AuRico Gold Intermediate Producer after wise acquisitions (Northgate Minerals, production, silver, 2012, exploration)

   Update for 4Q 2011 As reported on January 13, 2012 Aurico produced 72,119 ounces of pure gold (up from 29,384 in 2010) and 1.109 million ounces of silver (down from 1.2 million qoq), or 92,815 oz of gold equivalent (up from 53,030 qoq) during the three months ended Dec 31, 2011. Consolidated cash costs for the quarter were 67.1% higher to $680/oz due mainly to non Mexican operations in Australia acquired through the Northgate takeover (only produced 29,858 oz in the 2011 year but at a cash cost of $863/oz). North American operations finished the year at a cash cost of $499/oz (over 80% of production is still only coming from Mexico, Canadian projects won't start producing until 2012 at the earliest). Over the 12 months Aurico produced 187,401 oz of gold (up 64.3% from 114,064 oz) and 4.728 million ounces of silver (down 4.6% from 4.954 million yoy). The largest producing mine, Ocampo saw higher cash costs in the last quarter owing to lower grades being mined, while El Cubo's higher costs (up to $1,046 on the year) were due to a major conversion in its method of mining which may be part of the deal struck with workers in 2011 to raise standards at the mine, ending the shutdown. Ocampo still had relatively low production costs during the year ($413/oz in the 1st half, $436/oz in the third quarter). For the year Ocampo, which accounted for 72% of gold equivalent production had a cash cost of $415/oz (realized), down 5.0% (though it was $553/oz in the last quarter which could be an aberration considering Ocampo's cash costs have been inconsistent quarter to quarter throughout 2011 due to higher/lower grades being mined).

Stawell, AUS mine life ends in the second quarter of 2012 which you probably already realized considering 2011 4Q production between it and Fosterville was only 29,858 oz at a cash cost of $858/oz (2009 production there was 206,500 ounces, cash cost under $500/oz). Young-Davidson mine in Canada is 79% complete. Young Davidson will produce 180,000 ounces of gold a year for 15 years at a long term cash cost of $400/oz. El Cubo which was shutdown in 2010 had cash costs of $1,090 in the 4Q and $1,046 during the year BUT you have to remember that almost all of what El Cubo produces is silver (556,379 ounces in the quarter up 3.7% compared to only 8,670 ounces of gold).

Update for 3Q 2011 As reported by AuRico Gold on November 10, 2011 the company produced 45,686 gold ounces (up from 27,018) and 1.4 million silver ounces (up from 1.19m oz), or 76,630 oz of gold equivalent (up 68%) during the three months ended September 2011; All of the increases in production came from mines in Mexico meaning that the higher revenue and profit are not the result of the Northgate Minerals acquisition (Northgate's main properties are outside Mexico). Even though cash costs were up 9% to $487/oz margins were 55% higher ($1,217/oz) due to record breaking gold prices ($1,704/oz), that resulted in a 580% increase in profit (to $62.6M or 36c a share). The El Chanate mine became the first Mexican operation to record one million man hours of work without lost time injuries. Not all was rosy however, all of the production increases came from El Chanate and El Cubo two mines that produced neither gold nor silver in 2010, in 2011 they combined to produce 20,842 oz of gold (16,444 from El Chanate) and 308,528 oz of silver (all at El Cubo) while the company's main mine Ocampo showed negative production growth (-8% for gold production/-15.3% for gold sold and -10.5% for silver production/-20.4% for silver sold). Cash costs remained low at Ocampo ($436/oz) and high at El Cubo ($936/oz but down from 1,386/oz). Average realized gold price was $1,704/oz up 38.54% (from $1,230/oz), realized silver price was $38.13/oz nearly double what is was the year before ($19.19/oz). Higher production particularly from the smallest mine, El Cubo (gold equivalent ounces up to 11,360 oz from nil) propelled 2011 annual guidance up to a high of 195,000 oz from 189,000 oz. Range for silver is 4.95-5.0m ounces (up from 4.84-5.56). Cash costs for the year are on track to be $445-$475/oz. By comparison, in the first half of 2011 cash costs were $486/oz (even with Ocampo being $413/oz which is $23/oz lower than what it was in the 3Q).

