Raymond James has cut its target price on Alio Gold (TSX: ALO; NYSE: ALO) from $4.50 to $1.00 per share and downgraded the company from market perform to underperform due to operating challenges, debt and declining gold prices.
The company has temporarily suspended all development work at its Ana Paula project in Mexico's Guerrero state, including the construction of an underground decline, exploration work and the completion of a definitive feasibility study.
Alio Gold announced this week that, as a result, its vice president of project development, Paul Hosford, and project manager Terry Murphy, are leaving the company at the end of August. It also said that its chief financial officer, Colette Rustad, left the company on August 17.
The Ana Paula decision was taken in order to focus the company's efforts and capital allocation on its two operating mines, San Francisco in Mexico's Sonora state and the Florida Canyon mine in Nevada, which it recently picked up in its March acquisition of Rye Patch Gold.
Mining analyst Tara Hassan of Raymond James argues that delaying Ana Paula "puts growth on the backburner."
"This decision delays Alio's highest quality project and the one that would be providing low-cost growth," she writes in a research note. "With timing unclear for Ana Paula, we have pushed back production to 2023 (from 2021) and reduced our net asset value multiple to 0.5 times (from 1.0 times), which is in line with current developer multiples."
Alio Gold has also decided to reduce mining rates at its San Francisco mine to focus on generating cash flow due to lower gold prices, and plans to slow down waste stripping on phases six and seven. At the same time, the company is undertaking a review of operations at the mine that will examine how to reduce mining dilution and improve grades feeding the crushing circuit.
As a result of the changes at San Francisco, Alio says, the company will not meet its production guidance for 2018 of between 90,000 and 100,000 ounces of gold.
Hassan describes the steps at San Francisco as "the right call" but points out that it will hit the company's cash flow.
"With no guidance provided until negotiations are compete with the mining contractor to reduce the tonnage commitment, we believe Alio has a lot of ground to make up with investors to show that San Francisco can be a profitable mine," she notes. "We have made negative revisions to reflect lower tonnage and higher operating costs, however also flag the risk of the negotiations being unsuccessful, which could result in a curtailment of mining and a large penalty payment."
Meanwhile, at Alio's newest mine, Florida Canyon, the company is working on an updated mine plan, but in the interim costs remain high.
The company completed the acquisition of Florida Canyon on May 25, and in the three months ended June 30, the mine produced 11,587 ounces of gold and 8,734 ounces of silver, compared to 10,846 ounces of gold and 5,709 ounces of silver in the first quarter of the year.
"While Florida Canyon's production rates met our expectations, all-in sustaining costs remain elevated (est. of US$1,235/oz gold) as the mine ramps up, but also due to some capital improvements required," Hassan comments. "Additionally, the highest grade zone is currently restricted due to permitting limitations. While we expect these factors could improve, we expect Alio is facing a six-12 month window before notable cost reductions can be achieved."
Overall, Hassan says, challenges at its operations, particularly in the current environment in which the gold price is falling, could strain the company's balance sheet. "At a gold price below US$1,200 per oz., Alio's cash balance will be at risk of dropping below US$10 million in 2019, a level at which we expect Alio may need to shore up its balance sheet."