Is It Time for Investors to Buy Alamos Gold?

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Source: Thinkstock

Source: Thinkstock

So far, 2014 has been a very good year for gold and gold mining equities more generally.

  • The SPDR Gold Trust (NYSEARCA:GLD), which tracks the price of gold, is up nearly 7 percent year-to-date.
  • The Market Vectors Gold Miner ETF (NYSEARCA:GDX), which is comprised of the world’s largest gold miners, is up nearly 14 percent year-to-date.
  • The Market Vectors Junior Gold Miner ETF (NYSEARCA:GDXJ), which is comprised of smaller gold miners– usually companies with one or two mines — is up nearly 19 percent year-to-date.

However, not every gold miner has performed well. Alamos Gold (AGI) has fallen more than 17 percent year-to-date. The irony of this is that this was one of the better performing gold mining stocks in 2013. Alamos stood out as a company that was producing gold inexpensively. It was paying a dividend, it had a large cash position, and it had a pipeline of projects that would allow the company to expand production and keep its costs down. This is why investors were willing to pay well over $1 billion with production at just under 200,000 ounces.

All of this is still true except for the low costs. Alamos saw its effective cost of production soar in the fourth-quarter, and as a result, it actually reported a loss. This generated investor disappointment; wouldn’t you be upset if you paid a premium for one of the few gold miners that was able to make money in the downturn only to find that its costs have soared and that its profits are vanishing? Investors expressed this disappointment by selling off Alamos shares.

Now, however, might be a good time for contrarian investors to consider taking a position. While you might be hesitant to put your money in a quality gold mining stock that has risen 20 percent or 25 percent on the year, you may be more willing to buy a stock at a discount such as Alamos Gold.

Unfortunately, the company will likely not be able to bring costs back down to the extremely low levels we saw when the shares were in demand back in 2013. Still, the company predicts costs will come in at $1,000/ounce at the high end before taxes at its Mulatos mine. That means it can generate about $20 million in post-cash tax flow at $1,300/ounce gold.

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