   AuRico acquired Northgate Minerals on August 29, 2011 for US$1.49 billion which represents a whopping 46% premium to Northgate's average stock price in the previous 20 days, but a record low of 14.7 times EBITDA based on Northgate's earnings before tax, depreciation, ammortization in the previous 12 months, the lowest in a North American deal since 2004 when Goldcorp bought Wheaton (by comparison, Kinross Gold paid about 40 times more than EBITDA for Redback Mining). Ironically, Goldcorp is also the company that paid one of the highest premiums in a takeover, 56% higher than the average stock price for Andean
Resources in the 20 days leading up to the deal. (Bloomberg: Northgate Takeover Proving Cheapest) At a time when the price of gold is on the rise AuRico is being bold, making deals that most companies wouldn't think possible (AuRico made US$1.9 billion in takeovers since April 2011, that's 87% greater than AuRico's market value in 2010). (MorningstarAdvisers: Digging for Outliers in Gold Mining) Included in the deal is the $370 million Young-Davidson Mine in Ontario which could begin producing as early as late 2012 (3 million ounces/15 year mine life, Young-Davidson also has 1.5 billion pounds of copper). Also of note, Northgate's assets are scheduled to produce 75% more in 2013 than in 2011 compared to 40% for AuRico. AuRico also gains a foothold outside of Mexico for the first time. Ocampo, the company's biggest producing mine also produces silver at a rate of between 4 and 5 million ounces, annually. The two biggest operating mines, Ocampo and El Cubo each have their own ore processing mills with a capacity in excess of five thousand tonnes per day (combined). In the last quarter ended June 2011 the company's operating cash flow increased 247% and its 2011 pure gold production guidance increased to between 175 and 195,000 ounces, gold equivalent (includes silver) rising to 265-295,000 ounces (about 33% of total production comes from silver). (2011 2nd qtr report)

For AuRico, production costs are low (for the six months ended June 2011 it was $413/oz (2.4% lower) at its largest mine Ocampo which produces at a rate of just over 110,000 ounces annually, overall it was around $486/oz). Total production (after takeover of Northgate Minerals is complete) is comparable to Eldorado Gold, New Gold and Osisko mining, three companies that have a market value 2 to 3 times higher. Even after 2 deals in 5 months that boosted its size by more than 70% AuRico continues to be totally unhedged meaning that it is fully exposed to changes in the price of gold, not a bad position to be in at a time when gold investment is spiking (even debt laden nations like Greece are buying up the commodity, others like Thailand, Mexico, Russia, South Korea are increasing reserves).

The only downside of the deal is that it led to the break up of Northgate's takeover attempt of Primero Mining which would have given it another 3 million ounces of proven gold reserves at San Dimas, Mexico.

Performance of Gold Mining Stocks not Necessarily Correlated with the Price of Gold (last 2 months gold price is up over 14% but a basket of large/mid cap gold stocks is down 7%)

Gold stocks have decreased in value by about 7% over the last 2 months even though the price of gold has risen 14%. (Maison Placements Canada Inc.) Goldcorp and Kinross Gold both fell 4% in July 2011 even though the price of gold increased 14% (in Canada the S&P gold index only increased 8% during that time even though it hit a near term low prior to that). (globeandmail: Gold stocks still lag surging bullion price) Gold companies are playing catchup for a number reasons; Many of the established companies have dwindling reserves (annual production exceeds reserve replacement) which is one of the reasons behind declining global output (China is one of only a handful of countries that can be relied on for growth); Prior to the more recent spike in the price of gold (before 2009) gold production worldwide fell each year, from 2005 to 2009 consecutively meaning that record high gold prices are needed just to keep production steady (higher gold prices make new mine production easier to accomplish because cash costs don't need to be low for healthy margins to be realized) (Goldsheet - Historical World Gold Production) Over the long term, production has also been down in the established mining districts of South Africa and Canada. (Gold News:Gold Mining Decline) In September 2010 all of the world's gold stocks had a combined market value of US$ 360 billion, that compares to US$ 19 billion in 2000 (increase is due mostly to new mining companies entering the market; higher gold prices make even the highest cash cost operations economically viable).

