Mandalay Resources Corporation (TSX: MND) is a gold, silver and antimony producer engaged in mining and related activities, including acquisition, exploration, extraction, processing, and reclamation. The company's segments include Australia, Chile, Sweden and Canada. The company's producing assets are its Costerfield gold-antimony mine in Victoria, Australia; its Cerro Bayo silver-gold mine in Patagonia, Chile; and its Bjorkdal gold mine in northern Sweden. The company focuses on Challacollo silver-gold project near Iquique, Chile. The company conducts exploration on near-mine and district targets at its operating and feasibility stage projects. Its Costerfield is an underground gold-antimony mine located in the state of Victoria, Australia. Cerro Bayo is an underground silver-gold mine located in the Aysen Province of southern Chile.

Investment Rationale

• Consistently Deleveraging Balance Sheet: The company has consistently deleveraged its balance sheet with a Debt/Equity ratio reaching 0.36x at the end of the June quarter of 2020, compared to 0.66x at the end of June 2020. Higher commodity realization prices over the past year were crucial in the deleveraging balance sheet and minimize balance sheet risk. Further, the company has strong debt protection metrics, with the Net Debt/EBITDA ratio at the end of June 2021 stood at 1.04x, which implies that the outstanding debt position is quite manageable. The interest coverage ratio stood at 7x, which implies that the company has easily managed to pay its interest liabilities.

• Generating Strong Free Cash Flow: During the second quarter, the company generated USD 12.7 million in free cash flow and ended the quarter with a cash balance of USD 39.1 million. As the company continues to generate strong free cash flow, the emerging strength of its balance sheet significantly improves its abilities to fund near-term growth opportunities. Further during this quarter, the company also repaid USD 3.8 million towards the Syndicated Facility, leaving USD 51.4 million owing.

• Debt Free Balance Sheet by the end of 2021: The company expect to improve on the level of operational and financial performance while building on the successful exploration campaigns. Given the stronger free cash flow generation ability and current metal prices and exchange rates, the company is on schedule to be net debt-free by the end of 2021.

• Solid Quarterly Performance: The company has delivered strong financial results for the second quarter of 2021. In the second quarter, the company generated USD 51.4 million in consolidated revenue and USD 23.1 million in adjusted EBITDA, resulting in an EBITDA margin of 45% and earned USD 11.5 in adjusted net income. This was the sixth consecutive quarter of profitability. Further, exploration so far this year has been a huge success for the group due to the outstanding results at the newly discovered high-grade Shepherd structure.

• Gold to Remain in Investor's Limelight: Gold is again gaining ground amid a resurgence of COVID-19 Delta variant cases across the world and raised concerns that a recovery in the global economy and fuel demand may slow. An extended uncertainty over global growth recovery could bring the safe-haven gold into the investor's limelight as many investors use gold to hedge their portfolio return against the broader market mayhem. Moreover, elevated gold prices would have a positive impact on the gold miners, as it would increase gold realization prices, which would lead to topline growth, margin expansion, higher profit, and higher free cash flow generation.

• Technical Strength: Despite recent correction in the MND shares on the back of volatility in the gold prices, its shares are sustaining above the rising trend line, which is acting as crucial support. Further, MND shares are trading well above the 200-day SMA, which implies a long-term uptrend is broadly intact. Also, the 14-day RSI hovering in the neutral zone at 46.4 with a bullish bias.

Technical Price Chart (August 17, 2021). Source: Refinitiv, Analysis by Kalkine Group

• Stable Outlook: Mandalay expects to see continued improvements in production and costs from Costerfield and Björkdal in 2021. At Costerfield, the company expects production to increase throughout 2021 as it increases production from the high-grade Youle vein. Mandalay also expects production and cost improvements at Björkdal in 2021, as the higher-grade Aurora zone and surrounding veins increase production, allowing for a higher feed grade to be processed. The company currently expects strong operating performance to continue; however, the COVID-19 pandemic creates uncertainties as experienced across the mining industry.
  

