Alamos Gold Inc. (TSX: AGI) is a Canada based gold producer which operates in Canada and Mexico. The company has three operating mines, the Young-Davidson Mine in Canada and the Mulatos and El Chanate Mines in Sonora, Mexico.

Key highlights

• Healthy cash flow from operating activities: In FY 2021, the company generated cash flow from the operation, before changes in working capital at USD 411 million increased by 7.3%, against USD 383 million in the previous corresponding period. This higher number was on the back of higher realized gold prices and more ounces sold, in the reported period.

                                   Source: Company Presentation

• Production guidance for 2022: The Company continues to deliver its key objectives and remains well positioned to meet full year guidance. For FY2022, the management highlighted strong production growth and expects to be in a range of 440,000 to 480,000 ounces of gold, a 5% increase from 2021 achieved numbers. Furthermore, they expect lower costs with total cash cost to be in a range of USD 875 to USD 925 per ounce.

Source: Company Filing

• Three-year outlook – expanding profitability: The company foresee to increase its production in next 3 years, on the back of La Yaqui Grande to drive production higher in 2023, while the higher grades at Island Gold would support stable production into 2024. Moreover, the group also aims to expand its profitability by curtailing the cash cost and capital expenditures on the sequential basis, which is a key positive.

Source: Company Presentation

Risks associated with the investment

The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance.

Financial overview of FY 2021 (In mn of USD)

Source: Company Filing

• The company’s reported operating revenue increased by 10% to USD 823.6 million in FY2021, compared to USD 748.1 million in pcp, primarily the back of higher realized gold prices and more ounces sold.
• In the reported period the cost of sales increased to USD 534.1 million, against USD 482.0 million in pcp. Primarily on account of higher gold production which pushed the mining cost by 9.7% to USD 351.5 million in FY2021 vs USD 312.6 million in pcp.
• On the back of impairment cost of USD 224.3 million in FY2021, the company reported decline in its earnings from operation at USD 14.9, compared to USD 227.6 million in pcp.
• Primarily due to above stated reason the company reported net loss of USD 66.7 million in FY 2021, against a net profit of USD 144.2 million in pcp.

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Stock recommendation

In the fourth quarter, the company's Canadian operations performed well, resulting in a better end to 2021 and reaching the revised full-year output and cost projections. Young-Davidson mine experienced a record year in terms of mining rates and free cash flow, while Island Gold mine continued to advance the Phase III development, balancing the temporary issues at Mulatos mine.

Additionally, the business anticipates meeting the 2022 goals, all of which support the company's long-term goal of increasing production at significantly lower costs, which would expand its profitability.

Therefore, based on the above rationales and valuation, we recommend a "Hold" rating on the stock at the at the last closing price of CAD 10.60 as on April 05, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 05, 2022). Source: REFINITIV, Analysis by Kalkine Group

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