Osisko Mining Inc.

Osisko Mining Inc. (TSX: OSK) is a precious metal mining company. It is engaged in acquiring, exploring and developing mineral properties. The company's project portfolio includes Urban-Barry, Windfall Lake Property, Catherine Fault.

Recently, The Company bought 6 cell fractions of Windfall mining camp from Globex Mining Enterprises Inc. at a price consideration of CAD 1 million. The site is located across one of the Windfall area cells to the east of Osisko's Windfall gold deposit.

Q2FY20 Financial Highlights: OSK announced its second quarter results, wherein the company posted an operating loss of CAD 10.685 million as compared to a profit of CAD 0.72 million in the previous corresponding period (pcp). The quarter was marked by higher Compensation expenses of CAD 8.845 million as compared to CAD 3.145 million in Q2FY19, partially offset by a gain from marketable securities amounting to CAD 15.721 million, as compared to a gain of CAD 0.559 million in pcp. This increase in compensation was primarily due to an increase in stock-based compensation of CAD 5.1 million on account of the increased stock price for both Osisko and O3 Mining. The company is yet to report its revenue and hence reported an operating loss. Net finance income stood at CAD 0.059 million, as compared to CAD 0.139 million in pcp. Net loss stood at CAD 7.675 million, as compared to a net profit of CAD 6.941 million in pcp. During the quarter the company reported a lower capital investment and cash used for investing activities stood at CAD 40.547 million, as compared to CAD 54.423 million in pcp.

Income Statement Highlights (Source: Company Reports)

Risks: The group is yet to mark its commercial production on any of its mineral properties and hence does not generate cash from operations. The management estimates that the negative cash flow from operating activities is likely to sustain in the coming days.

Stock Recommendation: The stock of OSK gained ~13% in the last one year respectively. The group is an exploration stage company and is yet to commercialize its operations and hence yet to report income from operations. The company has purchased 6 cell fractions of the Windfall mining camp, which is impressive. However, we remain skeptical as the company is yet to commence its drilling activities on the sites. The company has reported a negative cash flow so far this year, and the management expects that the same pattern is likely to continue for a while till the company confirms gold drilling point from any of the locations. Further, the company’s operations were suspended due to the ongoing COVID 19 pandemic and the performance of the company has been materially impacted, which is a drag for the overall operations. Hence, considering the aforesaid facts, current price movements, we recommend a ‘Watch’ stance on the stock at the current market price of CAD 3.98 on August 31, 2020.

OSK Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Hudbay Minerals Inc. 

Hudbay Minerals Inc. (TSX: HBM) is a diversified metal mining company which primarily produces copper concentrate (including copper, gold, and silver) and zinc. The company owns four ore concentrators, three polymetallic mines, and a zinc production facility.

Q2FY20 Financial Update: HBM announced its second-quarter results, wherein the company posted revenue of USD 208.913 million as compared to USD 329.414 million in the previous corresponding period (pcp). The decline was majorly attributed to a significant reduction in the production levels across the Constancia facility due to temporary suspension of the operations on account of COVID-19 pandemic. Meanwhile, the Manitoba operations of the company have delivered strong operational performance, which has supported the overall performance. The quarter was marked by a fixed overhead production cost of USD 25.6 million within the Constancia facility, which weighed on the company’s profitability. Earnings before loss stood at USD 74.604 million as compared to USD 43.931 million in pcp. Adjusted EBITDA, stood lower at USD 49.1 million as compared to USD 95.9 million in pcp. The company reported net earnings of USD 51.901 million, as compared to USD 54.145 million in pcp. The company ended the quarter with cash and cash equivalent of USD 391.136 million, while total assets stood at USD 4.499 billion.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks:  The group is exposed to the volatility in commodity prices such as copper, gold etc. Any volatility in the commodity prices would affect the group’s financial performance. Further, the second wave of the novel virus might affect the operations of the mines.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of HBM gained ~35% in the last one year, due to the increase in the gold prices in the recent past. The company reported its Early mining of the gold zone at Lalor is as per the expectation, and the company expects additional gold production of 74,000 ounces in FY20 and 102,000 ounces in FY21, which is a key positive. During the second quarter, consolidated cash cost per pound of copper produced, net of by-product credits stood at USD 0.64, reflecting a 47% improvement over the previous quarter due to a significant reduction due to the production suspension across the Constancia facility. The Company’s Constancia operations in Peru has been fully operational, which is likely to drive the production going forward. The stock appreciated ~56% and ~78% in the last three months and six months, respectively and currently trading at its 52-weeks high. We have valued the stock using P/CF based relative valuation method, and our valuation model suggest that the stock is fairly priced at the moment and upside might be limited. For the said purposes, we have considered peers like Lunding Mining Corp, Ero Copper Corp and Trevali Mining Corp etc. Hence, considering the current stock price movement and above-mentioned facts we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 5.85 on August 31, 2020 and look for the better entry point.

HBM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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