Low-Cost Transcontinental Gold
Back in 2001 Turkey produced less than 50k ounces of gold, an insignificant amount considering the geological potential of this transcontinental country. The prolific Tethyan Metallogenic belt, which covers a large part of it, offers an environment capable of hosting large precious-metals deposits. But strangely even though the ancient Romans found great success tapping this belt, the modern-day miners largely ignored it.
Two watershed events finally turned the miners on to Turkey. First was the enactment of a mining law designed to attract foreign investment, which led to large-scale systematic exploration and the discovery of some major gold deposits in the 1980s and 1990s. And second was the 2000s gold bull market, which ultimately encouraged the development of these discoveries.
As a result Turkey has seen steady growth in gold production over the last decade or so. It is now host to 7 commercial-scale mines. And in 2013 they collectively produced over 1.0m ounces. This represents a whopping 2200%+ increase in output since 2001. And Turkey anticipates a continued uptrend that'll have it producing 1.6m ounces annually within the next couple years.
One of the biggest and best gold mines in the country is the Copler mine. Copler is 80%-owned by Alacer Gold (a local joint-venture partner owns the balance), one of the first foreign companies to venture into this rich land. This project first hit Alacer's radar in the late 1990s. And it was early JV work with Rio Tinto that yielded the discovery of its strong zones of epithermal gold/silver/copper mineralization.
Alacer eventually proved up a strong resource base amenable to profitable mining. And after successfully procuring permits and financing, it built its mine. Copler ended up pouring its first gold in late 2010. And it has been going strong ever since.
Alacer is currently mining Copler's surface oxide ore via conventional open-pit heap-leach methods. And it has fine-tuned this operation to where it is one of the most efficient in the world. In its first three full years Copler's average production was 215k ounces, way above what was drawn up in the original mining plan. And best of all is this gold is produced at costs that are in the lower quartile of industry average.
In 2013 Copler's all-in sustaining costs came in at an impressive $820/ounce. Midpoint guidance for 2014 has this mine producing 212k ounces (170k ounces attributable to Alacer) at AISC of only $755/ounce. And through H1 Alacer has handily bested guidance cost expectations, with AISC at only $704/ounce.
This 2014 outperformance would lead to a year-over-year AISC decrease of 14%! Lowering costs is an incredibly rare feat these days, especially for an operation that already has a low cost base. You just won't find many gold miners producing their product at this low of a cost. And as a result, Alacer is one of only a small fraction of miners able to turn a profit at today's prices.
As for longevity, the Copler mine should be profitably producing gold for many years to come. Per the latest estimate it still has 1.1m ounces of oxide reserves remaining, which ought to give it another 4 or so years worth of production at the current rate. But the future of this mine is in its deeper much-higher-grade sulfide ore, which provides an additional 2.7m ounces of reserves.
Now as a heap-leach mine Copler is currently only able to process the shallower oxide ore. So it will obviously require development to build out an operation capable of processing the sulfide ore. And a recently completed definitive feasibility study provided further confidence that developing a facility to process the sulfides would have stellar economic potential.
Given the complexity of Copler's sulfides, Alacer will need to construct a large milling facility for processing. The ore first needs to be reduced to a slurry, which means it needs to run through a grinding circuit after it is crushed. The slurry would then go through a pressure oxidation process to convert the gold into a recoverable form. And finally it would run through cyanide-leach and carbon-in-pulp circuits for recovery.
Copler's newly-proposed plant and the associated infrastructure would cost an estimated $660m. This seems like a hefty sum in an environment where miners are having trouble accessing capital. But I suspect Alacer won't have any problem raising money given the attractive financial returns that would come with mining these sulfides.
Per the feasibility study, life-of-mine all-in sustaining costs are estimated at only $580/ounce. At $1300 gold this would allow for an after-tax IRR of 20% and a payback period of only 1.7 years. Under this parameter Copler would generate $1.6b in free cash flow over the life of the mine.
And speaking of mining life, mining Copler's sulfides would extend its longevity by 17 years. Per the latest mining plan, production would average 160k ounces per year through 2034. And with much-higher grades up front, production would average 256k ounces annually over the first three full years of sulfide production.
This mining plan naturally only covers Copler's reserve base. And there's a whole lot of upside potential given the huge cache of resources on top of reserves. The Copler complex of deposits holds a grand total of 9.4m ounces of gold resources in all categories. When you remove the reserves, that leaves 5.6m ounces that aren't even part of the mining plan.
