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Alamos Gold Inc

Alamos Reports Second Quarter 2020 Results

Jul 29, 2020

TORONTO, July 29, 2020 (GLOBE NEWSWIRE) - Alamos Gold Inc. (TSX:AGI; NYSE:AGI) (“Alamos” or the “Company”) today reported its financial results for the quarter ended June 30, 2020.

“The second quarter of 2020 will be remembered as one of the most challenging times in our history given the COVID-19 pandemic. We started the quarter with two of our operations being temporarily suspended, but we adapted well and by June both Island Gold and Mulatos had safely returned to normal operating levels,” said John A. McCluskey, President and Chief Executive Officer.

At the same time we made good progress on several catalysts that form key parts of what is a transformational year for Alamos. These include the completion of the lower mine expansion at Young-Davidson earlier this month, the announcement of a Phase III expansion of Island Gold, and a construction decision on the La Yaqui Grande project. These have greatly enhanced the long-term outlook for each of our operating mines. We look forward to creating additional value for our stakeholders in the second half of 2020 with higher production and lower costs expected to drive strong free cash flow growth,” Mr. McCluskey added.

Second Quarter 2020

Produced 78,400 ounces of gold, with production impacted by the previously guided downtime of the Northgate shaft at Young-Davidson and temporary suspension of operations at Island Gold and Mulatos due to COVID-19. Mulatos and Island Gold resumed operations in May with both returning to normal operating levels in June

Mulatos produced 35,900 ounces of gold and generated mine-site free cash flow1 of $19.3 million, with the operation benefiting from the ongoing recovery of gold from the leach pad during the temporary suspension

Island Gold produced 19,400 ounces of gold and generated mine-site free cash flow1 of $9.2 million. Production was lower than previous quarters due to the temporary suspension of operations which began the last week of March. After a phased ramp up in May, mining and milling rates increased to average more than 1,200 tpd for the month of June Advanced the tie-in of the upper and lower mines at Young-Davidson, successfully commissioning the Northgate shaft and new lower mine infrastructure in July. Underground mining rates increased to 6,500 tpd by the end of July and are expected to ramp up to 7,500 tpd by the end of 2020. Sold 74,605 ounces of gold at an average realized price of $1,692 per ounce for revenues of $126.2 million Generated cash flow from operating activities of $49.6 million ($44.7 million, or $0.11 per share, before changes in working capital1).

Consolidated total cash costs1 of $933 per ounce and all-in sustaining costs ("AISC")1of $1,276 per ounce were both temporarily higher, due to higher costs at Young-Davidson during the lower mine tie-in. AISC were higher than usual as a result of the impact of the 79% increase in the Company’s share price on the revaluation of outstanding stock-based awards. In addition, sustaining capital was allocated to lower ounces of gold sold given the above noted temporary suspensions. Total cash costs and AISC are expected to decrease significantly in the second half of 2020

Realized net earnings of $11.7 million, or $0.03 per share.

Reported adjusted net earnings1 of $9.8 million, or $0.03 per share1, which includes adjustments for unrealized foreign exchange gains of $10.3 million recorded within deferred taxes, partially offset by COVID-19 costs of $6.5 million related to the suspension of operations at Island Gold and Mulatos, and other one-time losses of $1.9 million

Ended the quarter with cash and cash equivalents of $201.3 million and equity securities of $30.2 million

Paid a quarterly dividend of $5.9 million and repurchased 527,100 common shares at a cost of $2.6 million, or $5.05 per share, under the Company's Normal Course Issuer Bid ("NCIB"). To date in 2020, the Company has returned $17.3 million to shareholders in the form of dividends and share repurchases Subsequent to the Second Quarter:

Reported results of the positive Phase III Expansion Study conducted on Island Gold, which is expected to drive a 72% increase in average annual production to 236,000 ounces and a 30% decrease in mine-site AISC to $534 per ounce at the operation
Announced a construction decision on the high-return La Yaqui Grande project, which generates a 58% after-tax internal rate of return ("IRR") at a $1,750 gold price and is expected to significantly reduce Mulatos District AISC starting in 2022

(1) Refer to the “Non-GAAP Measures and Additional GAAP Measures” disclosure at the end of this press release and associated MD&A for a description and calculation of these measures.

Management's Response to the COVID-19 Pandemic

The World Health Organization declared COVID-19 a pandemic on March 11, 2020. The Company responded rapidly and proactively to COVID-19 and has implemented several initiatives to help protect the health and safety of our employees, their families and the communities in which we operate.

Specifically, each of our operating mine sites has activated established crisis management plans and developed site-specific plans that enable them to meet and respond to changing conditions associated with COVID-19. The Company is adopting the advice of public health authorities and adhering to government regulations with respect to COVID-19 in the jurisdictions in which it operates.

