VANCOUVER — As lower realized gold prices become the norm producers have received a clear message from markets: cut the fat and boost the margins. And AuRico Gold (TSX: AUQ; NYSE: AUQ) is aiming to move in that direction as it implements cost-containment initiatives to start the year, even as it ramps up production at its flagship Young–Davidson gold mine 60 km west of Kirkland Lake, Ont.
On Feb. 6 AuRico released 2014 guidance for its two producing assets, which include Young–Davidson and the open-pit El Chanate gold operation, 37 km northeast of Caborca in Sonora State, Mexico. The company expects a 25% boost in gold production over the next year, with annual output pegged at between 210,000 and 240,000 oz. Company-wide cash costs are expected to be between US$675 and US$775 per oz., while all-in sustaining costs are expected to fall between US$1,100 and US$1,200 per oz.
That compares to 2013 production of 192,600 oz. at total cash costs of US$676 per oz., which sits near the low end of AuRico’s guidance of between 190,000 and 220,000 oz. at total cash costs ranging from US$565 to US$645 per oz.
At Young–Davidson production is expected to jump by up to 32% to between 140,000 and 160,000 oz. The company reports that productivity from the underground mine during the first quarter should average 2,500 tonnes per day, and is expected to grow steadily throughout the year as the underground mine ramps up to a targeted year-end rate of 4,000 tonnes per day. Cash costs are also predicted to decline throughout the year as the higher-cost open pit ceases operation, while AuRico anticipates a sustainable productivity rate of 8,000 tonnes per day by the end of 2016.
President and CEO Scott Perry noted in the release that AuRico’s gold production is expected to increase from both mines on a quarter-to-quarter basis, which would mark the seventh consecutive quarter the company has registered growth. He added that the company is “uniquely positioned with a low-cost asset base located in top jurisdictions that provide significant organic growth.”
As far as capital expenditures are concerned, spending during 2014 is expected to be within the range of US$125 million to US$135 million. Capital spending is set to decrease by up to 40% relative to 2013 levels, as building wraps up at Young–Davidson underground.
AuRico reviewed its cost structure after the steep year-on-year drop in gold prices. The company reports that in fourth-quarter 2013 it “renegotiated numerous contracts on more favourable terms” and eliminated 50 positions from the El Chanate mine site. In addition, AuRico cut its corporate head office staff by 30%, and reduced its board of directors from nine to eight. The changes are expected to drop AuRico’s general and administrative expenses to US$20 million in 2014.
BMO Capital Markets analyst Brian Quast described AuRico’s annual guidance as “slightly positive,” and boosted his target price on the company from $4.75 to $5.50 per share on Feb. 6. Quast maintained his “market perform” rating on AuRico, noting that “after reviewing 2014 guidance, BMO Research has made small adjustments to its forecasts, which are slightly positive to net present value (NPV). In addition, an improving gold price and depreciating Canadian dollar have also positively impacted NPV.”
AuRico reported a cash balance of US$140 million at the end of September after generating US$24 million in cash during the third quarter. The company has traded within a 52-week window of $3.56 and $7.34, and closed up 23¢ after releasing its $5.34-per-share 2014 guidance at press time. AuRico has 248 million shares outstanding for a $1.3-billion market capitalization.
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