Alamos Gold Inc. (TSX: AGI) and AuRico Gold Inc. (TSX: AUQ) reported on April 13, 2015, that the two companies will merge in a transaction valued at approximately US$1.5 billion. Alamos shareholders will receive one share of the newly merged company for each Alamos share held, while AuRico shareholders will receive 0.5046 of a share for each AuRico share held.
In addition a new company, to be named AuRico Metals Inc., will be created to hold AuRico’s Kemess project, a 1.5% net smelter return royalty on the Young-Davidson mine, AuRico’s Fosterville and Stawell royalties, and will be capitalized with US$20 million of cash. About 94.9% of the new spinoff company will be distributed equally to former shareholders of both Alamos Gold and AuRico Gold. Alamos Gold shares moved up 7% to $7.90 following the announcement, while AuRico Gold shares also gained 8% to $4.09.
While Alamos Gold didn’t need this transaction, it was a far different story for AuRico. Based on the company’s 2014 year-end results, AuRico Gold was producing gold at all-in sustaining costs of US$1,200 per ounce, up 2% from the previous year. Its operating cash flow for the year, meanwhile, declined 5% to $60.4 million.
As well, AuRico’s cash balance fell 37% to $89 million for the year, while the company owes $82.5 million in contractual obligations over the next 12 months. Included in its Q4 results is a $90-million impairment charge on AuRico’s El Chanate gold mine in Mexico as a result of a decrease in El Chanate’s gold reserve estimates and higher future processing costs, among other items. AuRico ended the year with $333 million in debt.
So why would Alamos Gold want to join forces with AuRico? Both have operations in Mexico, so potential synergies could make mining AuRico’s El Chanate more economic. Also the Mulatos mine owned by Alamos is barely economic at current gold prices based on 2015 estimated all-in sustaining costs of US$1,100 per ounce. Alamos also has a development project (Esperanza) in Mexico.
The real prize for Alamos appears to be AuRico’s Young-Davidson mine in northern Ontario, a better jurisdiction than its current operations in Mexico or Turkey. Production at the Young-Davidson mine has been increasing steadily since 2013 and is expected to reach between 160,000 and 180,000 ounces annually in 2015, while all-in sustaining costs are forecast to come in at between US$950 and $1050 per ounce.
At least one analyst, Phil Russo of Raymond James, thinks another suitor could make a rival bid for AuRico, although Alamos has a deal in place to purchase a 9.9% stake in AuRico via a private placement for $2.99 a share, so any competing takeover bid could prove too expensive at the current gold price.
The combined company will have cash and short-term investments of $427 million and could be on the hunt for an acquisition of its own. One potential target might be Timmins Gold Corp. (TSX: TMM), a small but profitable Mexico-focused gold miner with a market cap of approximately C$130 million. Timmins Gold is in the process acquiring Newstrike Capital Inc. (TSXV: NES) and when the two companies’ operations are combined the expected all-in sustaining costs are forecast to be less than US$780 an ounce.
A more likely scenario, though, is the combined Alamos-AuRico Gold being taken over by a much larger player. It’s a sign of the times for an industry that’s been hurt by falling gold prices. One thing that’s for certain is the junior gold mining landscape will look a lot different two years from now than it did just four years earlier.
Alamos Gold is a component company of the Ubika Gold 20 index. See the other top-performing junior gold stocks HERE >>
