Alio Gold facing dilution problem at San Francisco Mine

Alio Gold Inc. [ALO-TSX, NYSE] is looking at several options for its San Francisco gold-silver mine in Mexico to reduce mining dilution in 2019, including a temporary suspension of mining while leaching and processing of low-grade ore from stockpiles continues.

Shares of Alio closed down 9% on November 8, 2018, the date of the announcement. On Friday November 9 the shares were unchanged at 94 cents, leaving Alio with a market cap of $87.25 million, based on 84.7 million shares outstanding. The 52-week range is $4.94 and 81 cents.

Alio Gold is a Canadian gold mining company engaged in production, development and exploration in Mexico. Its principal assets include the producing San Francisco Mine in Sonora and the development-stage Ana Paula development project in Guerrero.

San Francisco is an open pit heap leach operation with a mineral reserve of 928,700 ounces of gold (58.4 million tonnes at 0.53 g/t). The deposit is still open along strike and at depth, with exploration potential for high-grade ore beneath the existing pit.

Back in March, 2018, Alio said it had agreed to acquire all of the outstanding shares of Rye Patch Gold Corp. under a plan of arrangement deal worth $128 million.

Rye Patch recently billed itself as Nevada’s newest gold producer. Its Florida Canyon gold mine, between Lovelock and Winnemucca, has been in production since the spring of 2017. Florida Canyon produced 11,998 ounces of gold and 8,960 ounces of silver in the third quarter of 2018, Alio said.

“This transaction is consistent with our strategy to create a leading mid-tier previous metals company,” said Alio Gold CEO Greg McCunn.

The update on the San Francisco Mine was contained in a November 8, 2018 press release in which Alio reported a third quarter net loss of $3.72 million or $0.04 a share, after including a one-time impairment charge of $8.96 million on the used processing plant being stored at Ana Paula.

The company said it produced 23,606 ounces of gold in the third quarter at an all-in sustaining cost of US$1,293 per ounce.

The 100%-owned San Francisco Mine produced 11,608 gold ounces and 3,912 ounces of silver in the third quarter, compared to year ago production of 19,429 ounces of gold and 8,808 ounces of silver. Gold and silver production was lower as a result of fewer recoverable ounces deposited and lower recoveries of the San Francisco pit ore.

With respect to San Francisco, a temporary suspension of mining is only one of the options being considered, the company said. Others include increasing mining rates back to 90,000 to 100,000 tonnes per day if dilution can be effectively controlled in order to complete the pit push-back by the end of 2019.

Another possible option is reducing mining rates in the San Francisco pit and deferring stripping until the gold price environment improves.