Mining Investor Guide: The Alamos-AuRico Merger, Part 2

Keeping a finger on the industry pulse, looking for growth opportunities, Cipher Research applies its GEONOMICS analyses on the potential merger between Alamos Gold Inc. and AuRico Gold Inc. announced on April 13. The two Canadian mid-sized gold companies will be merging in a $1.5-billion (U.S.) friendly deal. Shareholders of Alamos Gold Inc. and AuRico Gold Inc. would each own half of the new company.

The following is a brief overview of Cipher's analysis in a three part series.


AuRico Gold Overview
  • Project
    • Quality of Operations - VERY LOW
      • Operations have been poor for the last 3 years but with OPEX and IMP accounting for well over 100% of Revenues. Expectations are for production to increase and for IMP to drop but without a much higher gold price these operations will not provide positive Adjusted Free Cash Flows.
      • Quality of Reserves - VERY LOW
    • Quality of Resources - LOW
      • The company has total R&R of over 18.5 million oz Au-equiv but other than the 1.2 million oz resource at Lynn Lake, and the fact that 6.4 million oz R&R are producing the remaining 11 million oz have little or no value at current gold prices
  • Capital
    • Quality of Financials - VERY LOW
      • The company has $100 million in cash and $650 million in total debts and has average -5% annual ROI over the last 2 years and has lost money in each of the last 3 years
    • Quality of Structure - LOW
      • The Company has total share capital of $2.03 billion issued through conventional equity offerings, exercise of stock options and for acquisitions. Investors have provided a large amount of capital and as yet have not seen any positive return on it
    • Quality of Liquidity & Valuation - LOW
      • The liquidity ranks very high with an annual 1.0 turnover ratio
      • The Market Cap and EV have been high relative to the quality of the assets throughout the company's history
  • People
    • Quality of Management - MODERATE
      • Well qualified management team committed to a sound growth strategy of merger and acquisitions

In our opinion both companies are pursuing a sound growth strategy however Alamos Gold seems to be selling itself short with the proposed 50%-50% structure. Unless there is more to the story, we do not consider the companies to be equals.