Northern Miner articleDAILY NEWSSep 3, 2015 11:28 PM
AuRico CEO: 'We're well situated for challenging markets'
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2015-09-03
VANCOUVER — Newly-minted AuRico Metals (TSX: AMI; US-OTC: ARCTF) is poised to hit the ground running with a strong capital position and a portfolio of royalty assets that make it cash flow positive right out of the gate.
The company is a spin-out vehicle established through the recent US$1.5-billion merger between AuRico Gold and Alamos Gold (TSX: AGI; NYSE: AGI), and it also holds a 100% interest in the past-producing Kemess gold-copper project, 250 km due north of Smithers, B.C.
The new AuRico was bankrolled with US$25 million in cash, and it holds a basket of gold royalties that generate income of between US$7 million and US$8 million per year. Major shareholders include New York-based hedge fund Van Eck Global and streaming company Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND), which hold 15% and 12% equity interests in the company.
"I’d say we are pretty unique since we're generating upside through our royalty portfolio and a stand-out development project, where we're looking to deliver a number of important catalysts over the next twelve months," explained president and CEO Chris Richter during an interview.
"We'll definitely see value creation at Kemess, but right now the market is more focused on the royalty business given the metal price back drop. I think its right to say we're more of a royalty company than a developer currently, but we're very keen on maintaining our optionality. And even on the royalty side we're trading at a significant discount compared to other players in the space,” he continued.
AuRico generates income from interests in a trio of producing mines in Canada and Australia, including a 1.5% net smelter return (NSR) royalty on Alamos' Young-Davidson operation in Ontario.
The twin Australian gold assets include a 2% NSR on the Fosterville mine and a 1% NSR on the Stawell mine, which were recently absored by Newmarket Gold (TSX: CRK) following a $190-million merger with Crocodile Gold.
AuRico boosted its cash position in late August when Alamos invested another $5.6 million via a private placement wherein it picked up 5.8 million shares at a price of 70¢ per share. The arrangement increases Alamos' equity position in AuRico to nearly 11%.
"We think our cash position will allow us to pursue growth on both the development and royalty fronts. We completed the placement with Alamos, and we've received strong endorsement in the market from Sandstorm," Richter commented.
"The money we're spending at Kemess is focused on a number of key deliverables we think will drive the value of that asset higher in investor's eyes. We're also looking to expand our royalty presence in good jurisdictions, with a focus on gold. There's been few times better than this for royalty companies in terms of market conditions,” he added.
AuRico put Kemess on care-and-maintenance in 2011 after previous-operator Northgate Minerals failed to acquire a permit for an open-pit mine expansion when concerns were raised by the Tse Keh Nay First Nations over proposed tailings and waste management designs. The company's new plan, however, envisions a block-cave underground operation.
Current development models focus on the Kemess Underground deposit, which hosts proven-and-probable reserves of 100 million tonnes grading 0.56 gram gold per tonne, 0.28% copper, and 2.05 grams silver per tonne for 1.8 million oz. contained gold, 6.6 million oz. contained silver, and 619 million lbs. contained copper.
According to a feasibility study (FS) released in 2013, the company could develop the project for around $451 million and produce 105,000 oz. gold and 44 million lbs. copper annually.
The game-changer for AuRico could be the Kemess East discovery. The company released a maiden resource on the deposit in late January, which highlighted 56 million indicated tonnes grading 0.52 gram gold, 2 grams silver, and 0.41% copper; and 117 million inferred tonnes averaging 0.38 gram gold, 1.79 grams silver and 0.34% copper. Overall, the deposit holds around 5.5 million oz. of gold equivalent.
"We have a pretty large exploration program ongoing at Kemess East," Richter said. The company is spending around $6.5 million on the target this year, which will fund roughly 30,000 metres of predominantly in-fill drilling.
"We really have a great leg up at the property with the infrastructure at our disposal. All together it's around $1 billion in replacement costs, and includes the mill circuit, grid power, and a full three-hundred person camp. We also have the permits to use the past-producing Kemess South open pit as a tailing facility. When you combine those factors with the Canadian dollar depreciation, we think it's a very attractive development scenario," he continued.
The carrying cost for the current infrastructure at Kemess is around $6 million per year.
On Aug. 18 AuRico released assays from the first two holes at Kemess East, which extended core mineralization beyond what was identified in previous drilling. Hole 15-01 cut 305 metres of 0.63 gram gold and 0.43% copper, while hole 15-02 intersected 301 metres grading 0.47 gram gold and 0.39% copper. The deposit remains open to the east towards the Kemess East Offset Fault and to the south towards the post mineralization Sovereign intrusion.
AuRico has traded within a window of 47¢ and 90¢ since its inception in early July, and closed at 64¢ per share at the time of writing. The company maintains 118 million shares outstanding for an $85 million press time market capitalization.
"We're very well situated for this type of market where we have challenging metal prices. I feel we're extremely protected by not only a strong balance sheet, but also the income from our royalties. We have some great shareholders supporting us, and we have a quality development asset that could give us major torque that other royalty companies just don't have," Richter concluded.
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