Equinox Gold Corp (TSX: EQX) is a Canada-based mining company. The Company is engaged in the development and operation of mineral properties. Its operating mines include Mesquite Gold Mine, Los Filos Mine, Mercedes Gold Mine, Aurizona Gold Mine, Fazenda mine and RDM mine.

Investment Rationale

• Price Has Broken Downward Sloping Channel: On weekly price chart EQX shares have registered a breakout above the downward sloping channel, a bullish indication. Further, the momentum indicator has also charted into neutral zone with bullish bias at 53.8, indicating that bulls are gaining control bears.

Technical Chart (as on October 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Registered Bullish Breakout on Daily Price Chart: On daily price chart, EQX shares have moved above the downward trend line Further it has retested the trend line support and retrenched from that support level, a bullish technical indication. Also, bullish range shift has taken place in RSI, with 14-day RSI moved above 60 and rising, indicating that the bulls have taken control from bears.

Technical Chart (as on October 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Reported Decent Sequential Quarter Performance: Earnings from mine operation in the second quarter of FY21 stood at USD 45.6 million increased slightly from USD 44.2 million in Q1FY21, and net income in Q2FY21 of USD 325.7 million increased from USD 50.3 million in Q1FY21.  The increase in earnings from mine operations was due to higher realized gold prices and improved cash costs per oz gold sold compared to Q1FY21.
• Robust Financial Risk Profile: The company has maintained a strong balance sheet with debt/equity ratio at the end of June 30, 2021, stood at 0.25x, improved from 0.39x reported at the end of March 31, 2021. Further, % Long-term debt to total capital ratio stood at 18.8% as of June 30, 2021, reduced from 26.5% reported as on March 31, 2021. Further, the company has robust debt protection metrics with Net Debt is just 2.8 times of its EBITDA as on June 30, 2021, implies no balance sheet risk.
• Positive Gold Outlook: Given an extremely stretched valuation in the equity market and heightening inflationary pressure, we believe gold would continue to attract investors looking for a safe haven to hedge against any unprecedented market volatility and gold prices will remain elevated in mid-term.

• Positive Pre-Feasibility Study for Aurizona Expansion: The company announced the results of a Pre-Feasibility Study for expansion at the company's fully owned Aurizona Gold Mine located in Brazil. This is expected to add 11 years to the mine life with an average annual production of 137,000 ounces of gold/yr, and total life-of-mine production of 1.5 million oz of gold. Peak production from the above mine is expected between 2026 to 2029, with an average production of ~160,000 oz of gold/annum.

Risk Associated to Investment

Equinox Gold Corp exposed to variety of risks ranging from downward trend in the gold prices, dollar index movement against the basket of majors, interest rate risk, current exchange risk and other macro-economic risks.

Financial Highlights: Q2FY21 (all figures are in USD)

 Source: Company Filing

• Revenue: Realized revenue of USD 226.2 million on sales of 124,712 oz of gold in the Q2FY21, compared to revenue of USD 215.3 million reported on sales of 125,824 oz of gold in Q2FY20.
• Average Gold Realization Prices: During the quarter under review, the company’s average gold realized price stood at USD 1,806/oz compared to USD 1,708/oz in the same period of the previous financial year.
• Improved Mine Operation Earnings: Mine operations earnings in the Q2FY21 stood at USD 45.6 million increased slightly from USD 44.2 million reported in Q1FY21, on account of higher gold realization prices in quarter under review.
• Reported positive bottom line vs losses reported a year before: The company reported net income during the Q2FY21 stood at 325.7 million as compared to losses of USD 77.8 million reported in Q2FY20.
• Reduced Stake in Solaris: During the quarter under consideration, the company sold 10 million shares in Solaris, reducing the Company's interest in Solaris to 19.9%.
• Reduction in Net Debt : As of June 30, 2021, the company reported Net debt of USD 215.6 million, reduced from USD 229.8 million reported as of March 31, 2021.
• Cash Position: Cash and cash equivalents increased to USD 333.9 million as on June 30, 2021, compared to USD 317.5 million reported as of March 31, 2021.

Top-10 Shareholders

Top-10 shareholders together holds approximately 34.7% stake in the company, with Van Eck Associates Corporation and Beaty (Ross J) are among the major shareholders holding approximately 9.8% and 6.37% respectively. Institutional holding in the company stood at 41.54%.

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metric

*1 USD = 1.24 CAD

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

The company reported decent performance in the quarter just gone by, with improvement in Mining activities earnings on the back higher average gold realization prices. Further, the company has bolstered its balance sheet by reduction in net debt and improved cash position. Moreover, the company has robust debt protection metrices, with Net Debt/EBITDA ratio of 2.8x, implies no balance sheet risks.

Further, the company is generating a TTM ROE (Common Equity) of 24.4% compared to peer’s average of 8% , which is significantly higher and reflets that the management is deploying shareholders money in high yielding projects.

Also, from the technical standpoint, EQX shares have registered a bullish breakout both on daily as well as weekly price chart, and well placed for upside movement from the current trading levels.

Hence, we recommend a “Buy” rating at the closing price of CAD 10.05 (as on October 13, 2021)

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

 1-Year Price Chart (as on October 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on October 14, 2021, price as well.

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Disclaimer

 

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