Alamos Gold: Firing On All Cylinders (NYSE:AGI)

Last month, I covered Alamos Gold Inc. (NYSE:AGI), highlighting its impressive track record of growing resources/reserves methodically, with its most recent acquisition setting up material reserve per share growth. However, equally impressive as its M&A track record that’s created enormous value for shareholders is its near flawless operational execution, with Q2-24 being no different.

In this update, we’ll dig into the Q2-24 results, recent developments, and why AGI continues to be one of only a handful of producers suitable for investment given its laser-focus on per share growth vs. growth for growth’s sake.

All figures are in United States Dollars unless otherwise noted. G/T = grams per tonne (of gold or silver). GEOs = gold-equivalent ounces. AISC refers to all-in sustaining costs.

Q2 Production & Sales

Alamos Gold released its Q2-24 results last month, reporting record quarterly gold production of ~139,100 ounces (ca. 5 t). This translated to a ~2% increase from the year-ago period, benefiting from the strongest quarter in over three years (Q2-21) at its flagship Island Gold Mine, which produced ~41,700 ounces (1.58 t). Not surprisingly, this translated to record financial results with the tailwind from a record gold price and another 50,000+ ounce quarter from its Mulatos Complex. Let’s take a closer look at the results below:

Starting with Alamos’ Young-Davidson Mine, production came in at ~44,000 ounces (1.66 t) of gold at all-in sustaining costs of $1,203/oz, a slight dip from ~45,200 ounces (1.71 t) produced at $1,212/oz AISC in the year-ago period. Lower production was related to slightly lower recoveries, which partially offset higher throughput and grades (~725,600 tonnes processed at 2.18 G/T of gold). As for overall mine contribution, Young-Davidson generated an impressive $40.1 million in mine-site free cash flow, up from $35.4 million in the year-ago period.

Looking at Young-Davidson’s H1-24 results, free cash flow is sitting at ~$54.7 million with two quarters to go, placing the mine on track to have another consecutive year of $100+ million in free cash flow. Alamos noted that the mine should benefit from higher grades in H2-24. There’s certainly reason to be optimistic about mined grades and growth in resource tonnes, with a new high-grade discovery made outside the syenite (which hosts the bulk of YD’s gold mineralization) directly south of existing infrastructure.

As for cost performance, Young-Davidson’s $1,203/oz AISC were slightly better than I expected, with inflationary pressures mostly offset by higher gold sales and lower sustaining capital year-over-year.

Moving to Alamos’ Island Gold Mine, production soared ~33% year-over-year to ~41,700 ounces (1.58 t) of gold. The significant increase in quarterly output was related to higher grades, which benefited from planned higher-grade zones and positive grade reconciliation (~92,700 tonnes processed at 14.39 G/T of gold vs. ~102,000 tonnes at 9.51 G/T of gold in Q2-23). As for the impressive Q2-24 results, Alamos shared it continues to mine in the high-grade 1025 mining horizons, but that the very welcome positive grade reconciliation has not been contained to just that high-grade zone.

“I mean there’s a high-grade complex at 1025 that we’re mining in. We’ll continue to mine there in the second half of the year. But I mean, the positive reconciliation we have seen has been not just specific to that high-grade zone, but some of the other areas that we’re mining with some of the other mining fronts as well.”

— Alamos Gold, Q2-24 Conference Call.

It’s also worth noting that this robust quarterly output was despite lower mining rates in the first half of Q2-24 (reduced haul truck availability in older units). Mining rates moved back towards annual guidance of 1,200 tonnes per day with the receipt of two new trucks before quarter-end. As for operating expenses, Island Gold reported industry-leading AISC of $805/oz in Q2-24 (Q2-23: $1,072/oz), lower year-over-year and benefiting from increased ounces sold, offset by inflationary pressures and higher sustaining capital. Given the phenomenal operational performance with Island being one of the lowest-cost gold mines globally in Q2-24, free cash flow was (+) $14.7 million despite spending ~$56.1 million in capex in the quarter (P3+ Expansion).

Last but certainly not least, Alamos’ Mulatos Complex had a solid quarter as well with production of ~53,400 ounces (ca. 2 t) of gold at all-in sustaining costs of $963/oz. Although this was a strong quarter overall, production at the Mulatos Complex was down year-over-year after lapping difficult comps in Q2-23 (~60,300 ounces (2.28 t) at $894/oz AISC) due to the shift to residual leaching at the Mulatos Pit with mining focused solely at La Yaqui Grande (new higher-grade pit that began production in mid-2022).