The following measures have been instituted across the Company to prevent the potential spread of the virus:

Medical screening for all personnel prior to entry to site for symptoms of COVID-19
Testing of personnel at Mulatos and Island Gold prior to starting their rotation at the camp
Training on proper hand hygiene and social distancing
Remote work options have been implemented for eligible employees
Social distancing practices have been implemented for all meetings, huddles and transportation
Mandatory use of personal protective equipment for employees where social distancing is not practicable
Rigid camp and site hygiene protocols have been instituted and are being followed
Elimination of all non-essential business travel
Required 14-day quarantine for any employees returning from out of country travel

Impact on Operations

In order to protect nearby communities and align with government requirements, two of the Company's mines were temporarily suspended, but resumed normal operations during the second quarter.

At Island Gold, operations were suspended on March 25, 2020 given the unique set up of the operation with a large portion of the workforce operating on a fly-in, fly-out basis and being housed within a camp located directly within the local community. The Company restarted operations in a phased approach at the beginning of May 2020 and ramped up to budgeted mining and milling rates of 1,200 tpd in the month of June. The Company incurred $4.5 million in COVID-19 costs at Island Gold in the quarter, mainly related to labour costs for idle employees and additional transportation and lodging costs.

Operations at Mulatos were suspended in early April following a mandate by the Mexican government to suspend all non-essential businesses in response to the COVID-19 crisis. The suspension period was lifted in May and mining, crushing and stacking ore on the leach pad was restarted. Although mining activities were suspended for part of the quarter, the Company continued to recover gold from the leach pad given the significant amount of contained ounces stacked in the first quarter. The Company incurred $2.0 million in COVID-19 costs at Mulatos in the quarter mainly related to labour costs for idle employees and additional transportation costs.

To date, operating activities at Young-Davidson have not been significantly impacted with mining and processing activities and construction and commissioning of the lower mine ongoing throughout the quarter. Completion of the lower mine expansion was delayed slightly but was completed on July 8, 2020.

Second Quarter 2020 Development Activities

Mulatos District (Sonora, Mexico)

La Yaqui Grande

On July 28, 2020, the Company reported results of an internal study completed on its fully permitted La Yaqui Grande project located in the Mulatos District in Sonora, Mexico. La Yaqui Grande is located approximately 7 kilometres (straight line) from the existing Mulatos operation and adjacent to the past producing La Yaqui Phase I operation. Given the project’s strong economics and its proximity to the existing Mulatos operation, the Company is proceeding with construction of the project starting in the second half of 2020.

La Yaqui Grande Project Highlights:

Average annual gold production of 123,000 ounces per year starting in the third quarter of 2022. This will replace higher cost production from the main Mulatos pit, keeping combined production at approximately 150,000 ounces per year
Mine-site all-in sustaining costs of $578 per ounce, significantly reducing Mulatos District all-in sustaining costs from the mid-point of previous 2020 guidance of $960 per ounce
After-tax net present value (“NPV”) of $165 million at a 5% discount rate and an after-tax internal rate of return (“IRR”) of 41%, using a base case gold price assumption of $1,450 per ounce and a MXN/USD foreign exchange rate of 21:1
After-tax NPV of $260 million and an after-tax IRR of 58% at a 5% discount rate using a gold price assumption of $1,750 per ounce and a MXN/USD foreign exchange rate of 21:1
Mine life of five years, extending production from the Mulatos District to 2027, based on current Mineral Reserves
Initial capital of $137 million to be spent over a two year period starting in the second half of 2020. At a $1,750 per ounce gold price, Mulatos is expected to self finance the development of La Yaqui Grande following which the operation is expected to generate strong free cash flow
La Yaqui Grande is fully permitted for construction having received approval of the environmental impact assessment (“MIA”) in the second quarter of 2019 and the Change of Land Use permit in the third quarter of 2019. As with La Yaqui Phase I, La Yaqui Grande will be developed with an independent heap leach pad and crushing circuit. The project will be developed over the next 24 months with initial production expected in the second half of 2022.

During the second quarter, the Company incurred $0.7 million ($1.9 million for the first half of 2020) focused on detailed engineering, project design and costing, and exploration activities. With construction commencing, the Company expects to spend between $15 and $20 million in the second half of the year.

Kirazlı (Çanakkale, Turkey)

On October 14, 2019, the Company suspended all construction activities on its Kirazlı project pending the renewal of its Turkish mining concessions which expired on October 13, 2019. Although the mining concessions have not been revoked and can be renewed following this expiration date, no further construction activities can be completed until the concessions have been renewed.

The Company has met all the regulatory requirements and conditions for the concessions to be renewed and reasonably expected the renewal by the expiration date. The communities local to the Kirazlı project remain supportive. As such, the Company is working with the Turkish Department of Energy and Natural Resources on securing the renewal of the mining concessions which will allow for a resumption of construction activities. The renewal is required from the same government department that granted the Operating Permit for Kirazlı in March 2019. The Company will provide updated guidance on the construction schedule and budget for Kirazlı following the receipt of the concession renewal and resumption of construction activities.

