lynn lake site tour shows glimpse of development pipeline
TRANSCRIPT
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Company Comment
Thursday, July 16, 2015, Pre-Market
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Alamos Gold Inc. (AGI-N US$4.50)
(AGI-T C$5.80)
Lynn Lake Site Tour Shows Glimpse of
Development Pipeline
Trevor Turnbull, MBA, MSc - (416) 863-7427 (Scotia Capital Inc. - Canada) [email protected]
Alex Watt, MBA - (416) 860-1429 (Scotia Capital Inc. - Canada)
Rating: Sector Perform Target 1-Yr: US$7.00 ROR 1-Yr: 56.2%
Valuation: 0.93x NAV
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Div. (NTM) $0.03
Div. (Curr.) $0.03
Yield (Curr.) 0.7%
Event
Pertinent Revisions
New Old
Adj. EPS15E $-0.15 $-0.14
Adj. EPS16E $-0.02 $-0.01 Adj. EPS17E $-0.03 $-0.02
■ We attended a site tour of the Lynn Lake Gold Camp in Manitoba hosted by Carlisle Goldfields (CGJ-TSX, not covered). Alamos holds a 25% interest in the project with the option to earn up to 60%.
Implications
■ Lynn Lake is a high grade, open pit gold project consisting of the MacLellan and Farley Lake deposits; past-producing mines from the 1980s and 1990s respectively. The current PEA filed by Carlisle yields an NPV at 5% of C$257 million for a 12-year mine life. Alamos acquired the 25% interest as part of the AuRico transaction.
■ The tour revealed Alamos' level of engagement on the project with a drill program in full swing and further studies being contemplated in the near term in support of a feasibility study. We also met with a former Chief of the local First Nations group who is a supporter of the project and is helping with local relations. The current timetable for the project includes a feasibility study in late-2016, start of construction in 2018, and first production in 2020.
■ Our NAV3% is relatively unchanged at $7.32 per share. Our Lynn Lake valuation is based on $15/oz for the 900,000 oz of gold-equivalent production that Alamos can earn into at 60%.
Recommendation
■ We maintain our Sector Perform.
Qtly Adj. EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization
Market Cap (M) $1,149 Net Debt + Pref. (M) $-19 Enterprise Value (M) $1,130 Shares O/S (M) 255
Float O/S (M) 255
ScotiaView Analyst Link
2013A $0.26 A $0.16 A $0.07 A $0.05 A $0.54 n.m. 2014A $0.04 A $0.01 A $0.00 A $0.02 A $0.07 n.m. 2015E $-0.02 A $-0.04 $-0.07 $-0.03 $-0.15 n.m. 2016E $-0.01 $0.00 $0.00 $0.00 $-0.02 n.m.
(FY-Dec.) 2013A 2014A 2015E 2016E 2017E
Adj Earnings/Share $0.54 $0.07 $-0.15 $-0.02 $-0.03 Price/Earnings n.m. n.m. n.m. Cash Flow/Share $0.89 $0.40 $0.29 $0.57 $0.82 Price/Cash Flow 15.7x 7.8x 5.5x EBITDA (M) $154 $54 $82 $185 $254 Production (oz) (000) 198.2 140.5 278.0 426.1 505.3 Tot. Cash Cost ($/oz) $496 $674 $799 $786 $729 All-In Sust. Cost ($/oz) $772 $948 $1,060 $1,075 $950
BVPS15E: $2.10 NAVPS: $7.32 P/NAV: 0.62x
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
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Exhibit 1 - Lynn Lake Gold Camp
Source: Carlisle Goldfields
Exhibit 3 - Lynn Lake General Project Information
Source: Carlisle Goldfields.
Exhibit 2 - Farley Lake Pit Shell and Historical Drilling
Source: Carlisle Goldfields.
Past-Producing Lynn Lake Gold Camp Offers Future Potential
■ Series of open-pittable projects headlined by two highly prospective deposits. The Lynn Lake Gold Camp is located in northern Manitoba and consists of five near-surface deposits, some of which are past-producing mines, surrounding the town of Lynn Lake.
■ The MacLellan Mine Project is a past-producer and one of the two deposits (along with Farley Lake) that was the subject of Carlisle’s 2014 preliminary economic assessment (PEA). Further discussion below.
■ The Farley Lake Mine Project is also a past-producing mine and part of Carlisle’s 2014 PEA. Further discussion below.
■ The Burnt Timber Project produced 78,000 oz from an open pit about 20 years ago. It contains 46,000 oz in the M&I category and a further 780,000 oz of inferred resources.
