Alio Gold Has a Problem That It Needs to Correct

For Alio Gold , things have gone from bad to worse in 2019 as the stock is down nearly 30% so far this year. The company had started the year on the wrong foot thanks to a ton of issues, such as operational challenges, higher costs, and weak volumes, and it has failed to recover since then.

However, Alio Gold’s latest results indicate that it is capable of staging a comeback. Does this mean that it is time to take advantage of the stock price weakness and build a long position? Let’s find out.

Latest Results Show an Improvement…

Alio Gold sold 23,986 ounces of gold during the first quarter of fiscal 2019. Its silver sales also went up substantially to 14,404 ounces from 5,826 ounces a year ago. However, Alio’s stronger sales last quarter were tempered by weak gold prices.

The company’s average realized gold price during the quarter came in at $1,300 an ounce, down from $1,332 an ounce a year ago. But the increase in production was strong enough to offset the weak pricing. As a result, Alio’s revenue increased to $31.4 million as compared to $23.3 million a year ago.

But the top line gains didn’t translate into higher earnings as Alio continued to struggle on the cost front.

…but Earnings Keep Declining

Alio Gold’s net earnings from operations dropped to just $671,000 during the quarter as compared to $3.6 million in the prior-year period. Its earnings per share fell to just $0.02 from $0.07 a year ago.

Alio’s weak bottom-line performance can be attributed to a combination of lower gold prices and higher costs. The company’s cash costs per ounce increased to $1,094 an ounce as compared to $884 an ounce a year ago. Its all-in sustaining cost per ounce of gold produced also increased slightly.

Thanks to these higher costs, Alio’s production costs (before depreciation and depletion) went up from $15.5 million a year ago to $26.4 million last quarter. So it wasn’t surprising to see the company’s earnings fall by such a big margin.

More Pain Ahead

Alio’s ballooning costs can be attributed to its aging equipment at the Florida Canyon mine, where it is looking for ways to enhance production and keep a lid on costs at the same time. According to the press release issued by the company:

Work continues to evaluate numerous opportunities to increase production and reduce costs from historic levels.  Areas of primary focus are improving mining and mine fleet efficiency, improved mine planning functions which are expected to result in more efficient mining practices and grade optimization, exploitation of low strip ratio ore, increased ore in process by improved efficiency in crushing and possible inclusion of run-of-mine ore to the heap leach pad.

As such, Alio Gold’s bottom line can only improve if the company can find a solution to its infrastructure problems. Analysts expect a turnaround in this fiscal year, projecting a small profit as compared to the massive loss incurred last year. If Alio can deliver on that front, be assured that the company will be able to make a comeback, otherwise its stock will keep plunging.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects.

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