It’s been a mixed Q2 Earnings Season for the Gold Miners Index (GDX), with most producers posting solid operational results but revising cost guidance higher to reflect inflationary pressures. These pressures are related to…
fuel (diesel) and labor inflation, partially related to a tight labor market in prolific mining regions.
However, a few companies have bucked the trend, and others are in a position to claw back any margin declines experienced this year. These miners are the ones to own, and due to depressed sentiment in the sector, they’re trading at large discounts to their net asset value, with two being prime takeover targets.
Alamos Gold (AGI)
Alamos Gold (AGI) is a mid-cap gold producer operating in Mexico and Ontario, Canada, that has three mines and a development project in Manitoba.
The company was one of the few miners not to raise its cost guidance this year due to diesel hedges and operating high-grade underground mines. Notably, it’s also tracking nicely against production guidance, explaining the stock’s sharp rally following its Q2 results.
However, the real news for AGI was the release of its Island Gold Phase 3+ Study, which has outlined an operation capable of producing over 270,000 ounces per year at all-in sustaining costs below $600/oz.
This would make its Island Gold Mine (130,000 ounces per annum at ~$900/oz currently) one of the lowest-cost mines globally and a top-5 in Canada from a profitability standpoint. I believe this is a game-changer, but due to the poor sentiment sector-wide, the stock has not enjoyed the premium it should for this news.
Assuming the expansion is successful and the company can receive permits for its Lynn Lake Mine in Manitoba, Alamos has a path to become a 750,000-ounce producer at sub $850/oz costs by FY2027 a major upgrade from 460,000 ounces at $1,200/oz currently.
This should command a large premium to net asset value ($11.00 per share), yet it trades at a discount at a share price of $7.40, making this a rare opportunity to pick the stock up on sale.
So, from a growth/value standpoint, AGI is a must-own name if one is looking for gold exposure.
Karora Resources (KRRGF)
The second name worth keeping a close eye on is Karora Resources (KRRGF), a small-cap gold producer operating two mines in Western Australia.
While the region has seen cost escalations due to a labor market that impacted Karora’s Q1 results, the company should have a much stronger second half of the year. From a bigger picture standpoint, it has paved a path toward 90% production growth by 2026.
During Q1, Karora produced 30,000 ounces of gold at all-in sustaining costs of $1,396/oz, translating to a significant margin hit.
However, this figure had $300/oz in COVID-19-related costs, and the company will benefit from increased productivity and higher grades in H2 2022. That said, even with H2 improvements, its FY2022 costs will likely come in at or above $1,040/oz.
While some investors might be discouraged by the increase in costs year-over-year, it’s important to note that Karora’s plans to nearly double annual production with a second decline will lead to a meaningful drop in unit costs. This will be driven by higher throughput and additional nickel production, with the latter translating to higher by-product credits.
So, while costs could rise 3-5% in 2022, I see this as merely an aberration in the long term. In fact…
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