■ The Linkwood Project is located 4 km west of Burnt Timber and contains 37,000 oz of M&I resources and an additional 783,000 oz in the inferred category.
■ The Dunvegan Zone is a new zone located further west of Linkwood. It does not have any mineral resources defined at this time.
■ The MacLellan and Farley Lake deposits are the primary sites of the Lynn Lake Gold Camp. They are envisaged as feeding a joint mill and producing for 12 years.
■ MacLellan was an underground operation that was mined from 1986 to 1989; it has been on care and maintenance since mining ended. It consists of three separate deposits (Rainbow-Dot, MacLellan, and the Nisku) with the latter two being considered as the MacLellan mineralization.
■ Farley Lake was an open pit operation that was mined from 1996 to 1999; it has since undergone reclamation. The property is hosted in a Precambrian sedimentary iron formation with mineralization in discordant sulphide lenses.
■ February 2014 PEA yields an NPV of C$257 million (5% discount rate, $1,100/oz gold price, $18.33/oz silver price). The project is expected to produce 145,000 oz of gold annually for the 12-year mine life. Key financial parameters are shown in Exhibit 3.
■ Two-year construction period followed by 12-Year mine life. Initial capital is estimated at C$185 million, including C$35 million of contingency.
■ Mining: Conventional open pit mining is expected for the two pits. The higher grade ore from Farley Lake would be hauled roughly 34 km to the mill site located adjacent to MacLellan.
■ Milling: A two-stage construction phase for the mill is anticipated to double throughput from 3,750 tpd in years 1-4 to 7,500 tpd thereafter. The process would use a conventional crushing and grinding circuit followed by a gravity circuit (including intense cyanide leaching) to ultimately produce gold-silver doré.
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Exhibit 4 - Lynn Lake Main Road with Hydro Power Lines
Source: Scotiabank GBM.
Exhibit 5 - Outcrop at MacLellan (within the proposed pit shell)
Source: Scotiabank GBM.
Exhibit 6 - Previous Open Pits at Farley Lake (both within the proposed pit shell)
Source: Scotiabank GBM.
Site Tour Shows Alamos is Serious About this Project
■ Alamos is driving the infill drill program on Farley Lake and MacLellan in support of the pending feasibility study. There are 3 drills turning on site with about 25,000 meters drilled so far (including carry over from AuRico); roughly split between Farley Lake and MacLellan. Simultaneously, the joint venture is conducting a smaller scale regional exploration program throughout the belt region; any upside will benefit Alamos.
■ Outside of drilling, other feasibility study work is underway. These items include soil and overburden testing, environmental baseline studies, and community engagement. We interpret these actions, along with the aforementioned drilling, as indications of Alamos’ excitement about the project.
■ The “Gateway to the North” is well serviced by infrastructure. The town of Lynn Lake benefits from hosting past-producing mines and serves as a touch point for some ice roads further north. Existing infrastructure includes:
■ Airport with a 5,000 foot runway that is serviced by the federal government and capable of handling large planes (e.g., 737’s).
■ Fully paved highway into town and out to the site line. From the highway into site are dirt roads that will need improvement for modern mining operations. We would expect widening and resurfacing with gravel.
■ Power lines servicing the entire area. However, lines into site will need to be reconnected to the grid. Hydro power in the province is incredibly cheap at less than $0.03/kWh and will be a major contributor to lowering cash costs once in production.
■ A railroad that could be used for bringing in some equipment later in the process.
■ Alamos and Carlisle completed an exploration agreement with the Marcel Colomb First Nation in Q1/15. Additionally, discussions were held with various local stakeholders in both Lynn Lake and Winnipeg. We believe these relations are benefitting from the support of a former Chief of the Marcel Colomb First Nation who was on the tour.
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Exhibit 7 - Asset-Based NAV Breakdown for Alamos
Source: Scotiabank GBM estimates.
Young-Davidson, 55%
Mulatos, 19%
El Chanate, 10%
Turkey, 13%
Lynn Lake JV, 1%
Esperanza, 3%
Alamos Can Increase Its Interest to 60% for Relatively Minimal Funding
■ The Lynn Lake interest was acquired by Alamos as part of its AuRico transaction. Recall that in late-2014 AuRico completed a private placement with Carlisle (AuRico invested C$5.6 million for 19.9% of the shares outstanding) and acquired a 25% interest in the Lynn Lake project for C$5 million. This ownership stake and project interest now belong to Alamos, who is the project operator and has controlling representation on the management committee.