During the quarter, ~1.02 million tonnes were processed at an average grade of 1.46 G/T of gold at 87% recoveries, a marginal dip in grades from ~1.01 million tonnes at 1.52 G/T of gold and similar recoveries in Q2-23. Mulatos’ AISC increased year-over-year due to continued inflationary pressures and fewer ounces of gold sold, offset by lower sustaining capital spend. However, even with slightly higher AISC in H1-24 vs. H1-23, Mulatos continues to be a cash cow, generating $69.9 million in free cash flow in Q2-24 and ~$119.6 million year-to-date even with front-end loaded tax payments in H1-24.

Financial Results

Based on Alamos’ exceptional operational performance, Alamos is tracking well against its full-year guidance midpoint of 505,000 ounces (ca. 19 t) of gold, sitting at ~54% of guidance or ~275,000 ounces (ca. 10 t) year-to-date. However, Alamos’ is unique in that while it’s reporting record production, it’s also reporting record per share metrics and financial results — the only thing that should matter to shareholders. This was evidenced by record revenue of ~$333 million (+27% year-over-year), record operating cash flow of ~$195 million, free cash flow of ~$107 million even with higher capex of $87.6 million, and adjusted earnings of ~$97 million or $0.24/share or adjusted earnings of $0.37 year-to-date (+37% year-over-year).

Given the strong financial results, Alamos continued to sport one of the sector’s stronger balance sheets with ~$314 million in cash and cash equivalents at quarter-end, up from $225 million in the year-ago period. However, it’s important to note that this cash build has been achieved during construction of a major growth project ($381 million of $756 million spent to date). After quarter-end and to reduce the impact of Argonaut Gold’s hedges following the acquisition of the Magino Project, Alamos drew $250 million on its RCF. It extinguished all of its inherited low-priced 2025/2026 gold hedges, repaid its term loan and RCF, and the company stated it is searching for opportunities to clean up the remaining 2026/2027 hedges.

Argonaut’s hedge book included ~329,400 ounces (ca. 12 t) to be delivered between 2024 and 2027 at average forward prices of $1,821/oz — $1,860/oz.

Costs & Margins

While Alamos delivered once again on production and has been one of the most consistent producers in the case of over-delivering on promises (Q2-24 production of ~139,100 ounces (ca. 5 t) trounced the 128,000 ounces (ca. 5 t) guidance midpoint), it’s cost performance has been just as impressive. Notably, Alamos was one of only a handful of companies with sub $1,100/oz AISC in Q2-24 and one of the few producers to enjoy lower costs year-over-year. And while Q2-24 AISC benefited from lower sustaining capital ($20.9 million vs. $23.4 million), there is a clear path to Alamos dominating its peers from a margin standpoint with a path to even lower consolidated operating costs once its P3+ Expansion is complete (*).

(*) Per the 2022 Island Gold P3+ Expansion Study, all-in sustaining costs were expected to average sub $600/oz post-2026 with production growing to ~290,000 ounces (ca. 11 t), with Alamos now benefiting from material synergies post-Magino acquisition, including increased purchasing power and shared infrastructure. (*)

Digging into Alamos’ margins, AISC margins increased materially year-over-year to $1,240/oz (53.1% vs. 43.8%), benefiting from lower AISC and a record average realized gold price of $2,336/oz. These results easily beat my estimates of $1,180/oz ($2,365/oz gold price, $1,185/oz AISC) in Q2-24, with higher production at Island Gold being the culprit for the stronger performance in Q2-24. And judging by where the gold price has spent the bulk of Q3 thus far, Alamos should enjoy another quarter of $1,200/oz AISC margins even when factoring in the higher costs in Q3-24 from Magino.

Finally, as for inflationary pressures, Alamos called out inflation as contributing to higher costs, but stated that the impact of inflation remains within its budgeted levels, an encouraging sign. As for capex estimates for its P3+ Expansion and the minor expansion to the Magino Mill (12,400 tonnes per day) to accommodate post-P3+ mining rates at Island Gold (2,400 tonnes per day) plus Magino ore, Alamos stated that it will provide an update to cost estimates as well as 2024 guidance to reflect the inclusion of its new Magino Mine.

While cost creep is inevitable, Alamos is enjoying significant savings of ~$140 million (no need for mill or tailings expansion following acquisition of completed Magino Project with 10,000 tonnes per day mill). This should offset much of the inflationary pressures on the P3+ Project. Cost estimates are a little stale given they’re based on Q2-22 estimates and AACE class 3 guidelines for a PFS estimate, vs. a minor benefit from a stronger CAD/USD assumption (0.78/1.0). In addition, over 60% of capital has been spent/committed to date, with savings (tailings/mill) and significant spending that’s already been completed, eliminating the risk of any major capex blowout when updated capex figures are shared later this year.

Recent Developments

As for recent developments, there are several worth covering, with exploration certainly being a highlight to date, but we’ll start with the P3+ Project.

