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Minera Alamos Inc. (TSXV:MAI:CA)(OTCQX:MAIFF) is a high-conviction idea of mine that was picked according to value investing principles. Minera pursues a well-crafted niche strategy characterized by building - in quick succession - a series of open-pit, heap-leach gold mines in northern Mexico, which is known as an ideal operating environment to construct moderately-sized mines. After two years of the publication of the original articles, it is time to review how such an investment thesis has been playing out.
On August 24, 2022, Minera released the interim financial statements for the quarter ended June 30, giving us an opportunity to examine its operational progress.
Santana ramp-up
As an important backdrop, the La Nia dry spell over the past 2 1/2 years did not spare Sonora state of Mexico, where Minera's Santana mine is located. The heap leach operation at Santana has been negatively impacted by the drought, according to the management. However, going forward, the wetter El Nio cycle is expected to boost the operations (Fig. 1).
Fig. 1. The Oceanic Nio Index, 1950-present (Jan Null)
First gold
By the end of 2021, mining of mineralized material approached 100,000 tonnes per month; the area of stacked mineralization under leaching continued to expand, with 9,100 oz of gold inventory moved to the leach pad; cumulative gold recovery from mineralization under leach for >30 days exceeded 70% with additional recovery ongoing.
Minera Alamos delivered dor containing 401 oz of gold from the first shipment of carbon in 4Q 2021.
1Q 2022
Through the end of 1Q 2022, some 600,000 tonnes of mineralized material had been mined; gold production was 890 oz in January, 1,130 oz in February, and 1,370 oz in March, with cumulative gold recovery from mineralization under leach for >30 days reaching >75% with additional recovery ongoing. The company recovered 2,157.69 oz of gold in the quarter (Fig. 2).
Fig. 2. Santana gold ounces sold in the quarter, actual and estimated (Laurentian Research based on Minera Alamos news releases)
2Q 2022
By 2Q 2022, Minera had increased the monthly average mining rate to ~300,000 tonnes, up from 12,000 tonnes in June 2021, 35,000 tonnes in July 2021, 100,000 tonnes in August 2021 - December 2021, and 200,000 tonnes in 1Q 2022.
Minera recovered 3,129 oz of gold in 2Q 2022, reaching a total of 5,687 oz of gold production as of end-June 2022.
The company further increased gold recovery to 2,275 oz in July 2022, from which I reckon the 3Q 2022 production may reach 6,752 oz. As of late August 2022, some 5,000 oz were said to have been already recovered (Fig. 2).
As for officially declaring commercial production, the company indicated,
While recoveries from areas under leach have been consistent throughout the ramp up phase of operations, the erratic nature of the drought that has been in effect since late 2020 remains the final hurdle to the Company being comfortable in declaring commercial production at the mine. The ultimate timing for this declaration will continue to be assessed with the help of operational data and climate forecasting.
Given the rainfall in July and August 2022 in Sonora state, I believe Minera has achieved commercial production at Santana.
Financials
Minera Alamos realized C$864,612 in revenue in 4Q 2021, C$5,160,026 in 1Q 2022, and C$7,269,242 in 2Q 2022. The company may pull in ~C$15 million in 3Q 2022, everything being equal (Fig. 3).
Fig. 2. Revenue from Santana gold sales, actual and estimated (Laurentian Research based on Minera Alamos news releases)
Minera has kept the gross cost of sales at ~C$1,000/oz, which includes the cost of production, the cost of processing, and royalty. The direct costs of production only experienced a minor increase of C$16/oz from 1Q 2022 to 2Q 2022, suggestive of little impact of inflation, which can be attributed to diesel price control in Mexico, a drop in blasting costs, thanks to it now having the explosive permit, slight reagent cost appreciation, and economies of scale driven by operation ramp-up.
As a result, gross margin improved from 29.63% in 1Q 2022 to 35.47% in 2Q 2022, while net margin enhanced from 20.69% in 1Q 2022 to 37.56% in 2Q 2022.
Improvement in cash flow and C$2,056,150 from the sale of 590,000 shares of Prime Mining Corp. (PRYM:CA) led to an increase in cash position from C$6,106,610 as of March 2022 to C$9,031,977 by the end of June 2022. The debt-free balance sheet of Minera is expected to be further bolstered by 3Q 2022 gold sales. As such, I believe Minera will not need to raise equity or debt capital until it starts to build the next mine - Cerro de Oro.
Upside and risk
In my opinion, Minera has reached commercial production at Santana in July 2022 when the rainy season began. I look forward to the conservative management declaring Santana commerciality in November 2022 when it releases the 3Q 2022 operating results. By then, Minera will have accomplished the transformation from cash-flow neutral to cash-flow positive, a critical inflection point for the stock.
For a commercial gold producer that is projected to produce >27,000 oz over the next 12 months, Minera seems to be incredibly cheap. The share price has more or less followed gold from 2019 to date, which suggests little credit has been given by the market to the operational milestones reached by the company, notably including the transformation from a developer to a producer amidst an unprecedented pandemic as well as the receipt of surface rights at Cerro de Oro. As of late August 2022, the stock was once again hugging the support trend-line of the bullish flag pattern that has been operative since August 2020 (Fig. 4).
Fig. 4. Stock chart of Minera Alamos, as compared with gold on the LHS (modified after Seeking Alpha and Barchart)
Going forward, there are a host of catalysts that I believe will serve to highlight what an incredible bargain Minera is, and precipitate revaluation of the stock. These catalysts include (Fig. 5):
- The PEA of the Cerro de Oro project expected in September 2022;
- The Cerro de Oro permit application to be submitted in 3Q 2022, with its approval anticipated in 2Q 2023;
- Construction at Cerro de Oro to commence immediately following the receipt of permit;
- First gold anticipated from Cerro de Or before the end of 2023, making Minera a two-mine producer;
- The maiden mineral resource estimate to be released for Santana around September 2022, after the Cerro de Oro PEA.
- The official declaration of commercial production at Santana possibly in November 2022.
Fig. 5. Project timeline of Minera Alamos in 2022 and beyond (Minera Alamos)
Investors should be aware of a number of risk factors that may disrupt or delay the above deliverables. Weather conditions in northern Mexico may again turn against Minera Alamos even after the start of the El Nio cycle. The low-cost operation has so far enabled the frugal management team to largely contain the impact of inflation but going forward, inflation continues to be something investors should keep an eye on. Permitting of Cerro de Oro may be received later than anticipated, although the Minera team has consistently delivered in the past. The gyrating gold price will introduce uncertainty even to a low-cost mine such as Santana.
Investor takeaways
Wayne Gretzky once said, "A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be." Investors should strive to anticipate what will be on the horizon for Minera Alamos.
As I discussed above, Minera Alamos has achieved commercial levels of operation at the Santana mine. Before the market gives the company any credit for reaching this important operational milestone, prior to an official announcement of positive cash flow, I believe it is time to invest in the talented and shareholder-friendly Minera team as it grows the company into the next mid-tier gold producer.