Mandalay Resources Corporation (TSX: MND), a natural resource company, engages in acquiring, exploring, extracting, processing, and reclamation of mineral properties. It explores gold, silver, and antimony deposits. The company holds 100% interests in the Costerfield gold-antimony mine located in Central Victoria, Australia, and the Björkdal gold mine, which comprises ten mining concessions and 16 exploration permits located in Västerbotten County in northern Sweden.

Q3FY21 Production Mix

Source: REFINITIV, Analysis by Kalkine Group

Investment Rationale

• Generating Higher Return for Shareholders: MND is generating a higher return on shareholders' money than its close peers. TTM ROE stood at 39.5%, whereas the industry median stood at 34.9%, implying that MND shareholders have a competitive advantage, as Return on Equity is a test of how effectively a company is growing its value and managing investors' money.

Source: REFINITIV, Analysis by Kalkine Group

• Reported Industry Leading Margin in Q3FY21: The company's reported EBITDA margin, operating margin and net margin were significantly higher than the industry median. Its EBITDA margin stood at 47.6% vs industry median of 41.0%, the operating margin stood at 28.0% vs industry median of 27.0%, and net margin was 17.6% vs industry median of 12.9%, respectively. This is a testament to MND's competitive edge against its peers. Also, a higher margin will have a positive impact on the overall health of the company.

Source: REFINITIV, Analysis by Kalkine Group

• Strong Underlying Commodity Prices: The company is engaged in exploring gold and silver, which are firm on the commodity exchange. Also, heightened inflationary pressure will further help gold prices to move up in upcoming quarters, and the increasing industrial uses of silver will keep silver prices more robust. Because most of the movement in commodity-dominated stocks comes from the movement in the underlying commodity prices, we believe higher gold and silver prices will benefit MND shares on the Toronto Stock Exchange.
• Hedge Funds Hold ~20% Stake in MND: We noticed that the hedge funds hold ~20% stake in the company from the latest shareholdings. Typically, hedge funds are short-term investors. They are constantly looking for opportunities that can generate a decent capital gain in a shorter period. Hence, a significant hedge fund ownership in MND indicates potential upside in the short run. Also, the presence of hedge funds in a penny stock provides a lot of confidence to retail investors. GMT Capital Corp, a US-based hedge fund, alone owns a ~19.67% stake in the company.
• Institutional Holding of ~77.6%: Institutional holding is significantly higher in MND shares regardless of its penny cap market categorization. A significant presence of institutional investors reduces the chances of unnecessary financial shenanigans to a great extent. Approximately 12 funds have bought shares of MND, as per the latest update.
• Costerfield Gold-Antimony Mine Reported Strong Production Growth: During the third quarter of 2021, with an approximately 30% increase in gold equivalent produced at Costerfield (compared to the same period last year), the site's per gold equivalent ounce metrics improved significantly to cash and all-in sustaining costs of USD 546 and USD 837 respectively, from USD 657 and USD 1,088. This improved production also increased revenue to USD 27.0 million and adjusted EBITDA of USD 18.5 million during Q3FY21.
• Deleveraging Balance Sheet: The company has been consistently deleveraging its balance sheet over the last eight quarters. Moreover, it has robust debt protection metrics, with a Net Debt / EBITDA multiple of just 0.82x as of September 30, 2021.

Source: REFINITIV, Analysis by Kalkine Group

• Available at a Bargain: From the valuation standpoint, MND shares are available at dirt-cheap prices against their peers despite a fundamentally strong business. On TTM Price to Free Cash Flow multiple basis, MND shares are trading at 3.97x whereas industry median TTM Price to Cash Flow multiple stood at 25.17x.  This implies a discounted valuation of ~84% against the industry median. Given the company's high underlying commodity prices and balance sheet strength, we believe that this valuation gap will narrow down in the coming quarters.

Risks Associated with Investment

The company is exposed to various risks ranging from adverse price movements for gold and silver, strengthening the dollar index against the basket of majors, the resurgence of COVID-19, supply chain-related challenges and macro-economic risks.

Financial Highlights: Q3FY21

Source: Company report

• Reported Revenue Growth: During Q3FY21, MND recorded consolidated revenue of USD 52.6 million, 6% higher than USD 49.6 million generated in Q3FY20. This increase is attributable to the sales of 3,508 more gold equivalent ounces combined compared to the corresponding previous financial year. However, revenue was partially offset by a 4% reduction in the average gold realization prices.
• Significant Jump in Consolidated Net Income: During the quarter just gone by, the company reported a consolidated net income of USD 9.26 million, significantly higher than USD 0.64 million reported in the same quarter of the previous year.
• Higher Gold Production: Consolidated gold produced during the quarter under review stood at 33,121 ounces, an increase of 29% YoY.
• Lowered All-In Sustaining Costs: The company's all-in sustaining cost in Q3FY21 reduced to USD 1,135/oz of gold equivalent produced, compared to USD 1,262 in Q3FY20. All-in sustaining cost is a metric used by mining companies to reflect the cost of gold mining in a consistent format valid to both investors and mining professionals.

Top-10 Shareholders

Top-10 shareholders in the company together hold approximately 77.78% stake in the company. Plinian Capital, Ltd. and GMT Capital Corp. are the major shareholders, with an outstanding position of 25.36% and 19.65%, respectively. Institutional ownership in the company stood at 77.55%.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Cash Flow-Based Valuation

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

During the third quarter of FY21, the company sustained the financial momentum during the first half of the year. It delivered another solid quarter, driven by strong adjusted EBITDA and profits. MND earned USD 10.1 million or USD 0.11 per share in adjusted net income during Q3FY21, marking the seventh consecutive quarter of profitability. Further, its operational efficiency was depicted by the declining consolidated cash and all-in sustaining costs per saleable gold equivalent ounce during this quarter. In addition, an increase in underlying commodity prices will further bolster the group's financials in the upcoming quarters. The company has a strong balance sheet and has consistently deleveraged its balance sheet with robust debt protection metrics. However, any adverse move in the underlying commodity price could significantly impact MND's share prices. Hence, based on the above rationale, valuation done and considering the risks associated with the investment, we recommend a "Speculative Buy" rating on MND at the closing price of USD 2.39 (as on November 23, 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 November 23, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on November 24, 2021, price as well.

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Disclaimer

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