Alamos Gold: Any Chance of Further Upside?

Shares of Alamos Gold rebounded from lows seen in early June, but they remain at depressed levels. Falling production mixed with difficulties in obtaining permits for key projects continue to weigh on the company's performance. However, not everything is as bad as it looks. 

Growth postponed
The company's two main projects, Kirazli and Agi Dagi, are situated in Turkey. Back in 2013, Alamos Gold received environmental approval for Kirazli from the Turkish ministry of the environment and urbanization. However, the provincial court issued an injunction order regarding the ministry's approval of the Kirazli project. In turn, the ministry is challenging the court's decision.

This might look like a soap opera, but it's no fun at all. The project that was ready to be developed is stalled. Documentation for the second project, Agi Dagi, has been submitted and is currently under review. Together, Kirazli and Agi Dagi can produce 242,000 ounces of gold annually. In comparison, Alamos Gold expects to produce 150,000-170,000 ounces of gold this year.

According to statements from Alamos Gold, it will take 18 months to develop the Kirazli project after the permits have been obtained. The current political situation in Turkey is challenging, however, and obtaining permits could be a difficult and lengthy task. That's why Alamos Gold is among the few gold miners whose shares have lost ground since the beginning of the year.

Yamana Gold and Kinross Gold are also in this club. Yamana Gold purchased Osisko Mining together with Agnico Eagle Mines , but unlike its partner, the company's first-quarter performance was weak. Falling production and rising costs put significant pressure on Yamana Gold's operating cash flow. While the purchase of Osisko Mining is beneficial for Agnico Eagle Mines, Yamana Gold has yet to prove that it could afford such expenditures.

Kinross Gold was pressured as Russia faced increased sanctions over the Ukrainian conflict. Two of Kinross Gold's cheapest mines, Dvoinoye and Kupol, are located in Russia. However, I believe the fears were exaggerated, and Kinross Gold will get a boost after the dust over Russian sanctions settles.

Patience required
Fortunately, Alamos Gold has room for maneuver. The company finished the first quarter with $410 million in cash and short-term investments and had no debt. The biggest expenses associated with these mines were carried back at the beginning of 2010 when the company purchased them for $40 million in cash and 4 million of Alamos common shares.

Given the company's solid balance sheet, it can afford to pay a dividend which currently yields 2%. This dividend is a form of paying for patience, because it will take time for Alamos Gold to reach its growth targets. Hopefully, the second-quarter report, which is due on July 31, will shed more light on the developments in Turkey. It may also let investors know if the company has a plan B in case permits are delayed further in the future.

Bottom line
Alamos Gold's costs allow it to stay profitable in the current gold price environment. However, declining production from the company's sole producing Mulatos mine in Mexico leaves little room for an earnings boost. The company could experience major growth when its Turkish projects are approved, but before that, investors should stock up on patience.