Cost-Efficient Major Sees El Chanate as Priority,Tue, 10/21/2014 - 20:09
Q: During 2013, AuRico Gold sold off weaker properties and maintained its most valuable. How have you reinvested the proceeds over the last year?
A: A portion of the proceeds have been invested in the construction of the Young-Davidson operation in Canada and the ongoing ramp-up of the underground mine. We have also returned a portion of the capital to our shareholders through a US$300 million share buy-back and the launch of a quarterly dividend policy.
Q: How has AuRico Gold modified its plans in Mexico in response to the country’s new mining tax and royalty?
A: The new mining tax and royalty contributed to an increase in operating cash costs at El Chanate from US$592 per ounce in 2013 to US$621 in the first three quarters of 2014. This increase was also partially accounted for by changes to how we are accounting for cash costs under IFRIC 20. Some of the increase has been offset by our focus on cost reduction and enhanced operational efficiencies. We always strive to drive operational efficiencies throughout the operation and have successfully lowered costs through renegotiating supplier contracts on more favorable terms and optimizing the size of our workforce. Mining taxes in Canada are determined based on net earnings for tax purposes, and therefore various tax deductions are permitted prior to applying the applicable mining tax. The Mexican mining tax of 7.5% is determined based on earnings before amortization, depreciation, and interest, and therefore does not permit the taxpayer to deduct these items prior to applying the mining tax. In addition, the 0.5% Mexican tax royalty is applied directly to revenue, with no deductions permitted.
Q: How well do rating agencies reflect the real worth of mining companies, and how do their decisions impact the investor perception of companies like yours?
A: Sell-side analysts evaluate companies under their coverage based on their interpretation of publicly available information using a variety of currency and commodity assumptions as well as their own view on the company’s current and future operational performance. On the whole, these analysts do a fairly good job of valuing the companies they cover. We do find, however, that most investors review a number of these research reports to get a more balanced view of the company, which augments their own valuation work, and generally do not rely solely on one analyst’s viewpoint.
Q: How has AuRico Gold been affected by the trend of mining companies reducing exploration investment to save money?
A: The company has reduced its 2014 exploration budget by 35% over the prior year. However, we have actually increased the exploration budget at El Chanate over the prior year with the majority of this year’s budget being allocated there. AuRico Gold has also focused on early stage exploration work at our other properties in Mexico.
Q: What are the benefits of having properties in both Canada and Mexico for AuRico Gold, and how do the operations complement each other?
A: Both Mexico and Canada are top mining jurisdictions that are “mining friendly”, have skilled workforces and high-quality deposits. El Chanate is a smaller, fully built, open-pit, heap leach operation that has been in operation for ten years. It is a solid and consistent producer, and requires significantly less capital investment.
By contrast, Young-Davidson is a much larger scale, underground mine that was recently commissioned and is still ramping up to its peak productivity levels. As such, there has been, and will be, more capital investment required at Young-Davidson than at El Chanate. However, the majority of our 2014 exploration budget has been allocated to El Chanate, where we are budgeting US$4.5- 5 million in exploration. Young-Davidson will not reach its peak productivity until the end of 2016, so they provide a nice compliment of stability and growth. One thing they have in common is that both El Chanate and YoungDavidson have top operations teams that we are fortunate in place. Furthermore, North America is considered to be the top mining jurisdiction in the world. It is stable, with established mining laws, a skilled workforce, steady governments, and quality deposits. Companies with assets in North America are generally ascribed higher valuation as a result of the reduced risk associated with operating in North America