Island Gold P3+ Project

Alamos noted that its ventilation upgrade was completed in the last week of July, allowing mining rates to increase to average 1,200 tonnes per day for the remainder of 2024, but slightly impacting Q3-24 mining rates. As for progress on its 5-meter diameter shaft that will hoist ore from the 1350 level to the surface, shaft sinking was at 403 meters by quarter-end and expected to be near the 1,000-meter level by year-end, implying a sinking rate of ~3 meters/day. Meanwhile, detailed engineering for its paste plant is ~90% complete. Looking at the image below, we can see that the planned shaft pulls 20+ gram per tonne stopes into the mine plan earlier than previously planned, providing a significant boost to production and cash flow.

While the P3+ Expansion already provided a material boost to production with the potential for further optimization given the impressive growth in resources/reserves the past two years, Alamos’ recent acquisition of Magino has turned Island Gold from a world-class asset with Tier-2 scale (250,000+ ounces) to a world-class asset with the potential for Tier-1 scale (~500,000 ounces (ca. 19 t)). Under an optimized mine plan, Alamos could be one of few non-majors with an operating mine/mining complex meeting Barrick’s (GOLD) strict Tier-1 asset criteria of 10+ years of mine life, 500,000+ ounces annually, and costs in the lower half of the cost curve. Island Gold is in the bottom decile.

As it stands, Magino is expected to add an incremental 100,000+ ounces conservatively to the Island Gold Complex production profile, pushing post P3+ Expansion production to just over 400,000 ounces (ca. 15 t). However, it’s important to remember that Alamos’ acquisition of a new and much larger mill with expansion potential offers significant long-term potential, given that a mill expansion could support higher mining rates from both operations. Additionally, the P3+ shaft is designed to handle 4,500 tonnes per day from an initial sink depth of 1,370 meters (capable of 3,500 tonnes per day at 2,000 meter level), with higher throughput at the shallower depth.

Given that, Alamos could have upwards of 500 tonnes of excess capacity from the initial depth (4,500 tonnes per day), suggesting the potential to develop into new areas and ultimately increase underground production rates under an optimized mine plan. Given that we’ve seen Alamos’ success in the past with drilling out new ounces and rapidly bringing them into the mine plan (NS1 discovered in 2023, mined in 2024), and its equally impressive track record of turning “exploration target areas” into ounces with remarkable precision a short two years later, the increased productivity a shaft brings is truly a game-changer for this asset that is surprising to the upside operationally (positive grade reconciliation) and from an exploration standpoint.

Of course, these benefits are aside from the immediate benefits of increased development meters and stope tonnes mined per employee with the productivity boost from the shaft vs. ramp haulage currently.

So, what’s the opportunity?

With an optimized mine plan to take advantage of the immense exploration success the past two years (multiple new zones) and geared towards a larger reserve base given that Island Gold looks like it’s ultimately on its way to an 8.0+ million-ounce resource, 290,000 ounces (ca. 11 t) annually could be the floor vs. the average for this asset. Meanwhile, peak production should have the potential to get closer to 380,000 ounces (ca. 14 t) (pointing to Island Complex production of 480,000 to 500,000 ounces (ca. 19 t) with Magino), especially if Alamos keeps churning out monster intercepts like the ones it reported from Island East last month:

• 17.2 meters at 102.42 G/T of gold
• 8.28 meters at 135.39 G/T of gold
• 5.23 meters at 101.13 G/T of gold
• 19.66 meters at 19.95 G/T of gold
• 11.15 meters at 33.66 G/T of gold.

The above results with multiple 1000+ gram-meter intercepts from this new zone is an extremely exciting development. Alamos noted that this definition drilling from the 945, 1040 and 1130 levels has continued to intersect wide high-grade zones with an 80 by 130 meter carrying significantly higher grades and widths relative to Island which is a relatively narrow-vein but extremely high-grade mine (10.3 G/T reserve grade). In fact, Alamos best intercept (1761 gram-meters) beats out all the best drill results since 2021 from the combined ~$90 billion market cap producers that own Nevada Gold Mines in Nevada (Carlin, Cortez, Turquoise Ridge) on a gram-meter basis.

Aside from continued exploration success at the main Island Mine, the bigger picture at Island Gold continues to get better each quarter. This is because Alamos is now sitting on nearly 100 kilometers of strike on the Michipicoten Greenstone Belt, while adding ~10,000 tonnes per day of processing capacity immediately next door. However, there’s the potential to increase mill capacity closer to 20,000 tonnes per day and a mill expansion was already being contemplated by Argonaut before Alamos’ proposed acquisition.

