The stock markets are in turmoil after President Trump’s recent moves towards raising tariffs, and a low-valued stock which has been attracting some recent interest is Alamos Gold Inc (TO:AGI). The Canadian gold mining company has slumped in value over the past year due to fears of gold prices and a costly merger with Richmont Mines in 2017. It hit a 12-month low of $4.91 a few weeks ago, and now has risen to its present value of just $5.21.
But when Alamos reached its low, NASDAQ reported that Alamos had become oversold, signifying a potential to rise again. And some investors may look at the recent stock market shakeup and conclude that Alamos is a good investment. A stock market shakeup should be good for gold as investors move towards a stable store of value, which should mean good things for gold miners.
Yet while this logic may be appealing, it is far from likely that either gold or Alamos’s value should be expected to climb anytime soon. The safest thing to say about gold in 2018 is that it should be expected to be volatile. Meanwhile, Alamos’s value is more likely to rise than fall as it can hardly fall much lower, but investors should wait and see for the following reasons.
The Gold Problem
On the surface, there are many reasons to be optimistic about gold’s future. We know that inflation is expected to rise in the United States. Furthermore, Trump’s tariffs would further spur inflation and unnerve investors, which creates a perfect market for gold.
But on March 1, MarketWatch reported that “Gold prices settled at their lowest levels of the year” in part to the Federal Reserve’s desire to crack down on inflation. The Federal Reserve will likely raise rates this month and at least two more times this year. Higher rates also means that Treasury bonds now have higher yields, which presents an even safer investment compared to gold for investors worried about market volatility.
That however applies to just the United States, and Alamos is a Canadian company. Other countries like Canada appear to be taking a more cautious approach to rate hikes and bond yields. And if the U.S. economy tumbles or even enters a recession as a result of Trump’s foolhardy tariff plan, then perhaps the Federal Reserve would dial back their attempts at a rate hike.
Given all these myriad factors, it is impossible to tell how gold will go in the short term. A look at the gold price over the past 12 months shows that while gold has risen from about $1,225 per oz. per year ago compared to its current value of $1,323, this is not impressive given how the markets rose in the same time and the chart shows numerous peaks and valleys. The lack of stability should give investors pause in both buying gold or investing in Alamos.
Why Alamos?
The volatility of gold in 2018, as witnessed by Ice Gold Investing, is a significant damper on Alamos’s expectations, and this is a shame because the company has done well over the past 12 months and should continue to grow.
Investors may have castigated Alamos’s decision to purchase Richmont as its share price fell 16 percent at the time, but Richmont was profitable while Alamos was not. As a result, Alamos’s 6-K report shows that its net earnings rose from a loss of $17.9 million in 2016 to a gain of $26.6 million in 2017. Revenue climbed from $482.2 million to $542.8 million.
Furthermore, Alamos is moving forward towards diversifying its mining assets. The company currently operates two mines each in Canada and Mexico but is developing multiple mines in Turkey and North America. The first of these mines, Kirzali in Turkey, is estimated to have 665,000 ounces of gold and over 10 million ounces of silver and is viewed as a low risk project.
This is not to suggest that Alamos has no risk. For example, the company has only $200 million in cash and cash equivalents, yet owes $172 million in debt commitments in 2017. But without the gold price problem, Alamos would be a low-risk company with room to grow.
But the uncertainty surrounding the gold price and the global economy in 2018 is a real problem, and Alamos’s future is thus uncertain. Investors may wish to jump on Alamos now if they view it as a low-risk venture given its low share price. But I would recommend waiting for now, until we know whether the global economy and by extension the gold price will stabilize or worsen.