Mandalay Resources Corporation

Mandalay Resources Corporation (TSX: MND) is a Canada-based natural resource company engaged in acquiring, exploring, and extracting gold, silver, and antimony deposits. It has producing assets in Australia and Sweden and care and maintenance and development projects in Chile and Canada.

Why Should Investors Book Profit?

• Long Cash Conversion Period: The company reported a lengthy cash conversion time of 103.4 days in Q3FY21 (ended September 30, 2021), higher than the industry median of 57.2 days. The above indicates that the company takes longer to convert its investments in inventory and other resources into cash flows.
• Low Operating Margins: On an interim basis, the company’s margins are lower than the industry median. In Q3FY21, its gross margin stood at 31.4% v/s the industry median of 50.0%. Its EBITDA margin shrunk from 52.3% in Q3FY20 to 47.6% in Q3FY21, and operating margin slipped to 28.0% in Q3FY21 from 34.0% reported in Q3FY20. This reflects inflationary pressure is suppressing the margin profile of the company.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation

In Q3FY21, the group reported a surge in its cost of operations to CAD 36.05 million from CAD 30.52 million in pcp. The above was due to an increase in the cost of sales plus higher depletion and amortization costs. This resulted in lower operating income despite higher sales generation during the quarter. Continuation of the above trend could dampen MND’s profit margins. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a double-digit downside (in percentage terms). Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of MND at the current price of CAD 2.68 on December 15, 2021, at 8:15 AM Toronto Time.

Price Chart. Source: REFINITIV

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

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