Just as exciting, in an upside case scenario with near-mine and regional ore sources ex-Magino also contributing, this complex could potentially surpass the 500,000 ounces (ca. 19 t) per annum mark. This would be due to an optimized feed of high-grade Island ore, mid-grade Magino ore and potentially displacing slightly lower grade Magino ore with higher-grade ore from satellite opportunities. Alamos Gold’s CEO John McCluskey had the following to say about Island Gold and the bigger picture:

“We are also starting to define longer-term upside opportunities through the integration of Island Gold and Magino. This includes the ability to expand the Magino pit onto the larger Island Gold District land package, and identifying and evaluating near mine, higher-grade targets like the North Shear which have the potential to provide additional mill feed to the larger Magino milling complex,”

— Alamos Gold, July 2024 (emphasis added).

Looking above, we can see that near-mine targets are showing promising results as well with the North Shear target intersecting 4.3 meters at 12.1 G/T of gold, 6.0 meters at 2.09 G/T of gold, and 4.92 meters at 3.65 G/T of gold. The North Shear target is directly east of the Magino Pit and certainly looks to be an opportunity to add mid-grade near-mine resources. Meanwhile, drilling at the Webb Lake Stock has potentially opened up the opportunity of Magino deposit to the east past the former Island Gold/Magino property boundary. It has highlight intercepts of 5.6 meters at 15.5 G/T of gold, 7.45 meters at 7.97 G/T of gold and 1.2 meters at 17.96 G/T of gold.

Alamos also stated the following on the North Shear Target/Corridor:

“Higher-grade mineralization has been intersected within the North Shear both this year as well as historically, and we plan on following up additional drilling and modeling to continue to evaluate the potential for underground bulk mining.”

While quite exciting to see another opportunity appearing so close to the new mill, these near-mine targets complement another regional discovery a little further from the mill at Pine-Breccia. This is where Alamos drilled one of the best holes industry-wide in the past twenty years from a gram-meter standpoint, with 0.67 meters at, 3442 G/T of gold. Pine-Breccia has thus far been defined over a 150-meter depth and 50 meter strike and other intercepts include 9.3 meters at 29.77 G/T of gold, including 4.4 meters at 59.15 G/T of gold.

In case it is not yet obvious, all of this is important because the land package Alamos has assembled, the royalties it’s clawed back and the overnight ~8x increase in mill throughput looks to be setting the Island Gold Complex up to be one of Canada’s most important mining complexes not just this decade, but for multiple future decades. So, with the company being in rare air as a producer with ~90% of its NAV tied to top-ranked jurisdictions, the potential to be one of the few non-majors with a Tier-1 mining complex, and a path to industry-leading sub $1,000/oz all-in sustaining costs with Lynn Lake and P3+ both in production, there’s no question that Alamos is solidifying itself as a bit of a unicorn in the mid-cap space.

In fact, it’s arguably the closest the sector will get to another Kirkland Lake Gold (KL) in its prime, which was a high-margin, Tier-1 only producer with industry-leading growth. Today, Alamos offers a very similar setup with industry-leading growth (~550,000 ounces (ca. 21 t) to 980,000+ ounces?), industry-leading AISC (sub $1,000/oz) and some of the safest jurisdictions globally with four of its five planned (*) mines (and its longest life mines) being spread across Canada. Ultimately, this contributed to a premium valuation for KL, with the stock trading near 25x free cash flow at its peak.

(*) Includes Lynn Lake, where no FID has been made yet (*)

The Big Picture

As for the big picture, growth is great and there are several companies that can point to 40% to 150% growth in production looking out to the end of the decade. However, Alamos’ capital discipline to only acquire when it’s creating enormous value and very conservative approach to carry low to no debt and self-fund its operations means that investors need not worry about any of the fruits of that growth evaporating. That’s because Alamos Gold is not going to dilute shareholders, and as the chart below shows, it has consistently trounced the industry in reserve per share growth.

Meanwhile, as for what this growth could look like, I see a path to Alamos increasing production to closer to 1.0 million ounces of gold per annum by 2029. That assumes it’s successful developing PDA, building Lynn Lake, and optimizing its mine plan at its Island Gold Complex. Opportunities for upside outside these assumptions include recent high-grade near-mine discoveries outside the syenite at Young-Davidson that could complement its already consistent ~200,000 ounce (7.56 t) production profile.

So, with a path to ~80% production growth looking out to 2029 with a simultaneous ~15% decline in costs to industry-leading levels, Alamos’ fundamentals have never been stronger.

Summary

Alamos Gold Inc. continues to be a top-3 producer in my view from a quality standpoint and I think it can grow into a $10+ billion company under its current leadership, with management regularly creating hundreds of millions in value during each cyclical bear market in the sector through shrewd M&A. So, for an investor looking for precious metals exposure, I continue to see AGI as a top-5 buy-the-dip candidate among all precious metals companies sector-wide.