• Risk Associated to Investment: The company’s business model is exposed to a variety of risks ranging from a sharp plunge in the underlying commodity prices, forex risks etc. The resurgence of COVID-19 cases could disrupt exploration and production, which would affect financial performance.

Financial Highlights: Q2FY21

Source: Company Filings

• Revenue of USD 51.4 million on gold equivalent sales of 28,115 ounces compared to USD 52.6 million on 29,713 ounces in Q1 2021, broadly the same between the periods. In Q2 2020, revenue was USD 42.3 million from 24,916 ounces of gold equivalent sold. This increase in Q2 2021 as compared to Q2 2020 was the result of a 13% increase in gold equivalent ounces sold and the support from higher realized metal prices.
• The Company’s realized gold and antimony prices in Q2 2021 were USD 1,793 and USD 11,671, respectively, while in Q2 2020 realized prices were USD 1,714 and USD 5,316, respectively.
• Consolidated gold equivalent production of 28,843 ounces compared to 28,676 ounces in Q1 2021, and 24,752 ounces in Q2 2020. The increase in ounces produced in Q2 2021 compared to Q2 2020 was mainly due to the continuation of the trial processing of mineralized waste dump material at Cerro Bayo in 2021.
• Adjusted EBITDA of USD 23.1 million compared to USD 26.1 million in Q1 2021 and USD 21.3 million in Q2 2020. Q2 2021 adjusted EBITDA was lower as compared to USD 26.1 million during Q1 2021 due to higher costs of sales. The increase in Q2 2021 adjusted EBITDA compared to Q2 2020 relates mainly to increased revenue.
• Consolidated cost of sales excluding depletion and amortization was USD 27.1 million for Q2 2021 compared to USD 19.7 million for Q2 2020. The increase in Q2 2021 costs was mainly due to relative foreign exchange movements, increased mining rates at both sites and the commencement of the trial processing at Cerro Bayo.
• Consolidated cash cost per ounce of saleable gold equivalent produced for Q2 2021 was USD 960, 13% higher than Q2 2020 of USD 851. Consolidated all-in sustaining cost per ounce of saleable gold equivalent produced for Q2 2021 was USD 1,342, 9% higher than Q2 2020 of USD 1,230. These per ounce cash costs were higher in Q2 2021 as compared to Q2 2020 due to higher costs of production and the relative strengthening of local currencies to the U.S. dollar.
• Consolidated capital expenditures for Q2 2021, totaled USD 13.6 million (USD 5.7 million occurred at Costerfield and USD 7.6 million at Björkdal). By comparison, total capital expenditures, including capitalized depreciation and exploration, in Q2 2020 were USD 10.6 million (USD 5.5 million at Costerfield, USD 5.1 million at Björkdal). The increase in capital expenditures was due to increased exploration at Costerfield and mining equipment at both sites.
• As at June 30, 2021, the Company had cash and cash equivalents of USD 39.1 million compared to USD 34.2 million at December 31, 2020.

Top-10 Shareholders

Top-10 shareholders together holds approximately 78.23% stake in the company with Plinian Capital, Ltd. and GMT Capital Corp. are the major shareholders with an outstanding position of 25.43% and 19.70% 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: Mandalay expects to see continued improvements in production and costs from Costerfield and Björkdal in 2021. At Costerfield, the company expects production to increase throughout 2021 as it increases production from the high-grade Youle vein. Mandalay also expects production and cost improvements at Björkdal in 2021, as the higher-grade Aurora zone and surrounding veins increase production, allowing for a higher feed grade to be processed.

Further, given elevated gold prices, the group is generating a solid free cash flow, and the trend is expected to continue in the mid-term. This would help the company to become debt-free on a net basis by the end of 2021, which would significantly increase the quality and strength of the balance sheet. Further, the company is generating a solid return on the shareholder’s money with a TTM ROE of ~35%.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 2.61 on August 17, 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 August 17, 2021). Source: REFINITIV, Analysis by Kalkine Group 

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

*Recommendation is valid at August 18, 2021 price as well.

Disclaimer

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