TD UPDATEEvent Alamos announced that it has entered into a friendly agreement to purchase Richmont Mines (RIC-T) in an all-share transaction valued at US$770mm (C$14.20/ share).
Impact: MIXED We believe that the acquisition of Richmont makes strategic sense for Alamos as it adds another long-life, de-risked, low-cost asset in a high-quality jurisdiction, providing tax synergies, and generating strong cash flow right away. However, we view the price being paid as fairly full and estimate that the deal is dilutive to our NAV. Although some of the premium being paid reflects potential exploration upside and synergies, we believe that it also reflects the scarcity of high-quality projects in the market currently.
Valuation: We estimate that Alamos is paying ~1.77x NAV based on Friday's closing price for AGI, a substantial premium to Alamos’ P/NAV valuation of 1.1x before the announcement, and historical takeout multiples of between 0.9x and 1.4x. With the 16% pullback in Alamos' share price yesterday, the take-out multiple falls to 1.48x NAV. Our estimates remain unchanged pending closing of the transaction. However, we estimate that the acquisition would be dilutive to NAV by $0.51 or 5.6%, but effectively neutral to our 2018 CFPS estimate (dilutive by $0.01 or 1.1%). Looking further out, we forecast that the transaction will be ~4-5% accretive to CFPS once the Island mine ramps up to the 1,100tpd steady state and production increases and costs fall. Bolstering production and lowering cost profile: Production from Island adds ~24% and ~33% to our 2018 and 2019 estimates, respectively. Island would result in a minor decrease in Alamos' consolidated cost profile.
We estimate 2018 costs of $515/oz for the Island mine, below Alamos' consolidated costs of $694/oz. On an AISC basis, our 2018 estimates would remain effectively unchanged ($941/oz vs. $946/oz excluding Island), however, they would fall from 2019 with the ramp-up of Island to higher throughput rates.
TD Investment Conclusion We are maintaining our BUY recommendation and C$13.50 target price. Alamos has a number of positive catalysts on the horizon, and at 0.94x NAV and 9.7x 2018E EBITDA, we believe that it is trading at an attractive valuation for a high-quality midtier producer with a good organic growth pipeline and strong balance sheet.