■ We assume Alamos will fund the C$20 million requirement and earn the full 60% interest in the project. AuRico’s guidance for 2015 had been to spend $5 million to $10 million this year on exploratory drill programs at Lynn Lake; we continue that assumption in our Alamos model and assume the remainder is spent over the 2016 and 2017 timeframe.
■ We value Alamos’ Lynn Lake interest at $13.5 million (1% of our asset-based NAV). Our valuation is based on a per-oz methodology whereby we ascribe $15/oz to the 900,000 oz of gold-equivalent production that Alamos can earn into upon reaching the full 60% interest. We like the longer term potential that these deposits provide Alamos with, but at this stage we don’t view it as a core asset.
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Exhibit 8 - Operating and Financial Parameters
Source: Company reports; Scotiabank GBM estimates.
Ratio Analysis 2014A 2015E 2016E 2017E 2014A 2015E 2016E 2017E
Net Income (US$mm) ($2) ($29) ($6) ($7) Average share price (US$) $7.00 $7.00 $7.00 $7.00
Net Income Adjusted (US$mm) $8 ($33) ($6) ($7) S/O (mm) - Basic 127.4 191.3 255.3 255.3
EPS (f.d.) (US$/sh) ($0.02) ($0.11) ($0.02) ($0.03) Realized gold price (US$/oz) $1,266 $1,210 $1,300 $1,300
P/E (x) n.m. n.m. n.m. n.m. Spot gold price (US$/oz) $1,266 $1,210 $1,300 $1,300
Operating CF bf. ch. in WC (US$mm) $51 $63 $152 $217 Mine Gold Production and Costs
CFPS bf. ch. in WC (US$/sh) $0.40 $0.29 $0.57 $0.82 Mulatos ('000 oz) 141 154 150 179
P/CF (bf. ch. in WC) (x) 11.4x 15.7x 7.8x 5.5x Young-Davidson ('000 oz) - 91 205 233
Dividend ($/sh) $0.20 $0.06 $0.06 $0.06 El Chanate ('000 oz) - 33 71 93
Dividend Yield 2.86% 0.86% 0.86% 0.86% Turkey ('000 oz) - - - -
Income Statement Items (US$mm) Total Production ('000 oz) 141 278 426 580
Total Revenue $170 $337 $554 $657 Total Cash Costs (US$/oz) $674 $799 $786 $729
Operating Costs ($160) ($354) ($532) ($633) All-in Sustaining Costs (US$/oz) $948 $1060 $1075 $950
Exploration and Corporate Exp. ($6) ($12) ($8) ($8)
Depreciation ($43) ($92) ($154) ($224)
Interest Expense $1 $13 $25 $25
Other - gain (loss) $50 $111 $171 $239
EBITDA $54 $82 $185 $254
EBIT $11 ($10) $31 $31
EBT $12 $4 $56 $55
Taxes - recovery (expense) ($3) ($5) ($6) ($7)
Effective Tax Rate 26% 24% 1834% -1567%
Reported Net Earnings ($2) ($29) ($6) ($7)
Reported EPS (f.d.) (US$/sh) ($0.02) ($0.11) ($0.02) ($0.03)
Adjusted EPS (f.d.) (US$/sh) $0.07 ($0.15) ($0.02) ($0.03)
Cash Flow Statement Items (US$mm)
Net Earnings ($2) ($29) ($6) ($7)
Depreciation $43 $92 $154 $224
Deferred Taxes $1 $0 - -
Other $9 ($1) $4 -
Operating CF bf. ch. in WC $51 $63 $152 $217 Additional Ratio Analysis 2014A 2015E 2016E 2017E
CF from Operating Activities $33 $58 $152 $217 Gross Margin 1.9 2.1 2.0 2.0
CF from Financing Activities ($29) $44 ($15) ($15) ROE (0%) (5%) (1%) (1%)
CAPEX ($59) ($112) ($215) ($260) ROA (0%) (3%) (1%) (1%)
CF from Investing Activities ($57) ($118) ($215) ($260) EV/EBITDA (x) 5.2x 10.3x 6.5x 5.0x
Net Change in Cash ($53) ($16) ($79) ($59) NAV Analysis
CFPS bf. ch. in WC (f.d.) (US$/sh) $0.40 $0.29 $0.57 $0.82 Mining Assets (US$mm) US$M US$/Sh %
Balance Sheet Items (US$mm) Young-Davidson (3% discount rate) $1,123 $4.40 60%
Cash $353 $336 $257 $198 Mulatos (3% discount rate) $390 $1.53 21%
Current Assets $445 $422 $343 $285 El Chanate (3% discount rate) $196 $0.77 11%
Long-term Assets $435 $476 $537 $574 Turkey (3% discount rate) $257 $1.01 14%
Total Assets $880 $898 $880 $858 Exploration Assets $13 $0.05 1%
Dividends Payable - - - - Esperanza $51 $0.20 3%
Current Liabilities $33 $40 $38 $37 Total Assets $2,031 $7.96 109%
Long-term Debt $63 $323 $318 $317 Net Cash $19 $0.08 1%
Total Liabilities $96 $363 $356 $354 Working Capital (Net of cash and short term debt) $60 $0.23 3%
