Allied Gold: The New Mine Will Be A Game Changer

Summary

• Allied Gold's growth profile remains attractive, targeting 700,000-800,000 ounces of gold by 2029 with lower production costs and strong cash flow potential.
• Despite high current AISC, cash flow is set to improve as new mines come online and production ramps up, especially with Kurmuk's low-cost output from 2026 on.
• The company's convertible debentures offer a compelling risk/reward, with an 8.75% coupon and potential for significant capital gains as free cash flow grows.
• At just 2.2x projected 2027 free cash flow, Allied Gold is undervalued. I'm maintaining my position in the debentures for yield and upside.
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Introduction

As it has been almost two years since I initiated coverage of Allied Gold (AAUC) (AAUC:CA), I think this is a good moment to check up on the company’s performance. Back in 2023, the main reason for me to give the company a good look was its growth profile that would see a much higher gold production at a lower production cost by 2029. As all of the company’s assets are located in Africa, an investment in Allied Gold comes with an elevated risk profile given the higher geopolitical risks versus Western countries.

Keep an eye on the cash flows instead of the earnings

In the second quarter of the year, Allied Gold produced just over 91,000 ounces of gold, of which just over 81,000 ounces were effectively sold. The AISC per ounce was approximately $2,343, which is rather high, as the sustaining capex at Bonikro and Agbaou remained elevated, as you can see below.

However, the situation will improve pretty drastically in the second half of the year. Allied Gold mentioned the full-year production split will be 45/55 with the best production quarter expected in the final quarter of this year. And as the image below shows, the H2 AISC should decrease to $1,850/oz which is still relatively high. That being said, the current gold price obviously offers an excellent tailwind and the net margins (on a pre-tax basis, and using the sustaining capex as base case) will exceed $1,600/oz.

As the company’s cash flow statement below shows, it generated almost $60M in operating cash flow before taking the changes in the working capital position into account. And although this was not sufficient to cover the $93.5M in total capex, the image earlier in this article indicated the sustaining capex was just $27.5M, which means the company generated north of US$30M in sustaining free cash flow.

The total capex is relatively high as Allied Gold is pushing hard to boost its gold production to 700,000-800,000 ounces per year by 2029. The new Kurmuk mine where construction activities are nearing completion will be the first important piece of the puzzle. The first gold pour is now expected in the second quarter of 2026, and the mine will produce an average of 240,000 ounces of gold per year at $950/oz as its all-in sustaining cash cost. This means that, using an average realized gold price of $3,000/oz to also account for the gold stream, this mine will generate almost US$500M in pre-tax after-capex (sustaining capex) cash flow. Allied Gold owns 93% of this mine.

It goes without saying adding an important production center will immediately boost Allied Gold’s net free cash flows, which will then be used to start working on the rest of the company’s pipeline.

At $3,500 gold, I anticipate Allied Gold to report a net sustaining free cash flow of US$800M in FY 2027 based on an anticipated production of approximately 650,000 ounces of gold.

I still like the risk/reward ratio of the debentures

While the company has quite a few liability items on its balance sheet (the total amount of liabilities is US$1.04B), approximately 90% of this is related to working capital items and "deferred revenue" related to the value of streams. As you can see below, there are really only US$110M in borrowings.

Those borrowings almost entirely consist of US$107M in convertible debentures, which are maturing in September 2028. These debentures come with a coupon of 8.75%, and can be converted into common stock at a price of US$17.37. Allied Gold will be able to use the "forced conversion" clause from next year on if/when the share price exceeds 115% of the conversion price. That’s a fast way to get rid of the debt on the balance sheet.

As AAUC is currently trading at just under US$16/share, we still aren’t close to the $17.37 conversion price nor the $19.98 that would be required from September 2026 on to "call" these convertible debentures. But if the commissioning phase of Kurmuk goes as planned and the company indeed generates US$800M in sustaining free cash flow in FY 2027, I don’t expect the company’s market capitalization to remain at the current $1.74B for much longer.

Investment thesis

Allied Gold Corp is cheap. Very cheap, as the stock is trading at just 2.2 times the sustaining free cash flow in FY 2027 based on $3500 gold, and even at $3000 gold I expect the sustaining free cash flow to exceed US$500M. Even if you’d apply a multiple of just 6x the free cash flow to that number, you still end up with a $3B market capitalization or approximately $25-26/share.

I'm sticking with my position in the convertible debentures as this adds an extra layer of safety. I continue to collect my 8.75% interest income while waiting for the potential capital gains. At the aforementioned $25/share, my convertible debentures will be worth 144 cents on the dollar – assuming Allied Gold hasn’t already triggered the forced conversion clause.

https://seekingalpha.com/article/4820675-allied-gold-the-new-mine-will-be-a-game-changer