Gold’s demand comeback
This gold bull’s latest upleg has proven mighty, surging to many new nominal record highs.
Alamos Gold’s (TSX: AGI; NYSE: AGI) development plan for its Puerto Del Aire (PDA) high-grade underground gold project in northwest Mexico boasts a net present value at least 63% higher than its initial capital costs.
The plan outlines a $269 million NPV at initial costs of $165 million, an after-tax internal rate of return (IRR) of 46% and at a gold price of $1,950 per ounce. At current gold prices near $2,500 per oz., the IRR rises to 73%, and the NPV climbs to $492 million. The project, in Mulatos district of Sonora state is expected to nearly triple the district’s mine life to 2035.
“While Alamos’ smallest asset, the Mulatos extension leverages a significant amount of infrastructure in place and adds eight years of production with strong economics and with additional exploration potential,” BMO Capital Markets analyst Brian Quast wrote in a note to clients Thursday.
The project is set to deliver strong returns and significant upside through ongoing exploration, despite slightly lower capital and operating costs than analysts initially projected, Quast wrote.
Alamos’s expansion at PDA and Cerro Pelon coincides with rising global demand for gold driven by economic uncertainty. With high-grade discoveries and an extended mine life at Mulatos, the company is set to surpass its 2024 guidance of 160,000-170,000 ounces. This growth enables Alamos to take advantage of elevated gold prices and contribute to the increasing demand for safe-haven assets.
Its initial costs are to be spent over two years starting in mid-2025. PDA’s cash cost will be $921 per oz., with all-in sustaining costs (AISC) at $1,003 per oz.—lower than previous estimates despite inflationary pressures on mining expenses.
Alamos highlighted the project’s ability to front-load production, producing 127,000 oz. yearly in the first four years at an average grade of 7 grams gold per tonne. This strategy could drive strong early returns. Quast also noted the low execution risk, given PDA’s proximity to existing infrastructure and use of mothballed equipment from Alamos’s other operations.
Canaccord Genuity mining analyst Carey MacRury highlights the upside potential, mainly if Alamos adds a paste plant to increase mining recovery and improve stope cycle times, which could extend production beyond the current plan. Additionally, continued exploration success at PDA and Cerro Pelon could expand reserves and extend the Mulatos District’s life beyond 2035.
The PDA plan outlines total payable production of 806,000 oz. gold. The mine will process 5.4 million tonnes of ore at an average grade of 5.61 grams gold. The flotation plant, which avoids using cyanide, is designed to recover 85% of the metal.
The project costs includes $51 million for underground development and $109 million for the processing facility, which will integrate the Cerro Pelon crushing circuit and equipment repurposed from Island Gold, in Ontario. Alamos plans to fund PDA’s development entirely through free cash flow generated by its ongoing operations at the Mulatos district operation.
“PDA will benefit from existing infrastructure, reducing capital intensity and ensuring a smoother project execution,” Alamos CEO John McCluskey said in a news release. “With the success we’re seeing at Cerro Pelon, we have a strong opportunity to extend the high-grade phase of production well beyond our current plans.”
As part of the company’s broader strategy, Alamos is continuing with 55,000 metres of drilling across the Mulatos district in 2024. The goal is to further expand high-grade zones at PDA and Cerro Pelon, while positioning the district for long-term growth and increased production.
Alamos shares trading in Toronto gained as much as 1.7% in early Thursday to an intra-day high of C$25.13, before falling below C$25.00 in the afternoon. Shares have touched C$14.80 and C$27.57 over the past 12 months. The company has a market capitalization of C$10.4 billion.
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