Why Alamos Gold Stock Just Crashed 16%

Markets Motley Fool

What happened

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This morning, Toronto-based goldminer Alamos Gold (NYSE: AGI) announced it will pay nearly three-quarters of a billion dollars to acquire a rival half its size -- Quebec-headquartered Richmont Mines (NYSE: RIC). Alamos Gold stock plummeted more than 16% in response, and is still down 15.7% as of 1:45 p.m. EDT.

So what

Alamos is shelling out 905 million Canadian dollars ($747 million U.S.) to acquire Richmont, but not in cash. Instead, Alamos will trade 1.385 of its own shares for each share of Richmont outstanding. The deal, says Alamos, worked out to a "22% premium to Richmont's closing price and a 32% premium based on both companies' 20-day volume-weighted average prices, both as [of] September 8, 2017" -- about CA$14.20 per Richmont share.

Alamos justified the premium by saying it will acquire "a High-Quality, Free Cash Flowing Mine in a World Class Jurisdiction," and cement its own position as "a Leading Intermediate Gold Producer," producing over 500,000 ounces of gold ore annually at a low cost.

Now what

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Investors are selling Alamos on the news, but here's something worth pointing out: Over the past year, Richmont has indeed been free-cash-flow positive, generating positive cash profits of about $0.4 million. Alamos itself, while FCF-negative currently, is operating close to breakeven already, and burned only $13.3 million in cash over the last 12 months.

Meanwhile, from a GAAP perspective, Richmont's $13.3 million in reported profits for the past year will exactly cancel out Alamos's $13.3 million in GAAP losses. All on its lonesome, Alamos had been steadily shrinking its GAAP losses. Now, with this merger, it will become a breakeven venture in one fell swoop. I have a strong hunch that after this deal closes in November, and investors get a look at Alamos' improved cash flow statement, and much-improved income statement, they will rethink their knee-jerk reaction of selling off Alamos Gold stock today.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.