Torex Gold Resources Inc. (TSX: TXG) is an intermediate gold producer based in Canada, engaged in the mining, developing, and exploring of its 100% owned Morelos Gold Property (the Morelos Gold Property), an area of 29,000 hectares in the highly prospective Guerrero Gold Belt located 180 kilometers southwest of Mexico City. The Company’s principal assets are the El Limón Guajes mining complex (ELG or the ELG Mine Complex), comprising the El Limón, Guajes and El Limón Sur open pits (the ELG Open Pits), the El Limón Guajes underground mine including zones referred to as Sub-Sill and ELD (collectively, the “ELG Underground”), and the processing plant and related infrastructure, which commenced commercial production as of April 1, 2016, and the Media Luna deposit (the Media Luna Project), which is an early stage development project, and for which the Company issued an updated preliminary economic assessment in September 2018 (the PEA). The property remains 75% unexplored.

Revenue Mix

Source: Annual Report

Key Highlights

Source: Company Presentation

Investment Rationale

• Strong Balance Sheet: Torex’s financial health continued to strengthen, with improved liquidity and deleveraged balance sheet, which implies a lower balance sheet risk for the investors. Further, the group exited 2020 with USD 206 million of cash and short-term investments. Moreover, the group is planning to repay USD 40 million of the remaining debt in Q1FY21.

Source: Company Presentation

 

• Cost Discipline, Key to Maintaining Margins: The company’s mining unit costs remained flat YOY, staving off inflationary and COVID cost pressures. Further, Oxidation and ore blending have helped minimize the impact of soluble iron and copper on reagent consumption in the processing plant. Mandated profit sharing (PTU) continues to be a key cost driver as it is directly related to the profitability of the mine (10% of taxable income in Mexico).

Source: Company Presentation

• Robust Cash Flow Generation: The group reported a strong conversion of operating cash flow (+USD 342 million) to free cash flow (+USD 168 million) during 2020. Further, the Projected cash flow from ELG expected to be more than sufficient to fund the development of Media Luna without requiring external sources of financing. Moreover, the group exited Q4 2020 in a net cash position of CAD 162 million.

Source: Company Presentation 

• Valuation Disconnect to Narrow Soon: TXG shares are available at a discount to its peers, which is expected to narrow soon as they execute their strategic plans. The group is investigate in value-accretive M&A opportunities.

Source: Company Presentation 

• Positive Spread Between ROCE and WACC: A positive spread between ROCE and WACC is a single crucial measure to assess whether the company is generating free cash flow or not. TXG’s spread between ROCE and WACC stood at 3.4%, which implies that the group is generating 3.4% above the total cost of capital. Also, the spread between ROE and Weighted Average Cost of Equity is ~4.8%, which implies a higher return for its shareholders. 

• Solid Margin Profile vs Industry: The group has outperformed the industry median margin profile and reported solid outperformance at the EBITDA level in Q4FY20. A higher operating margin is enabling the group to generate higher free cash flow for the firm and shareholders as well.

 Source: Kalkine Group, Refinitiv (Thomson Reuters)

• Risk Associated to Investment: The Company’s results from operations, financial condition, and cash flows are affected by various business conditions and economic trends that are beyond the Company’s control. The market price for gold and foreign currency exchange rates are the most significant external factors that affect the Company’s financial performance.

Financial Highlights: Q4FY20 and FY20

Source: Refinitiv (Thomson Reuters)

