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This gold stock has nearly tripled over the past two years, and we think there are more gains to come

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR


Monday, August 12, 2019

In June 2017, we wrote an article about Alacer Gold, a Colorado-based company that operates a mine in Turkey and trades on the TSX and ASX. The stock was around $2.00 then, and our conclusion was: “The feeling here is that the stock can do better than a triple.”

That has nearly been achieved.

Alacer is an unusual mining company. It outlines a plan with a budget and timeframe and actually hits the targets. People who follow the sector know that it is riddled with enterprises that often do not come close to meeting their goals on either of these parameters — a primary reason why it is so difficult to invest in this arena, which can be a quagmire of negative surprises and pie-in-the-ground projections.

A couple of years ago, to try to avoid those shocks, Contra analyst Philip MacKellar put his boots to the terrain at ASR’s Çöpler mine. He was impressed with what he saw and how management handled operations.

One aspect that had to be factored into the investment equation, given that this is Turkey, was political risk. President Recep Tayyip Erdoğan rules with an iron fist.

Fortunately, Alacer’s projects are located far from where violence normally permeates, reducing risk. Having Phil do due diligence in Turkey was a confirmation of why this investment made good contrarian sense.

One of the particularly appealing aspects of the operation was the continuing expansion at Çöpler, expected to extend the mine’s life by 20 years. This meant that, at an estimated all-in-sustaining-cost of $645 (all figures in USD), free cash flow was projected to be $1.6 billion, assuming a gold price of $1,250.

A huge investment was required, though — one that took the company from being debt free to about $350 million in the hole. That number has since decreased to $315 million, while cash sits at $125 million.

This year’ first-half results have been excellent, with 192,000 ounces of gold being sold. Revenue was $252 million and the AISC was $692. About $110 million of cash flow was achieved, with a net profit of $8 million.

One hope for the company to diversify was the Gediktepe Project, in which it had a 50 percent interest. In July, though, ASR sold its piece but maintained a net-smelter royalty. It is difficult to gauge whether this project will be developed.

Instead of focusing on Gediktepe, management is betting on prospects near Çöpler, such as the Ardich resource, which now indicates a potential 600,000 ounces, with a further augmentation possible. These are currently the primary prospects, though the corporation is exploring other possibilities.

Of course, as wisely as Alacer has operated, a key to the bottom line is the gold price. That has been ascending since the end of June, and miners dealing with the shiny metal have mostly seen their market caps leap.

Gold bugs have been magically appearing out of the woodwork like cicadas, and forecasts of future prices of US$2,000 plus are becoming de rigueur once again. From our perspective, it is difficult to predict, but even if valuations recede somewhat, Alacer should do well. At these more elevated levels, the numbers should be very healthy.

The initial sell target range that we set for the company in 2014 is $6.00 to $7.40, but at this point we cannot see selling at the very bottom end of the range. The first sale will likely see 50 percent of the position relinquished, but the potential seems so great that holding back some for the possibility of future gains seems shrewd. Perhaps ASR might once again trade near $12, where it did eight years ago.

Historically, we have had tremendous success in this sector, but our primary weakness has been regularly selling before the stock prices fully shine.

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