Fiore Gold Ltd (TSXV: F) is a growing gold producer, developer and explorer focused on precious metal projects in the United States. Fiore operates the Fiore Gold Pan Mine ("Pan"), an open pit, heap leach mine in White Pine County, Nevada. The nearby Gold Rock project is a federally permitted evaluation stage gold project, and the Golden Eagle project in Washington State is an exploratory stage project with significant identified gold mineralization.

Investment Rationale

• Reported Solid Q2FY21 Performance: During the second quarter of fiscal 2021, the company achieved a record quarterly revenue of USD 19.28 million led by a 19% increase in gold production compared to Q1FY21, at an average realized price of USD 1,770/oz as heap leach pH levels improved during the quarter. Further, mine operating income surged by 37% to USD 7.1 million.  Further, during the second quarter under consideration, the company's income from operations nudged by 47% on a YoY basis to USD 5.2 million, driven by higher mine operating income on the back of increased production and relatively higher gold realization prices. Basic EPS improved by 25% to USD 0.05 against USD 0.04 in the same quarter of the previous financial year.

• Strong Balance Sheet: Despite a capital-intensive business model, the company is virtually debt-free with a Debt/Equity ratio of 0.03x and long-term debt to capital ratio of 1.1%, which implies negligible balance sheet risks. Further, the company has consistently deleveraged its balance sheet since December 2019, with the debt to equity ratio declining from 0.08x to 0.03x at the end of the Q2FY21.

• Trading at a Discounted Valuation: From Price to Earnings multiple standpoints, F shares are trading at a discounted valuation to the peers, with LTM P/E multiple of F stood at 4.03x whereas Peer's median Price to Earnings multiple of 12x, which implies a discounted valuation of 66% against the peer's median.

• Strong Liquidity Position: At the end of the last quarter, the company's current ratio stood at 5.16x, significantly above the industry median of 2.6x, which implies ample liquidity to cover its short-term obligations. Further, at the end of June 2021, the company's cash and cash equivalent position stood at USD 18.5 million and implies that ~20% of the company's total market capitalization is in cash and Market Cap to Cash Position ratio stood at 4.9x, which looks quite attractive.

• Higher Yellow Metal Prices would benefit Fiore Gold in the Near-term: Gold prices have improved approximately 5.3% in a month over period and moved above USD 1,800/oz level. The recent price surge would lead to higher realization prices for the gold miners and bolster their financial health in the near term. Also, since 2020, gold has largely remained in a bullish trend and surged approximately 36% in the last two years, driven by an increased inflow of funds in the Gold ETFs globally. Given the resurgence in the COVID-19 delta variant cases, we assume that investors would further swap into gold ETFs as a hedging strategy against the speculative asset classes. Therefore, gold prices are likely to remain elevated in short to mid-term.

• Delivering Strong Return on Assets: Return on assets (ROA) is an indicator of how well a company utilizes its assets in terms of profitability. Businesses are ultimately about efficiency, squeezing the most out of limited resources. Comparing profits to revenue is a useful operational metric but comparing them to the resources a company used to earn them cuts to the very feasibility of that company's existence. Fiore Gold is posing a TTM ROA of 31.6%, whereas its peers average TTM ROA stood at 11.4%, which implies that within the gold mining arena, Fiore Gold is utilizing its resources in the best possible manner.

• Technical Strength on Weekly Price Chart: On the weekly chart, F stock prices are trading in a rising channel formation for the past more than five months and currently taking the support of the lower band of the pattern. Moreover, the prices are trading above 100-period SMA, acting as crucial support levels on the lower side. The momentum oscillator RSI (14-period) is trading at ~44.67 levels and showing a positive sign, which indicates the possibility of a strong rally in the coming trading session.

Source: REFINITIV, Analysis by Kalkine Group

• Risk Associated to Investment: The company business is primarily exposed to the risk of volatility in the gold prices. Further, the company’s operations are exposed to labor shortage, the outbreak of Delta variant at the production site, and Forex risks.

Financial Highlights: Q2FY21

• Q2 gold production stood at 10,915 ounces, a 19% increase compared to Q1 2021 as heap leach pH levels improved during the quarter.
• Gold sales came in at 10,884 ounces at an average realized price of CAD 1,770/oz.
• The company recorded quarterly revenues of USD 19.28 million, up 1.7% on a YoY basis, with mine operating income of USD 7.10 million, up 33.8%.
• The company reported a net income of USD 4.50 million and adjusted net earnings of USD 4.13 million.
• Basic earnings per share stood at USD 0.05, up 25% on a YoY basis and diluted earnings per share came in at USD 0.04, up 25%.
• The company generated a Pan operating cash flow of USD 5.2 million and a consolidated operating cash flow of USD 3.6 million.
• Closing cash balance stood at USD 17.52 million on March 31, 2021, a reduction in cash from December 31, 2020, as the group continue to invest in the expansion of the Pan heap leach pad to accommodate added mine life and in ongoing drilling and Feasibility Study activities to advance Gold Rock.
• During the quarter, the group spent USD 4.0 million on capital additions in the quarter, primarily the Pan Mine heap leach pad expansion, which is expected to be ready for ore stacking in fiscal Q3.
• At Gold Rock, the company continued with their resource expansion drilling and related Feasibility Study work, spending USD 0.9 million in the quarter.

Q3FY21 Production Highlights

• Q3 gold production of 11,756 ounces, an 8% increase over fiscal Q2 2021 as quarterly production trended back to historic levels.
• Gold sales of 11,741 ounces at an average realized price of USD 1,815 per ounce.
• During the quarter, the company agreed to acquire the past-producing project, Illipah, adding further exploration ground in Nevada.
• Closing cash balance stood at USD 18.5 million on June 30, 2021, an increase in cash from March 31, 2021, despite continued capital investment in the expansion of the Pan heap leach pad to accommodate added mine life and ongoing drilling and Feasibility Study activities to advance Gold Rock.

Top-10 Shareholders

Top ten shareholders together hold a 7.03% stake in the company, with Invesco Advisers, Inc. and Brunk (Kenneth A) are among the major shareholders, with an outstanding position of 3.16% and 2.4%, respectively.

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: Fiore's gold production has trended back to normal levels in the third quarter of FY21, and the company hope to see further improvement in fiscal Q4 as it begins to irrigate fresh ore directly above the liner on the new leach pad. With Pan performing well, the company plan to invest in an aggressive exploration program over the next 12-18 months covering the 200 km Pan and Gold Rock land package, as well as the newly acquired Illipah project. Given the success of previous drill programs at both Pan and Gold Rock, the management is confident that this expanded exploration program would demonstrate the longer-term potential of its Nevada asset.

Fiore has a strong balance sheet with a solid liquidity position and a virtually debt-free balance sheet. Also, rising gold prices would further bolster its financial health, and the company is expected to generate higher free cash flow from operation.

Gold prices are expected to remain firm and steady in the short-term to mid-term, given the lower interest rates, resurgence of Delta variant COVID-19 cases and stretched valuation in the equity market.

Moreover, the company is generating a very high return for shareholders, as the TTM ROE of the company stood 42.43%, which is gigantically higher.

Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 1.14 on July 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

One-Year Technical Price Chart (as on July 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid at July 14, 2021 price as well.

Disclaimer

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