Flush with US$750 million in cash from the sale to Minera Frisco (MSNFY-O) of its Ocampo mine and adjacent exploration projects Venus and Los Jarros in Mexico’s Chihuahua state and its 50% interest in Orion, an advanced exploration project in Nayarit state, AuRico Gold (AUQ-T, AUQ-N) is paying off US$128 million in outstanding debt and buying back up to US$300 million of its own shares.
AuRico shareholders can tender shares at prices in 5¢ increments between US$8.30 and US$9.30 apiece. Rahul Paul of Canaccord Genuity reasons that the share buyback program “could be substantially accretive to our per share earnings, cash flow and other financial estimates going forward.” If the maximum number of shares are tendered (32.3 million at US$9.30 per share or 36.1 million at US$8.30 per share), Paul estimates accretion to estimated earnings per share and cash flow per share in 2014 would be in the order of 12.8% to 14.6%.
Paul has a buy rating on the stock and a price target of US$11 per share. In New York, AuRico’s shares were trading at US$8.04 within a 52-week range of US$5.25-10.36, and in Toronto at $7.92 within a 52-week range of $5.20-10.24.
Paul also writes in a research note to clients that AuRico may announce a dividend policy at the time it reports its year-end results and that “continued successful operation execution, particularly on the Young Davidson ramp-up, could potentially drive further re-rating.” The company declared commercial production at the Young-Davidson gold mine in northern Ontario on Sept. 1.
“AuRico is acquiring shares of a potential dividend paying gold producer with an attractive organic growth profile, low cost/long life assets, low development/permitting/cost escalation risk, a solid balance sheet, and very low political risk,” Paul argues. “In our view, such an investment would typically involve a substantial premium valuation.”
David Haughton of BMO Capital Markets resumed coverage of the company following the Ocampo sale but has done so with a rating downgrade from outperform to market perform. At the same time, however, he has also raised his target price to $9.50 per share, noting that that paying off debt and buying back shares de-risks the company’s profile, while “increasing the importance of a successful ramp-up of Young Davidson.”
He argues that the share buyback will be dilutive to net present value by 1-5% over the proposed share price range using a 10% rate at spot and BMO prices, while he forecasts the share buyback will be positive to earnings per share by 12-14% in 2013 using spot and BMO prices.
The share offer will close on Jan. 23.
AuRico had already taken steps to strengthen its balance sheet in October when it sold its equity stakes in Endeavour Silver Corp. (EDR-T, EXK.N) and Crocodile Gold (CRK-T) on a block trade basis for gross proceeds of $104.6 million.
The Young-Davidson gold mine is near the town of Matachewan, about 60 km west of Kirkland Lake, and is situated on the site of two past-producing mines that churned out about 1 million ounces of gold from 1930 to 1960. In the three months to Sept. 30, the mine produced 9,903 oz. gold at a total cash cost of US$639 per oz.
Current production comes from an open pit forecast to produce 65,000-75,000 ounces of gold in 2012 and 135,000-155,000 ounces in 2013. The mine is expected to ramp-up to over 250,000 ounces of annual peak production by 2016.
The Young-Davidson mine near the town of Matachewan is about 60 km west of Kirkland Lake in the southwestern part of the Abitibi Greenstone Belt. Drill results continue to demonstrate potential immediately to the west of the mine, the company says, where it has five diamond drills exploring a number of targets.
As of Nov. 6, AuRico had completed nearly 29,000 metres of drilling this year primarily focused on two areas: the YD West Zone, west of the main zone below the 9,500-metre level and the West Shirriff area immediately to the West of YD West. The company discovered the YD West Zone in 2010 and has defined it to the west and at depth; it remains open in both directions. Results from the West Shirriff Zone have shown anomalous gold of the same rock and alteration type as the main zones of the mine, management says.
AuRico also owns the El Chanate mine in Mexico’s Sonora state. Acquired in April 2011, El Chanate is 37 km northeast of Caborca. Historical workings suggest the area has been mined for gold since the early 19th century and the current open-pit mine has been developed below the level of the historical small-scale mine workings.
In the three months ended Sept. 30, El Chanate produced 19,388 oz. gold at a total cash cost of US$434 per oz. The open-pit mine plan covers an area of about 1,700 metres in length, 780 metres in width, and 280 metres in depth. El Chanate utilizes conventional three stage crushing and heap leaching, with gold-bearing solutions processed in an ADR plant, followed by electro-winning and refining.
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