AuRico trims 2012 production guidance

AuRico Gold (AUQ-T, AUQ-N) has revised its 2012 production guidance after a high turnover of workers at its Ocampo gold-silver mine in Mexico dragged down output in the second quarter.

The Toronto-based producer says the shortage of workers at ­Ocampo in Chihuahua State slowed down underground development at the Northeast mine and caused dwindling developed-ore inventories.

During the second quarter, the underground mining at Ocampo averaged 1,613 tonnes per day grading 5.38 grams per tonne — which is a 30% drop in tonnage, and a 13% increase in grade over the previous three months.

AuRico explained in a July 16 press release that because fewer tonnes were mined from underground, the grade processed at the mill dropped as workers supplemented the mill feed with lower-grade ore from surface.

The mill churned out 37,579 equivalent oz. gold at total cash costs of US$515 per oz.

Given the disappointing quarter, AuRico downgraded Ocampo’s 2012 guidance to between 155,000 and 170,000 equivalent oz. gold at cash costs of US$540 to US$570 per oz., from 180,000 to 200,000 equivalent oz. gold at US$469 to US$495 per oz.

As a result, its company-wide guidance for the year decreased by 8% to between 298,000 and 333,000 equivalent oz. gold, while cash costs rose 9% to US$497 to US$542 per oz.

On a July 17 conference call, AuRico’s president and CEO Rene Marion — who will be stepping down this September owing to health reasons — explained that the company first experienced the high turnover at the end of the first quarter, though the worker shortage didn’t impact operations until May.

He added that the company lost some of its workforce to new mines starting up in the area, and has been recruiting and training new employees to compensate.

He says AuRico has filled 90% of positions so far, including those of miners, supervisors and managers.

For the remainder of the year, the producer needs to increase underground development by 4,000 metres to allow ore inventories to return to targeted levels by early 2013. Marion said the company aims to engage contractors to support its accelerated underground development and increase developed ore inventories.

 “We expect that it may take several quarters to ramp-up to targeted underground development or mining rates at Ocampo, with downside risks remaining if the labour issues continue or worsen,” Canaccord Genuity analyst Rahul Paul comments in a note.

On the call, AuRico’s management reiterated plans to ramp-up underground throughput at Ocampo to 3,000 tonnes per day starting in 2014.

The company estimates that the cost of ore and waste development by contractors is US$10 million, and expects to fall near the high end of its 2012 capital-expenditure (capex) guidance for Ocampo.

The mid-tier producer saw lower production at its other Mexican mine, El Chanate, where it completed the sixth-phase heap-leach expansion in late June “slightly behind schedule, thereby deferring a few thousand ounces into the third quarter,” Marion noted.

In the second quarter, El Chanate, located in Sonora State, generated 17,882 oz. gold at cash costs of US$432 per oz. Marion said ore is now under leach in phase six, and should produce as guided.

At the Young-Davidson gold mine in northern Ontario, the company saw pre-commercial production of 11,950 oz. gold, which fell below the anticipated 15,000 to 17,000 oz. range.

“Although second-quarter production this year from Young Davidson was lower at the beginning of 2012, the variance was largely expected, since management had previously indicated that lower-grade material would be used during the pre-commercial stage,” Paul states in the note.

The company outlines that it has completed mechanical commissioning of the flotation and gravity circuits required to put Young-Davidson into commercial production. As a result, it expects mill recoveries will reach the targeted 90% level in the third quarter, up from the second quarter’s average recoveries of 82%.

AuRico’s management says that Young-Davidson, which started up on April 30, is on track to hit commercial production in August.

The mine is slated to produce 65,000 to 75,000 gold oz. at US$450–US$550 per oz. in 2012.

However, the company cautions capex at Young-Davidson for the year is set to increase by US$40 million because of engineering, procurement and construction management costs, which include US$13 million in labour costs and US$27 million in material or scope changes.

For the second quarter, AuRico’s core three assets produced a combined 51,101 oz. gold and 894,414 oz. silver, or 67,411 equivalent oz. gold, which is slightly below consensus.  

As a result, Paul of Canaccord cut his target by US$4 to US$8 and reduced the stock’s rating to “hold” from “buy,” while National Bank Financial analyst Paolo Lostritto maintained his $9 per share target and “sector perform” rating.

In a separate press release, the company announced CEO Marion would be resigning due to a serious but not life-threatening illness. He will be replaced by Scott Perry, the current vice-president and chief financial officer, effective Sept. 3.  

Marion has been at the helm of the company for five years, and he and his team have transformed AuRico into a sizeable mid-tier producer with a low-cost production profile.

Most notably, he led AuRico’s acquisitions of Northgate Minerals and Capital Gold — which added the Young-Davidson and the El Chanate mines — and also sold off the company’s high-cost, non-core assets, company chairman Colin Berner said on the call.

Though Marion will be resigning to focus on his health, he will remain on the board as a strategic advisor.

Most analysts note that while Marion’s departure is unfortunate, they consider Perry a good fit for the lead role.

Prior to joining AuRico as chief financial officer in 2008, Perry worked as the chief financial officer for Highland Gold Mining (HGM-L), and has also held senior roles at Barrick Gold (ABX-T, ABX-N).

On news of Marion’s resignation, AuRico tumbled 13% to close July 17 at $6.60. The next day the stock lost another 6% to end at $6.20.