% on a YoY basis and led to achieve higher operating revenue of USD 227.4 million as compared to USD 176.9 million in the same period of the previous financial year. The prudent cost management helped to generate a higher free cash flow and bolster the overall financial health of the company. 

• Industry Leading Margin Profile: The company reported margin in the first quarter of 2021 had surpassed the industry median, with EBITDA margin significantly higher at 53.4% and Net Margin featuring at 22.5%, significantly higher when compared to industry media. The shows competitive advantage of AIG over its peers.

Source: Refinitiv (Thomson Reuters)

• Strong Financial Risk Profile: Financial risk profile continued to remain strong, with a healthy expected net worth in fiscal 2021, with zero debt in the balance sheet at the end of Q1FY21, and robust debt protection metrics with TTM cash accruals of USD 411.1 million. Going forward, debt is likely to remain zero as it has substantial reserves to fund future growth and expansion through internal accruals.

• Strong Liquidity: Alamos Gold Inc has a strong liquidity profile on account of healthy expected cash accruals and robust debt protection metrics. Cash accruals expected to remain higher on account of higher underlying commodity prices and would be adequate for moderate capex. The current ratio is robust at 3.67x and also improved from 3.22x recorded in the previous quarter. The company has a cash position of USD 238.2 million at the end of Q1FY20.

• Rewarding Shareholder through Higher Dividend and Share Buyback: The Company expects to generate strong ongoing free cash flow while funding its high return growth initiatives and supporting the recently increased dividend. The group is also rewarding its shareholders amid favorable industry dynamics and paid a quarterly dividend of USD 9.8 million, or USD 0.025 per share in Q1FY21 (annualized rate of USD 0.10 per share), representing a 25% increase from the previous quarter. The group repurchased 200,262 common shares at the cost of USD 1.5 million, or USD 7.35 per share (CAD 9.48), under the Company's Normal Course Issuer Bid.

• Phase III Expansion Study at Island Gold (Ontario, Canada) Posed Well for Future Growth: On July 14, 2020, the company reported results of the positive Phase III expansion study conducted on its Island Gold mine. Based on the results of the study, the company is proceeding with an expansion of the operation to 2,000 tpd. The Phase III expansion is expected to drive the average annual gold production to 236,000 ounces per year starting in 2025 upon completion of the shaft, representing a 70% increase from 2020 production. This would also reduce total cash costs to an average of USD 403 per ounce and mine-site all-in sustaining costs to USD 534 per ounce starting in 2025.

• Stable Outlook: Alamos Gold Inc is expected to achieve healthy revenue growth over the medium term on the back of higher commodity prices, improving business risk profile, higher gold production, and higher gold realization prices. Also, the financial risk profile is likely to remain robust in the near term.

• Risk Associated to Investment: The company's business is significantly exposed to the volatility in the gold prices. Further inherent risks associated with mining and mineral processing such as the company's mines may not perform as planned; uncertainty with the company's ability to secure additional capital to execute its business plans; the speculative nature of mineral exploration and development, including the risks of obtaining and maintaining necessary licenses and permits, including the necessary licenses, permits, authorizations and/or approvals from the appropriate regulatory authorities.

Financial Highlights: Q1FY21

Source: Company Filing

• First quarter revenues of USD 86.1 million were 88% higher than the prior year quarter, reflecting both a higher realized gold price and increased ounces sold. Sales in the prior year quarter were impacted by the temporary shutdown of the Northgate shaft to complete the lower mine expansion, which commenced in February of 2020.
• Total cash costs of USD 873 per ounce and mine-site AISC of USD 1,075 per ounce were 20% and 13% lower, respectively, compared to the comparative period in 2020, driven by higher throughput and higher grades mined.
• During the quarter under review, Production of 125,800 ounces of gold was above the top end of quarterly guidance and 14% higher from the first quarter of 2020, driven by significantly higher production at Young-Davidson and another record quarter at Island Gold.
• In the same quarter, the company generated cash flow from operating activities of USD 99.3 million (USD 119.6 million, or USD 0.30 per share, before changes in working capital, a 75% increase compared to the first quarter of 2020.
• Island Gold achieved another record in the first quarter, producing 42,200 ounces. This represents a 9% increase from the comparative period in 2020, reflecting higher grades mined and processed.
• The group reported realized adjusted net earnings of USD 49.1 million, or USD 0.13 per share, which includes adjustments for unrealized foreign exchange gains of USD 2.3 million, recorded within deferred taxes and foreign exchange, and other one-time losses of USD 0.2 million. Adjusted net earnings increased 67% compared to the first quarter of 2020.
• The company ended the quarter with cash and cash equivalents of USD 238.2 million and equity securities of USD 26.7 million.
• The company reported year end 2020 Mineral Reserves of 9.9 million ounces, up from 9.7 million ounces at the end of 2019 with additions at Island Gold, Young-Davidson and Lynn Lake more than offsetting mining depletion. This included an 8% increase in Mineral Reserves, as well as a 40% increase in Inferred Mineral Resources at Island Gold, for a combined increase of 1.0 million ounces.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 35.89% of the total shareholding. Van Eck Associates Corporation and BlackRock Investment Management (UK) Ltd. holds the maximum interests in the company at 11.41% and 5.92%, respectively.  The institutional ownership in “AGI” stood at 71.15%, and ownership of the strategic entities stood at 0.30%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The group had a solid start to the year, beating the gold production guidance in the first quarter along with a total cash cost of USD 757 per ounce and all-in sustaining costs of USD 1,030 per ounce. The costs were in line with guidance. This was driven by particularly strong performances at Island Gold, which set another quarterly record for production and Young-Davidson, which exceeded its targeted underground mining rates, achieving a new record. Further, the group remained well-positioned to meet the full-year production and cost guidance.

Also, Grades mined are expected to increase through the year. This, along with higher mining rates, is expected to drive production higher and cost lower in the second half of 2021. Higher production, lower costs, and lower capital spending are all expected to contribute to a record mine-site free cash flow of more than USD 100 million from Young-Davidson in 2021.

Moreover, Alamos Gold Inc is expected to achieve healthy revenue growth over the medium term on the back of higher commodity prices and improving business risk profile, higher gold production, and higher gold realization prices. The company has a strong balance sheet with zero debt and expects to fund its capex by internal accruals.

The company enjoys a competitive advantage within the industry with an industry-leading margin profile and robust financial risk profile. The company is also rewarding its shareholder through higher dividend payment.

Therefore, based on the above rationale and valuation, we recommend a “Buy" rating on the stock at the closing price of CAD 10.29 on May 12, 2021.

Technical Price Chart (as on May 12, 2021). Source: Refinitiv

*Recommendation is valid at May 13, 2021 price as well.

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