These existing resources along with future potential discoveries in the highly-prospective Copler district may at some point support an expansion and/or an extension of the mining life. Alacer also controls 7 other active exploration projects outside the Copler district, so a new standalone operation is not out of the question either. As one of Turkey's premier mining companies, Alacer has no shortage of exploration targets.
Overall what we can expect from Alacer Gold going forward is profitable oxide mining, the potential for discovery via ongoing exploration, and the development of Copler's large sulfide resource.
This development is of course contingent upon the procurement of permits, which shouldn't be a problem given Alacer's track record and understanding of Turkey's legal/social frameworks. It hopes to have all its permits in hand by Q1 2015, and will fund the initial stages of development from its large treasury ($291m in cash as of Q2) and cash flow. Initial sulfide production is targeted for 2017.
What investors can also expect from Alacer Gold is positive leverage to the price of its underlying metal. It's obviously been a tough last few years for gold. But when gold has mounted a rally, Alacer's stock has responded. And as you can see, investors were rewarded.
There's no denying that this chart is ugly. And sadly this is what a 4-year chart looks like for nearly all gold stocks scrubbed up against the metal. What's important to take from this though is how a stock responds when gold does show signs of life. This cyclical bear has devastated many mining companies, and many of their futures are bleak. But there's an elite group that will thrive when gold turns the corner. These miners are well-positioned fundamentally, and their stocks tend to outperform amidst gold's uplegs.
Like most stocks, Alacer's saw its apex in 2011 around the same time as gold's. But also like most stocks, Alacer plunged in sympathy with the metal. And plunge it did, shedding a staggering 83% to its 2013 low. Downside leverage naturally comes with the territory, but unfortunately ASR sold off harder than many of its peers.
What really left a bad taste in investors' mouths was its failed merger with Australian miner Avoca Resources. Alacer, which went by Anatolia Minerals at the time, entered into this deal in February 2011 in order to become a large low-cost multi-mine mid-tier. But with the timing so close to gold's peak and the subsequent underperformance of the assets that came over from Avoca, it was a colossal disaster.
As new CEO Rodney Antal puts it, the disparity between the Turkey and Australia mines resulted in an unbalanced asset portfolio that muddled Alacer's investment case. Alacer thus smartly decided to shed its Australian assets in a cash deal that closed in October 2013 in order to re-focus on Copler and its other Turkish assets.
Unfortunately the damage had been done. ASR didn't even participate in the first of gold's four post-apex uplegs in early 2012, falling nearly 7% while gold gained 15%. It did exhibit excellent positive leverage amidst the second upleg, gaining 50% to gold's 15% (3.3x). But with operating costs at its Australian mines continuing to rise, nothing was able to support it when gold went on a 9-month dive that bottomed out in mid-2013.
Alacer announced its decision to pursue the sale of its Australian assets around the same time as gold's bottom. So when investors did eventually come back, they found a company with a strong singularly-focused asset base.
And ASR's fabulous performance in gold's two most recent uplegs has indeed richly rewarded investors. It soared 79% to gold's 18% gain in Q3 2013's upleg (4.3x leverage). It gained 77% to gold's 16% in the latest upleg that peaked in March (4.8x leverage). And ASR even rose 27% in a rare summer rally that pushed gold 7.6% higher (3.6x leverage). This stock has clearly regained its mojo, and has shown a willingness to pop on any surge in the metal.
Given Alacer's high correlation with the performance of its underlying metal, it is indeed going to take a gold surge for its stock to soar higher. And since gold is way overdue for a major bear-busting uptrend, now could be one of the most opportune times ever to buy ASR, while it is still cheap.
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The bottom line is Alacer Gold owns one of the world's lowest-cost gold mines. Its Copler mine is located in transcontinental Turkey of all places, and in 2013 it was responsible for over 25% of this country's gold output. Alacer is currently mining Copler's oxide ore, but a recent positive feasibility study opened the door to mine its much larger sulfide resources.
Copler's low-cost profile and incredibly bright future has prompted investors to slowly return to Alacer's stock. And they'll be happy to see that its sole focus is back on Turkey following the recent sale of its hindering Australian assets. This stock has already shown the ability to positively leverage gold. And it ought to be one of the best performers when gold stocks return to favor.