• During FY20, the group reported record gold sales of 133,063 oz for proceeds of USD 249.6 million at an average realized gold price of USD 1,847 per ounce. Gold sold for the year was 437,310 oz for proceeds of USD 782.2 million at an average realized gold price of USD 1,771 per ounce. The average realized price includes USD 3.8 million of realized losses on gold contracts for the quarter and USD 7.8 million for the year.
• Revenue for the quarter was USD 251.6 million. The cost of sales was USD 143.0 million, or USD 1,075 per ounce of gold sold for the quarter. The company recorded revenue for the year at USD 789.2 million. The cost of sales was USD 532.0 million or USD 1,217 per ounce of gold sold for the year.
• The company generated record earnings from mine operations at USD 108.6 million for the quarter and USD 257.2 million for the year.
• The company’s net income for the quarter was USD 91.9 million, or USD 1.07 per share on a basic and USD 1.05 on a diluted basis. Net income for the year was a record USD 109.0 million, or USD 1.27 per share on a basic and USD 1.25 on a diluted basis.
• The company’s adjusted net earnings for the quarter totalled USD 60.9 million, or USD 0.71 per share on a basic and diluted basis, and for the year totalled a record USD 135.7 million, or USD 1.59 per share on a basic and USD 1.58 on a diluted basis. Adjusted net earnings for the year excludes USD 11.1 million of care and maintenance costs incurred in the second quarter related to the COVID-19 suspension of operations.
• Cash flow from operations for the quarter totalled USD 137.1 million (USD 140.8 million prior to changes in non-cash working capital), including income taxes paid of USD 21.9 million. The company generated cash flow from operations for the year at USD 342.1 million (USD 328.8 million prior to changes in non-cash working capital), including income taxes paid of USD 103.3 million.
• Record EBITDA for the quarter totalled USD 165.9 million and a record USD 413.0 million for the year. Free cash flow for the quarter totalled USD 70.3 million and USD 168.1 million for the year.
• Debt repayments of USD 230.0 million were made in 2020, including the repayment of USD 90.0 million drawn on the Revolving Facility during the second quarter to maintain liquidity during the COVID-19 mandated shutdown. In December, the remaining amount outstanding on the Term Facility was repaid early, bringing the company’s debt to USD 43.4 million, including leases, at year-end.
• All-in sustaining costs per ounce of gold sold for the quarter totalled USD 886 and USD 924 for the year, which excludes USD 8.0 million of production costs incurred in the second quarter related to the COVID-19 suspension of operations. All-in sustaining costs were lower than the lower end of revised guidance and in line with original guidance.

Top-10 Shareholders

Top-10 Shareholders in the company together command 41.3% stake in the company, with Van Eck Associates Corporation and BlackRock Investment Management (UK) Ltd. are among the top institutional shareholders owning 9.95% and 9.37% stake in the company, respectively. The institutional ownership in the company stood at 63.9% and strategic ownership stood at 0.53%. 

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

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: Torex Gold Resources Inc is a financially strong gold producer with robust margins and a healthy balance sheet and attractively valued relative to intermediate peers. Further, the company exited the FY20 with strong financial strength, led by a splendid rally in the underlying commodity prices in the wake of an increase in demand for the safe-haven yellow metal. Further, the group has significantly reduced its balance sheet risk and focusing on making the company debt free in the next few quarters, which is achievable given the cash flow and free cash flow generation ability of the company. The total assets of the company as of December 31, 2020, were USD 1,252.4 million (December 31, 2019 - USD 1,229.6 million), which includes USD 174.1 million in cash and cash equivalents (December 31, 2019 - USD 161.8 million).

Further, the company intends to advance the Media Luna project from early-stage development to production in the first quarter of 2024.

The group is well-positioned to deliver strong cash flow in 2021, driven by strong momentum on production with 2020 actuals exceeding the high end of revised guidance and lower end of original guidance. Further, the Projected cash flow from ELG expected to be more than sufficient to fund the development of Media Luna without requiring external sources of financing.

Also, recently its shares registered a breakout on the daily price chart, as share price crossover the crucial short-term resistance of 50-day SMA and continued to trade above it since then. This indicates that the stock has created new support at 50-day SMA. Also 14-day RSI is hovering in a neutral zone with bullish biases at 56.23.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 16.85 on April 07, 2021.

 

1-Year Price Chart (as on April 07, 2021). Source: Refinitiv (Thomson Reuters).

*Recommendation is valid at April 8, 2021 price as well.

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Disclaimer

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