Raymond James has cut its target price on Alio Gold (TSX: ALO; NYSE-AM: ALO) from $4.50 to $1 per share, and downgraded the company from “market perform” to “underperform” due to operating challenges, debt and declining gold prices.
The company has suspended all development work at its Ana Paula project in Mexico’s Guerrero state, including the construction of a decline, exploration work and the completion of a definitive feasibility study.
Alio Gold announced this week that, as a result, its vice-president of project development, Paul Hosford, and project manager Terry Murphy, are leaving the company at the end of August. It also said that its chief financial officer, Colette Rustad, left the company on Aug. 17.
The Ana Paula decision helped focus the company’s efforts and capital allocation on its two operating mines, San Francisco in Mexico’s Sonora state and the Florida Canyon mine in Nevada, which it recently picked up in its March acquisition of Rye Patch Gold.
Mining analyst Tara Hassan of Raymond James argues that delaying Ana Paula “puts growth on the backburner.
“This decision delays Alio’s highest-quality project, and the one that would be providing low-cost growth,” she writes in a research note. “With timing unclear for Ana Paula, we have pushed back production to 2023 [from 2021], and reduced our net asset value multiple to 0.5 time [from 1 time], which is in line with current developer multiples.”
Alio Gold has also decided to lower mining rates at its San Francisco mine to focus on generating cash flow due to lower gold prices, and plans to slow down waste stripping on phases six and seven. At the same time, the company is undertaking a review of operations at the mine that will examine how to lower mining dilution and improve grades feeding the crushing circuit.
As a result of the changes at San Francisco, Alio says, the company will not meet its production guidance for 2018 of between 90,000 and 100,000 oz. gold.
Hassan describes the steps at San Francisco as “the right call,” but points out that it will hit the company’s cash flow.
“With no guidance provided until negotiations are complete with the mining contractor to reduce the tonnage commitment, we believe Alio has a lot of ground to make up with investors to show that San Francisco can be a profitable mine,” she notes. “We have made negative revisions to reflect lower tonnage and higher operating costs, however also flag the risk of the negotiations being unsuccessful, which could result in a curtailment of mining and a large penalty payment.”
Meanwhile, at Alio’s newest mine, Florida Canyon, the company is working on an updated mine plan, but in the interim, costs remain high.
The company acquired Florida Canyon on May 25, and in the second quarter, the mine produced 11,587 oz. gold and 8,734 oz. silver, compared to 10,846 oz. gold and 5,709 oz. silver in the first quarter of the year.
“While Florida Canyon’s production rates met our expectations, all-in sustaining costs [of US$1,235 per oz. gold] remain elevated as the mine ramps up, but also due to some capital improvements required,” Hassan says. “Additionally, the highest-grade zone is currently restricted due to permitting limitations. While we expect these factors could improve, we expect Alio is facing a six- to 12-month window before notable cost reductions can be achieved.”
Hassan says that challenges at its operations — particularly in the current environment in which the gold price is falling — could strain the company’s balance sheet. “At a gold price below US$1,200 per oz., Alio’s cash balance will be at risk of dropping below US$10 million in 2019 — a level at which we expect Alio may need to shore up its balance sheet.”