Alacer Gold 03 Aug 11

Fat Prophets take profits

Alacer Gold certainly can’t be accused of lacking ambition. The gold miner, formed through the February 2011 merger between Anatolia and Avoca, plans to grow significantly larger over the next 4 years. Management expects production to double to around 800,000 ounces of gold, while also expanding Alacer’s reserves from 5.7 to 8 million ounces.

As we discuss below, these lofty targets are certainly achievable for Alacer as it continues to develop its existing assets. We also expect the gold bull market to remain in place for the foreseeable future, driven by the necessity of loose monetary policy in the US and Europe. However, it is a rare miner that manages to deliver on such an ambitious growth target without some hiccups along the way. Gold also tends to enter a consolidation period after each significant milestone and this could well occur in the short-term.

The recent break above the confluence of the downtrend line and 50 day moving average at the $8.50 region is bullish. This is also indicative of momentum favouring the upside. Initial resistance is located at $9.25, followed by the March high of $9.50.

With this in mind, we recommend that Members take advantage of the stock’s recent post-results rally to take some profits off the table by selling half of Alacer Gold.

The current state of play

Most of the company’s current reserves are contained in the former Anatolia’s Copler mine in Turkey. Copler’s reserves stand at 4.6 million ounces of gold, at a fairly low average grade of 1.5 g/t. The remaining 1.1 million ounces is split between what were previously Avoca’s assets of Frog’s Legs, South Kal and Higginsville. Higginsville is the most significant of this group at 0.7 million ounces. Frog’s Leg’s average grade is the highest of the group at 5.1 g/t, compared to Higginsville’s 3.9 g/t and 1.4 g/t at South Kal.

The exploration upside is most prevalent at South Kal, which has a 4.5 million ounce gold resource. South Kal alone could therefore deliver the targeted 2.3 million ounce reserve upgrade as its resource is proved up. However, Copler’s current resource of 6.2 million ounces will also be a key focus of the reserve upgrade drilling program.

Not surprisingly given their larger resource base, South Kal and Copler will also be the main engines of Alacer’s future production growth. Higginsville’s production on the other hand will remain relatively stable.

Copler’s future production growth will be in two stages. The first stage is focussed on expanding the recovery of gold from oxide ores through standard crushing and heap leaching processes. This is the method which is currently employed at the project, which has been running at commercial rates of production since April 2011. The second stage will process the non-oxidised ore through pressure oxidation (POX). A feasibility study is currently underway with regards to the second stage, which is due for completion in the second half of 2012.

Copler’s non-oxide production is the final component of the push to 800,000 ounces. Production is currently pencilled in to begin in 2014, ramping up to more than 200,000 ounces of gold in 2015. With around 25% of the miner’s future production target dependent on this particular expansion project, the feasibility study is of the upmost importance.

There has however already been a lot of work done on the project up to the pre-feasibility stage. The feasibility study could marginally alter the quantum of production and costs, but there is not likely to be a significant deviation from current expectations.

Turning to the miner’s current operating performance, second quarter production came in at 101,348 ounces of gold. This represents 11% growth from the first quarter, which was well ahead of guidance for 90,000 – 95,000 ounces. The strong quarterly performance provides management with the luxury of a slippage margin with regards to full year guidance of 400,000 ounces. We therefore remain comfortable that Alacer’s first full year of combined production will meet management’s expectations.

We are also pleased to see the group’s cash operating costs pull back 11% from the preceding quarter, to US$542 per ounce. Management stated that a company-wide cost and efficiency drive is currently under way, although no specific details have been provided. Indeed, the reduction is primarily a function of the total cost being averaged across a higher level of production. Lower costs are however better than higher costs and the current run rate is below full year guidance for US$590 per ounce.

Copler’s ramp-up made excellent progress through the quarter, with production of 41,122 ounces up 24% on the first quarter. Cash costs were a comparatively low US$381 per ounce. Management still expects costs to average US$463 through the course of the year, presumably due to the higher average costs through the first quarter.

Higginsville produced 40,919 ounces of gold through the period, coming in 13% ahead of the first quarter. As is the case for each of the former Avoca assets, Higginsville’s cash costs of production are considerably higher than Copler’s at US$715 per ounce. South Kal and Frog’s Leg produced 7,377 and 13,986 ounces of gold respectively, at cash costs of US$622 and US$599 per ounce.

The company’s second quarter performance continues to demonstrate that the merger between Avoca and Anatolia has not created any unnecessary operational difficulties. We have no reason to suspect that Alacer’s full year production and cost guidance won’t be met. Neither have we any reason for concern with regards to the likely achievement of Alacer’s longer term growth target.

The irony is that with everything running smoothly there is an absence of near term catalysts to drive Alacer’s stock price higher. The risk has in fact shifted towards the potential for negative rather than positive surprises. On this basis we believe the prudent course of action is to remove some profits from the table through a sell half recommendation.


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