During the second quarter of 2020, the Company spent $0.6 million at Kirazlı and $3.6 million for the first half of 2020, which includes $1.4 million of working capital payments from prior periods.

Lynn Lake (Manitoba, Canada)

The Company released a positive Feasibility Study on the Lynn Lake project in December 2017 outlining average annual production of 143,000 ounces over a 10 year mine life at average mine-site all-in sustaining costs of $745 per ounce.

The project economics detailed in the 2017 Feasibility Study outlined a 12.5% IRR at a $1,250 per ounce gold price (21.5% IRR and NPV of $290 million at a $1,500 per ounce gold price). Since the release of the 2017 Feasibility Study, the Company has undertaken several initiatives designed to improve the project economics. These include a detailed review of construction capital, the evaluation of various production scenarios and the inclusion of the results of more detailed engineering.

During the second quarter, the Company filed the EIS with the federal government. The permitting process is expected to take approximately two years.

Development spending (excluding exploration) in the second quarter of 2020 was $1.3 million and $2.8 million for the first half of 2020, primarily related to baseline work and preparation of the EIS submission.

Second Quarter 2020 Exploration Activities

Island Gold (Ontario, Canada)

The 2020 exploration drilling program is focused on continuing to expand the down-plunge and lateral extensions of the Island Gold deposit with the objective of adding new near mine Mineral Resources across the two-kilometre long Island Gold Main Zone. The exploration drilling program in the quarter was designed to follow up on the exploration success in 2019, where high grade gold mineralization was extended across all three areas of focus, most notably in the Main and Eastern Extensions. This resulted in a 21% increase in Mineral Reserves to 1.2 million ounces (3.6 mt grading 10.37 g/t Au), net of mining depletion, and a 46% increase in Inferred Mineral Resources to 2.3 million ounces (5.4 mt grading 13.26 g/t Au) as outlined in the 2019 Mineral Reserve and Resource statement issued on February 18, 2020.

Exploration drilling programs at Island Gold were temporarily suspended on March 25, 2020 given the COVID-19 pandemic. The underground diamond drilling program restarted in May with four underground diamond drill rigs currently operating including two focused on underground directional drilling. The surface directional diamond drilling program resumed in early June with three drill rigs currently drilling.

A regional exploration program which includes 10,000 m of drilling is also planned in 2020 and is focused on evaluating and advancing exploration targets outside the main Island Gold Mine area on the 9,750-hectare Island Gold Property.

Surface exploration drilling

A total of 2,167 m was completed in 5 holes during the second quarter as part of the surface directional drilling program. Directional drilling targeted areas peripheral to the Inferred Mineral Resource blocks below the 1,000 m level, with drill hole spacing ranging from 75 m to 100 m. The area that was targeted by the surface directional drill program extends approximately 2,000 m in strike length between the 1,000 m and 1,500 m elevation below surface.

Previously reported highlights from the surface and underground drilling program in Island Lower East (E1E-Zone) include:

29.05 g/t Au (26.67 g/t cut) over 4.86 m (620-MH2-01);

44.30 g/t Au (44.30 g/t cut) over 2.25 m (MH21-04); and

10.98 g/t Au (10.98 g/t cut) over 2.09 m (MH23-01).

Previously reported highlights from the surface drilling program in Island West (C-Zone) include:

25.41 g/t Au (23.07 g/t cut) over 5.58 m (MH22-04).

Underground exploration drilling

During the second quarter of 2020, a total of 2,601 m of underground exploration drilling was completed in 9 holes from the 620 and 840 levels. The objective of the underground drilling is to identify new Mineral Resources close to existing Mineral Resource or Reserve blocks. A total of 69 m of underground exploration drift development was completed on the 340 and 840 levels during the second quarter of 2020.

Previously reported highlights from the underground exploration drilling program in Island East Upper (E1E Zone) include:

18.72 g/t Au (16.44 g/t cut) over 3.64 m (620-616-07);

8.41 g/t Au (8.41 g/t cut) over 6.30 m (620-610-26);

21.30 g/t Au (15.52 g/t cut) over 2.24 m (620-616-02); and

8.15 g/t Au (8.15 g/t cut) over 3.83 m (620-616-04).

Previously reported highlights from the underground exploration drilling program in Island Main (E1E Zone) include:

52.10 g/t Au (22.54 g/t cut) over 10.31 m (840-566-01);

21.01 g/t Au (21.01 g/t cut) over 4.26 m (840-566-06);

31.19 g/t Au (31.19 g/t cut) over 2.22 m (840-572-02); and

13.53 g/t Au (13.53 g/t cut) over 2.36 m (840-566-02).