There is optimism regarding production though. In Australia, Olympic Dam (BHP Billiton's trillion dollar gold/copper/silver project), Super Pit, Newcrest Mining's Cadia Hill (33 million oz of gold reserves) are well on their way to producing in the near future while in other countries that have exhibited falling production rates in the 2000's (Canada specifically), new projects at Detour Lake, Malartic, Kerr-Sulphurets Mitchell and Snowfield/Bruceback (88 exploration projects in British Columbia alone in 2010 with capex spending the sixth highest since 1991) have investors optimistic. (Mineweb: Officials believe one of the largest gold resources in the world lies within BC) Canada's biggest gold project, Kerr-Sulphurets-Mitchell (reserves at 39 million ounces for gold and 214 million ounces for silver) is estimated to have cash costs of only $105 for the first seven years, that's four times less than Goldcorp's cash cost which has the lowest among tier 1 gold companies; also four times lower than Yamana Gold's cash costs !

The reason for the 7% drop in gold stocks at a time when gold prices increased by double digits (%) is simple: Companies with declining reserves are looking to mine in high cash cost regions out of desperation (higher cash cost=smaller margins=market value of each ounce goes down). Newmont Mining is an example; though reserves have maintained growth the increases have been smaller [only about 1.6% growth in 2P reserves in 2010, 93.5 million from 92 million ounces versus 7 million between 2008 and 2009 (85 mil in 2008/92 mil in 2009], established companies like AngloGold and Goldfields have decreasing production rates while other companies like Kinross Gold have taken on lots of debt to make questionable acquisitions (by issuing paper, other examples are Barrick Gold's acquisition of Equinox Minerals). Smaller potential for cash cost improvements/production rates by established companies means the junior, relatively new players (like Eldorado Gold, Detour Gold, Osisko Mining) and others like Yamana Gold (undervalued because of past risks which have proven to be not a problem for the company, Yamana was up 13% in the month of July, being one of the only major gold players to record significant growth over that time (Newmont was flat while Barrick Gold was only 3.5% higher, Goldcorp and Kinross were flat) is where the highest growth rates (PEG Ratio, P/E ratio) will come from. In 2008 though, things were different; For most of 2008 when gold prices started their overall upward trend, it was the large cap companies that outperformed the small cap; the opposite was true in the summer of 2011 when gold prices broke through new levels, the change in behavior might simply be the result of a much higher support level for gold prices making high production costs less of an issue for startup companies (many more juniors entered the market in 2011 than in 2008). Goldcorp's largest gold producing mine Red Lake, is nearing the end of its mine life (about 700,000 ounces/year gone), but Goldcorp production will be maintained due to many other mines commencing (Penasquito, Mexico reached commercial production in late 2010; Pueblo Viejo, Dominican Republic; Cerro Del Negro, Argentina).

Another thing to consider is that there are some factors unrelated to stocks, which affect spot prices; For example in early August of 2011 (when there was a lot of economic uncertainty) gold and silver spot prices declined at the same time major stock indices fell by their largest margin since the 2008 recession, the commodities selloff was sparked by a margin call (temporary selloff due to traders being required to meet call options). On August 8, 2011 when stocks performed poorly, gold spiked again (gold is the first thing central banks/banks/investors hoard when they want a stable investment medium, also when banks realize they might have to fulfill their significant short positions) but don't be concerned about the more gradual silver increase (historically, silver has lagged gold (time) when increases occur; the reason is that banks and large investors tend to wait until gold gets too expensive before buying the white metal); also, when gold becomes more costly, jewelers and industrials turn to alternatives and silver is one of them. Also consider the gold/silver ratio which is 44 (August 8, 2011), much higher than the historic ratio of under 20.

Some interesting facts about gold: 3/4 of all the gold ever extracted from the earth was mined after 1910. South Africa was the largest producer in most years since that time. Switzerland was the last country to tie its currency to the price of gold (1999). Until May 2009, all the gold ever extracted amounted to 5,835,876,025.6 ounces or about 85% of an ounce per person (165,446 tonnes). Gold weighs 19.3 times as much as water, is even more rare than diamonds, never oxidizes (maintains its shine), and in its more natural form, is one of the softest metals. Web Directories