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2019-10-14 21:47:06

Alamos Gold (AGI) shares have had a great run in 2019, starting the year around the $3.50 level and climbing above $7.50 in early August. Just like stocks of many other miners, Alamos Gold shares started a correction after such an upside. However, this correction turned into a real downtrend, which is now reinforced with fresh news - Alamos Gold had to suspend construction activities at its Kirazli project in Turkey, as its Turkish mining concessions have expired on October 13, 2019.

Alamos Gold bumped at problems at Kirazli in August, when the mine was the target of protesters who argued that the company cut down more trees than it promised and that the cyanide used in the technological process would contaminate the water in the region. Interestingly, the company had the following comment regarding the delay in mining concession renewal for the project:

The company has met all the regulatory requirements and conditions for the concessions to be renewed and reasonably expected the renewal by the expiration date. The communities local to the Kirazli project remain supportive .

It remains to be seen whether communities local to the project are as supportive as Alamos Gold believes they are. At first glance, the August protests and the delay of mining concession look directly connected to each other. I'd note that the company used the description communities local to the Kirazli project, which may be a signal (just a speculation at this point, of course) that the real problem lies outside the area that is most close to the project. Hopefully, the company will shed more light on this issue when it reports its third-quarter results on October 30, 2019, after the market close.

Due to this unexpected delay, Alamos Gold had to push its estimate of initial production from Kirazli to the right:

Given the uncertainty around the timing of the concession renewal, initial production from Kirazli has been delayed from previous guidance of late 2020. The company will provide updated guidance on the construction schedule and budget for Kirazli following the receipt of the concession renewal and resumption of construction activities .

During the latest earnings call, Alamos Gold stated that Kirazli would take the company's consolidated production to about 600,000 ounces of gold in 2021 (production guidance for 2019 is 480,000-520,000 ounces) and push costs down. The company expected to spend about $50 million on Kirazli in the second half of 2019 and $70-80 million in 2020. Obviously, the timing and the size of these investments are now under question until the company receives the mining concessions.

Financially, Alamos Gold is in a good shape with $183 million of cash on the balance sheet and no debt at the end of the second quarter. The upside in the price of gold is very timely indeed as Alamos Gold goes through a period of elevated capital spending. In the second quarter, the company had operating cash flows of $72 million and capital spending of $72 million - a perfect match. While current problems at Kirazli will not have a negative impact on the company's near-term financials, the risk of losing the mine (or getting dragged into some multi-year legal battle) will continue to put pressure on Alamos Gold shares. Turkey's activity on the geopolitical front (the country might be facing U.S. sanctions following its actions in Syria) does not help either - it is likely that companies with assets in the region will face some discounts regardless of whether their assets are troubled or not.

At this point, the near-term negative catalysts have lined up for Alamos Gold - something is going on with a major project in Turkey, the country itself may be facing sanctions from the U.S., gold took a pause around $1,500 per ounce and lacks near-term upside momentum, all while the company's shares breached a material support level and continue to trend down. Fundamentally, Alamos Gold has a solid balance sheet and several potential catalysts for 2020 - initial production at Cerro Pelon (a satellite to the active Mulatos mine) and completion of lower mine expansion at Young-Davidson. However, any positive results from these potential catalysts will be seen in the next year, while the problems at Kirazli are visible right now. In these circumstances, it's hard to expect any material upside in Alamos Gold shares before the earnings call when management will have a chance to explain the situation to investors. This time, it will definitely be a very interesting report, so stay tuned!

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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seekingalpha.com Vladimir Zernov
gold alamos kirazli company have problems turkey project 2019 trend current shares

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