Shareholder's Equity $783 $535 $524 $504 Equity Investments $9 $0.03 0%
Total Liabilities & Shareholder's Equity $880 $898 $880 $858 In-the-money Instruments $0 $0.00 0%
Working Capital $411 $382 $305 $247 G&A, Expl, Reclamation ($251) ($0.98) -13%
Mine Reserves and Resources Net Asset Value: $1,868 $7.32 100%
Gold Reserves (mm oz) 6.2 Target Multiple 0.93x
Gold M&I Resources (mm oz) 9.1 Target Price $7.00
$400
$600
$800
$1,000
$1,200
-
200
400
600
800
2014A 2015E 2016E 2017E 2018E
Cash
Co
sts
(U
S$/o
z)
Go
ld P
rod
uc
tio
n (
ko
z)
Young-Davidson ('000 oz) Mulatos ('000 oz)
El Chanate ('000 oz) Turkey ('000 oz)
Total Cash Costs (US$/oz) All-in Sustaining Costs (US$/oz)
ScotiaView Analyst Link
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Appendix A: Important Disclosures
Company Ticker Disclosures (see legend below)*
Alamos Gold Inc. AGI VS318
I, Trevor Turnbull, certify that (1) the views expressed in this report in connection with securities or issuers that I analyze accurately reflect my personal views and (2) no part of my compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by me in this report.
This research report was prepared by employees of Scotia Capital Inc. and/or its affiliates who have the title of Analyst.
All pricing of securities in reports is based on the closing price of the securities’ principal marketplace on the night before the publication date, unless otherwise explicitly stated.
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The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall profitability of Scotiabank, Global Banking and Markets and the revenues generated from its various departments, including investment banking. Furthermore, the research analyst’s compensation is charged as an expense to various Scotiabank, Global Banking and Markets departments, including investment banking. Research Analysts may not receive compensation from the companies they cover.
Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to NASD Rule 2711 restrictions on communications with subject company, public appearances and trading securities held by the analysts.
For Scotiabank, Global Banking and Markets Research analyst standards and disclosure policies, please visit gbm.scotiabank.com/disclosures.
Scotiabank, Global Banking and Markets Research, 40 King Street West, 33rd Floor, Toronto, Ontario, M5H 1H1.
* Legend
VS318 Our Research Associate visited Lynn Lake, a mine under development, on June 23, 2015. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
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Numbers are located to the left of the lines they represent.
Numbers indicated with a plus sign (+) have more than one target or rating change in the
given month.
Alamos Gold Inc. (AGI)
# Date Closing
Price Rating
Target-
1YR
1 13-Jul-12 C$ND Sector Outperform 25.00
2 18-Oct-12 C$ND Sector Outperform *24.00
3 9-Jan-13 C$ND Sector Outperform *23.00
4 20-Mar-13 C$ND Sector Outperform *22.00
5 8-Jul-13 C$ND Sector Outperform *19.00
26-Jul-13 C$ND *Focus Stock 19.00
6 13-Aug-13 US$ND Focus Stock *19.00
7 30-Sep-13 US$ND *Sector Outperform 19.00
8 1-Nov-13 US$ND Sector Outperform *18.00
9 17-Jan-14 US$ND Sector Outperform *13.00
24-Jan-14 US$ND *Sector Perform *11.00
10 24-Feb-14 US$ND Sector Perform *9.00
11 31-Mar-14 US$ND *Sector Underperform *8.00
12 1-Apr-14 US$ND Sector Underperform *7.00
13 1-Aug-14 US$ND *Sector Perform *7.50
14 20-Oct-14 US$ND Sector Perform *7.25
15 12-Jan-15 US$ND Sector Perform *7.00
23-Jan-15 US$ND Sector Perform *6.50
16 14-Apr-15 US$ND Restricted
17 7-Jul-15 US$4.95 Sector Perform *7.00
* represents the value(s) that has changed.
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