Alamos Gold Inc. and AuRico Gold Inc. Bet on Better Days for Gold with a $1.5 Billion Merger Deal

Weak gold prices will hurt smaller producers, but a bulked up Alamos Gold Inc. (TSX:AGI)(NYSE:AGI) might be attractive for gold bugs.

| More on:
The Motley Fool

Gold stocks have been a hard sell recently. Despite optimistic predictions of bullion reaching $2,000 an ounce, the price has struggled to touch $1,200 this year. But two Canadian gold companies, Alamos Gold Inc. (TSX:AGI)(NYSE:AGI) and AuRico Gold Inc. (TSX:AUQ)(NYSE:AUQ), are betting that gold mining has a bright future. Today the companies announced a friendly merger agreement.

The combined company would have a market cap of more than US$1.5 billion, making it a mid-tier producer with major assets in Ontario and Mexico. Alamos is an established gold producer that owns and operates the Mulatos Mine in Mexico, and has exploration and development activities in Mexico, Turkey, and the United States, while AuRico’s core projects include the Young-Davidson gold mine in northern Ontario and the El Chanate mine in Mexico.

The new company, to be named Alamos Gold Inc., will also include a spin-off firm, AuRico Metals Inc., which will hold AuRico’s Kemess project in British Columbia and will be capitalized with US$20 million in cash.

“This merger with Alamos represents a logical business combination that will create a premier intermediate gold producer with a diversified asset base that includes three low-cost producing mines, a significant organic growth profile, a pipeline of high-quality development projects, all of which is underpinned by a solid balance sheet and led by an experienced and proven management team,” said AuRico president and CEO Scott Perry in a statement.

The merged firm is expected to produce between 375,000 and 425,000 ounces of gold in Canada and Mexico this year, and has the potential to grow organically to as much as 700,000 ounces of gold annually.

Shareholders of both Alamos and AuRico are expected to benefit from the exposure to the significant value potential of the Kemess project and from stable, diversified royalty revenue via ownership in the new spin-off company.

Of course, gold companies are very much tied to the price of bullion, which has been weak over the past few years, mainly because of two factors: the ongoing strength of the U.S. dollar and the absence of inflation, reducing the precious metal’s appeal.

However, gold bugs have reason to be optimistic, according to a recent report by Citigroup, analysts forecast that while gold won’t make much progress this year, things will start to turn around in 2016. “Gold is still extremely vulnerable during 2015 but the 2016 to 2020 period could be supportive for gold,” analyst Jon Bergtheil said in the report.

Citigroup said it expects gold volume on the Shanghai Gold Exchange to recover after the recent pullback in prices, with large Chinese retailers already reporting increased buying interest in April. The bank also said it foresees some relaxation of Indian import restrictions meant to combat the current account deficit. China and India are major buyers of gold.

The Alamos-AuRico merger is, in many ways, a sign of the times. Smaller gold producers will struggle to survive as long as gold prices remain stubbornly low. But an expected boost in prices starting next year could make the merged company a worthwhile addition to your diversified portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Doug Watt has no position in any stocks mentioned.

More on Dividend Stocks

Close up shot of senior couple holding hand. Loving couple sitting together and holding hands. Focus on hands.
Dividend Stocks

Here’s the Average CPP Benefit at Age 70 in 2024

Canadian retirees can supplement their CPP payout by investing in blue-chip dividend stocks such as Enbridge.

Read more »

Gas pipelines
Dividend Stocks

Is Enbridge the Best Dividend Stock for You?

Enbridge now offer a dividend yield of 8%.

Read more »

STACKED COINS DEPICTING MONEY GROWTH
Dividend Stocks

How Long Would It Take to Turn $20,000 Into $100,000 With TSX Dividend Stocks?

Here's how a historical investment in TSX dividend stocks would have fared.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

Passive Income: How Much Should You Invest to Earn $100 Every Month

Want to earn an extra $100 per month in investment passive income? Here's how much cash you would need to…

Read more »

Canadian Dollars
Dividend Stocks

Buy 1,430 Shares of This Super Dividend Stock for $1,000/Year in Passive Income

Here's how to generate $1,000 in annual passive income with Dream Industrial REIT (TSX:DIR.UN) stock.

Read more »

A worker gives a business presentation.
Dividend Stocks

Ranking Inflation Rates in Canada: How Does Your City Stack Up?

Inflation rates stoked higher for some cities, but dropped for others. So let's look at how your city stacked up,…

Read more »

Doctor talking to a patient in the corridor of a hospital.
Dividend Stocks

Inflation Is Up (Again): What Investors Need to Know

Inflation ticked higher in Canada this month, but core inflation was lower. Here's how investors can take advantage during this…

Read more »

Happy family father of mother and child daughter launch a kite on nature at sunset
Dividend Stocks

Want to Make $10,000 in Passive Income This Year? Invest $103,000 in These 3 Ultra-High-Yield Dividend Stocks

Can you earn $10,000 in passive income in 2024? You can by investing $103,000 in these ultra-high-yielding stocks.

Read more »