Mining Investor Guide: The Alamos-AuRico Merger, Part 1

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.
  • Part 1: Alamos Gold Company Analysis
  • Part 2: AuRico Gold Company Analysis
  • Part 3: Merged Entity Analysis

PART 1: ALAMOS GOLD COMPANY ANALYSIS

Alamos Gold Overview
  • Project
    • Quality of Operations - MODERATE-HIGH
      • Operations have been very robust over the last 3 years but recently average grades have fallen and margins have shrunk. Expectations are for margins to return to sufficiently high levels to offer investors high returns
      • Quality of Reserves - MODERATE-HIGH
    • Quality of Resources - LOW
      • The company has total R&R of over 12 million oz Au but other that the 4.8 producing R&R in Mexico the remaining have little or no value at current gold prices
  • Capital
    • Quality of Financials - EXCELLENT
      • The company has $350 million in cash on $96 million in total debts and has averages 13% annual ROI over the last 3 years (albeit near 0% for the most recent year as margins were squeezed)
    • Quality of Liquidity & Valuation - HIGH
      • The liquidity ranks very high with an annual 1.0 turnover ratio
      • The market Cap and EV have been reasonable throughout the company's history
    • Quality of Structure - MODERATE
      • The Company has raised $509 million through conventional equity offerings and exercise of stock options. It had one failed acquisition that resulted in the issuance of $110 million in equity but this was recovered when the target was sold to a different suitor
  • People
    • Quality of Management - MODERATE-HIGH
      • Well qualified management team committed to a sound growth strategy

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