Alamos Gold Inc.

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. The Young-Davidson mine is the group's largest revenue contributor.

Key highlights

• Completion of lower mine expansion at Young-Davidson: The Company completed its lower mine expansion at Young-Davidson and commissioned Northgate shaft successfully. In Q3 2020, mining rates increased to 6,700 tpd and the group expected to ramp up to 7,500 tpd by the end of 2020, driving strong free cash flow growth.
• Debt-free balance sheet along with significant liquidity:At the end of Q3 2020, the Company maintained its strong liquidity position with USD 274.1 million of cash and cash equivalents and USD 400.0 million with its revolving facility out of total USD 500 million. The Company repaid the USD 100.0 million drawn on its revolving facility in October 2020 and became debt-free. The group believes to fund its growth initiatives from internal sources on the back of strong cash flows.

Source: Company

• Record cash flow from operating activities: In Q3 2020, the company generated record cash flow from the operation of USD 130.8 million, against USD 80 million in Q32019. Free cash flows were USD 76 million as compared to USD 2 million in the previous corresponding period.

Source: Company Filing

• Increase in dividend income:In Q3 2020, the Company declared and paid a dividend of USD0.015 per share. The group announced a 33% increase in its dividend to an annual rate of USD0.08 with next quarterly dividend to be paid in December 2020.

Financial overview of Q3 2020 (stated in millions of United States dollars)

Source: Company Filing

• In Q3 2020, the Company sold 116,035 ounces of gold and generated revenue of USD 218.4 million, an increase of 26% against USD 173 million in Q3 2019, based on higher realized gold prices.
• Cost of sales decreased by 4% to USD 122.6 million in Q3 2020, compared to USD 127.3 million in Q3 2019, mainly driven by lower mining and processing costs at Island Gold and Young-Davidson.
• The Company recognized earnings from operations of USD 88.0 million, 135% higher against USD 37.5 million in Q3 2019, based on improved operating margins driven by an increase in realized gold prices and a reduction in total cash costs.
• In Q3 2020, the company reported net earnings of USD 67.9 million, against USD 17.7 million in Q3 2019.

Risks associated with investment

The Company’s financial performance is mostly dependent on gold prices, which directly affects its profitability and cash flow. The price of gold is subject to volatility which is affected by numerous factors, such as the strength of the US dollar, supply and demand, interest rates, and inflation rates, all of which are beyond the Company’s control.

Valuation Methodology (Illustrative): Price to Cash Flow

(Note: All forecasted figures and peers have been taken from Thomson Reuters)

Stock recommendation

Q3 2020 is a transformational quarter for the company as it came out with the robust performance, strong cash position, zero debt, increase in dividend and Completion of lower mine expansion at Young-Davidson. All these factors give a glimpse of strong foundations led by the company. We are bullish on the gold prices and believe that despite a little pullback, gold, as an asset class would continue to remain in the limelight as uncertainty over the global economic growth is still prevailing. We believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansions. Therefore, based on the above rationale and valuation, we have given a ‘Buy’ rating at the closing price of CAD 11.78 as on November 16, 2020, with a lower double-digit upside potential. We have considered New Gold Inc, Kirkland Lake Gold Ltd, Eldorado Gold Corp etc. as the peer group for the comparison.

1-Year Price Chart Source: Refinitiv (Thomson Reuters)

Kirkland Lake Gold Ltd

Kirkland Lake Gold Ltd (TSX: KL) is a Canada-based gold mining and exploration company which has a diversified portfolio of exploration projects. The production profile of the group includes Macassa mine situated in northeastern Ontario and the Fosterville gold mine located in the State of Victoria, Australia. 

Key Highlights:

• Robust Return to Shareholders: The company has delivered a strong return to shareholders over the years, aided by impressive cash flow growth from the company’s operations. During FY20, the company repurchased 14,029,500 shares till date, at a price consideration of USD 526.6 million. As far as the dividend payment is concerned, the Board of Directors has increased its Q4FY20 dividend to USD 0.1875 per share from USD 0.125 per share in Q4FY19, which is commendable. Notably, the company has returned more than USD 200 million annually to its shareholders.

Historical Trends showing Return to Shareholders (Source: Company Reports)

• Re-issued guidance: The company reported a strong gold outlook for FY20 and expects its annual production at around 1,350 ozs to 1,400 ozs, looks impressive. Operating cash costs are expected at USD 410/oz to USD 430/oz.

Source: Company Presentations

Q3FY20 Financial Highlights:

• KL announced its quarterly results, wherein the company posted an impressive revenue growth at USD 632.843 million compared to USD 381.430 million in pcp. The increase was driven by higher gold sales of 331,959 oz, as compared to 256,276 oz in the previous corresponding period (pcp).
• Earnings from mine operations stood at USD 388.632 million, significantly higher than USD 255.644 million in pcp, thanks to the solid revenue growth, partially offset by a higher production costs and royalty expense.
• Operating cash costs stood at USD 406/oz, as compared to USD 287 million in pcp.    

Source: Company Presentations

• Earnings from operations stood at USD 319.550 million, higher than USD 238.647 million in Q3FY19, partially offset by an increase in general and administrative costs, higher care and maintenance expense and additional rehabilitation costs amounting USD 32.626 million.
• Net earnings stood higher at USD 202.022 million compared to USD 176.604 million in Q3FY19.                  

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s topline is correlated to the gold prices. Any volatility in the gold priecs would affect the group’s performance.

Valuation Methodology: EV/EBITDA Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The company has shown strong operational metrics in the recent past and posted Free cash flow of USD 500.639 million in 9MFY20, significantly higher than USD 330.186 million, a year ago, which reflects operational resilience. Further, the company has strong balance sheet with zero debt, which is commendable. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Alamos Gold Inc, B2Gold Corp and Wesdome Gold Mines Ltd, etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 57.58 on November 16, 2020.

KL daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.