Total exploration expenditures during the second quarter were $1.4 million, of which $1.2 million was capitalized. For the first half of 2020, $5.6 million was spent, of which $5.2 million was capitalized. Given the down time in the second quarter, the Company has revised its exploration budget at Island Gold from $21 million to $17 million, of which $15 million is expected to be capitalized.

Mulatos District (Sonora, Mexico)

The Company has a large exploration package covering 28,972 hectares with the majority of past exploration efforts focused around the Mulatos mine. Over the last three years, exploration has moved beyond the main Mulatos pit area and is focused on earlier stage prospects throughout the wider district.

At the beginning of the second quarter, exploration activities were suspended in response to COVID-19, with exploration activities expected to resume in the second half of 2020. During the second quarter, the Company incurred $0.6 million, mainly related to administrative costs. For the first half of 2020, $2.4 million was spent, of which $0.7 million was capitalized mainly related to La Yaqui Grande project.

Lynn Lake (Manitoba, Canada)

Exploration activities at the Lynn Lake Project were suspended late in the first quarter due to COVID-19. As a result, no drilling was completed during the second quarter. The focus throughout the second quarter was interpretation and targeting for the continuation of the drill program at Gordon and MacLellan, and developing and finalizing exploration programs to evaluate and further advance a pipeline of prospective regional exploration targets. Exploration spending in the second quarter totaled $0.7 million and $2.2 million for the first half 2020.

Review of Second Quarter Financial Results

During the second quarter of 2020, the Company sold 74,605 ounces of gold for revenue of $126.2 million, a 25% decrease from the prior year period driven by lower ounces sold, partially offset by an increase in realized gold prices. The decrease in ounces sold is primarily a result of the temporary shutdown of the Northgate shaft at Young-Davidson to facilitate the tie in of the lower mine infrastructure, as well as temporary suspensions of both Island Gold and Mulatos due to the COVID-19 pandemic. El Chanate concluded residual leaching during the fourth quarter of 2019, further reducing gold sales compared to the prior year.

The average realized gold price in the quarter was $1,692 per ounce, a 29% increase compared to $1,309 per ounce realized in the prior year period. The average realized gold price was slightly below the average London PM Fix price of $1,711 per ounce due to the impact of gold hedges.

Cost of sales were $103.3 million in the quarter, a 21% decrease compared to the prior year period, driven by lower production at all operating sites. For the three months ended June 30, 2020, cost of sales includes $6.5 million of COVID-19 costs.

Mining and processing costs were significantly lower than the comparative period at $67.9 million resulting from reduced underground mining and processing rates at Young-Davidson during the lower mine tie-in, as well as lower tonnes mined and processed at Island Gold and Mulatos due to the impact of COVID-19 on operations.

Consolidated total cash costs for the quarter were $933 per ounce, a 33% increase compared to $699 per ounce in the prior year period, driven by higher unit costs at all operating sites. The most significant impact was at Young-Davidson, which increased to $1,564 per ounce in the quarter driven by both a reduction in mining rates and processing of lower grade stockpiles. Total cash costs are expected to decrease significantly in the second half of the year.

AISC were $1,276 per ounce in the quarter, a 38% increase to the comparative period in 2019 driven by higher total cash costs, and higher sustaining capital per ounce given lower gold sales.

Royalty expense was $1.7 million in the quarter, substantially lower than the prior year period of $3.4 million due to lower gold sales, and a reduced royalty obligation at Island Gold following the repurchase of a royalty earlier this year which reduced the effective royalty rate on Mineral Reserves from 4.4% to 2.2% at Island Gold.

Amortization of $27.2 million in the quarter was lower than the prior year period due to less ounces produced and sold. Amortization of $365 per ounce was $44 per ounce higher than the prior year, due to the impact of straight-line amortization on a lower number of ounces sold. The Company expects amortization expense to be approximately $360 per ounce in the second half of the year.

The Company recognized earnings from operations of $12.1 million in the quarter, lower than the prior year period due to less ounces sold and COVID-19 costs, partially offset by higher realized gold prices.

The Company reported net earnings of $11.7 million in the quarter, compared to net earnings of $23.6 million in the comparative period. Net earnings benefited from the strengthening Canadian dollar and Mexican Peso, which resulted in a $0.2 million foreign exchange gain, as well as a $10.1 million foreign exchange gain recorded within deferred tax expense. On an adjusted basis, earnings of $9.8 million or $0.03 per share decreased compared to the prior year primarily driven by less ounces sold. Adjusted earnings reflect adjustments for one-time gains and losses, including COVID-19 costs, as well as foreign exchange movements.

Source: https://www.alamosgold.com/news-and-events/default.aspx

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Alamos Reports Second Quarter 2020 Results