VANCOUVER — Newly minted AuRico Metals (TSX: AMI; US-OTC: ARCTF) is poised to hit the ground running with a strong capital position and a portfolio of royalty assets that already make it cash flow positive.
The company is a spin-out from the recent US$1.5-billion merger between AuRico Gold and Alamos Gold (TSX: AGI; NYSE: AGI).
The new AuRico was bankrolled with US$25 million in cash, and holds a 100% interest in the past-producing Kemess gold-copper project, 250 km north of Smithers, B.C., plus gold royalties that generate between US$7 million and US$8 million per year.
Major shareholders include New York-based hedge fund Van Eck Global and streaming company Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND), which hold 15% and 12% equity interests.
“We are pretty unique, since we’re generating upside through our royalty portfolio and a standout development project, where we’re looking to deliver a number of important catalysts over the next twelve months,” president and CEO Chris Richter says during an interview.
“We’ll definitely see value creation at Kemess, but right now the market is more focused on the royalty business, given the metal price backdrop. We’re more of a royalty company than a developer currently, but we’re keen on maintaining our optionality,” he says. “Even on the royalty side, we’re trading at a significant discount compared to other players in the space.”
AuRico generates income from interests in a trio of producing mines: a 1.5% net smelter return royalty (NSR) on Alamos’ Young-Davidson gold mine in Ontario; a 2% NSR on the Fosterville gold mine in Australia and a 1% NSR on the Stawell gold mine in Australia. (The latter two mines were recently absorbed by Newmarket Gold (TSX: CRK) after a $190-million merger with Crocodile Gold.)
AuRico Metals boosted its cash position in late August when Alamos invested another $5.6 million via a private placement, wherein it picked up 5.8 million shares for 70¢ per share. The arrangement increases Alamos’ equity position in AuRico to nearly 11%.
“Our cash position will allow us to pursue growth on both the development and royalty fronts. We completed the placement with Alamos, and we’ve received strong endorsement in the market from Sandstorm,” Richter comments.
“The money we’re spending at Kemess is focused on a number of key deliverables we think will drive the value of that asset higher in investors’ eyes. We’re also looking to expand our royalty presence in good jurisdictions, with a focus on gold. There’s been few times better than this for royalty companies in terms of market conditions,” he adds.
On Sept. 8 AuRico unveiled a deal to bolster its royalty portfolio via the $6.85-million acquisition of Mineral Streams. The private company holds a trio of Canadian gold interests: a 0.3% NSR on the Williams mine at Barrick Gold’s (TSX: ABX; NYSE: ABX) Hemlo gold complex; a 0.5% NSR on Wesdome Gold Mines’ (TSX: WDO; US-OTC: WDOFF) Eagle River gold mine; and a 1.5% NSR on the David Bell property, which also forms part of the Hemlo package.
“The Hemlo-Williams and Eagle River royalties are an excellent fit within our portfolio of high-quality, cash flowing royalties in top-tier jurisdictions, and together with the Young-Davidson and David Bell royalties, we now have four royalties in Ontario giving us exposure to some of the best gold mines in the province,” Richter says.
Under its former name Northgate Minerals, AuRico put Kemess on care and maintenance in 2011, after it failed to acquire a permit for an open-pit mine expansion when the local Tse Keh Nay First Nations raised concerns over proposed tailings and waste management.
The company’s new plan, however, envisions a block-cave underground operation.
Current development focuses on the Kemess Underground deposit, which hosts proven and probable reserves of 100 million tonnes grading 0.56 gram gold per tonne, 0.3% copper and 2.05 grams silver per tonne, for 1.8 million contained oz. gold, 6.6 million contained oz. silver and 619 million contained lb. copper.
According to a feasibility study released in 2013, the company could develop the project for $451 million, and produce 105,000 oz. gold and 44 million lb. copper annually.
The game changer for AuRico could be the Kemess East discovery. The company released a maiden resource on the deposit in January 2015, highlighted by 56 million indicated tonnes grading 0.52 gram gold, 2 grams silver and 0.4% copper; and 117 million inferred tonnes averaging 0.38 gram gold, 1.79 grams silver and 0.3% copper. The deposit holds 5.5 million equivalent oz. gold.
“We have a pretty large ongoing exploration program at Kemess East,” Richter says. The company is spending $6.5 million on the target this year, which will fund 30,000 metres of mostly infill drilling.
“We really have a great leg up at the property, with the infrastructure at our disposal. All together it’s $1 billion in replacement costs, and includes the mill circuit, grid power and a full 300-person camp. We also have the permits to use the past-producing Kemess South open pit as a tailing facility. When you combine those factors with the Canadian dollar depreciation, we think it’s an attractive development scenario.”
The carrying cost for the current infrastructure at Kemess is $6 million per year.
On Aug. 18 AuRico released assays from the first two holes at Kemess East, which extended core mineralization. Hole 15-1 cut 305 metres of 0.63 gram gold and 0.4% copper, while hole 15-2 intersected 301 metres grading 0.47 gram gold and 0.4% copper. The deposit remains open to the east towards the Kemess East Offset fault, and south towards the post-mineralization Sovereign intrusion.
AuRico shares have traded from 47¢ to 90¢ since July, and closed at 64¢ per share at press time. The company has 118 million shares outstanding for an $85-million market capitalization.
“We’re well situated for this type of market, where we have challenging metal prices,” Richter says. “We’re extremely protected by not only a strong balance sheet, but also the income from our royalties. We have some great shareholders supporting us, and we have a quality development asset that could give us major torque other royalty companies just don’t have.”