Torex Gold Resources Inc

Torex Gold Resources Inc (TSX: TXG) is a resource company based out of Canada. The Group is engaged in the business of exploring, developing and operating of gold at Morelos Gold property located in southern Mexico based Guerrero Gold Belt.

Q2FY20 Financial Highlights: TXG announced its second quarter results, wherein the company posted sales of USD 109.1 million, lower than USD 150.7 million in the previous corresponding period (pcp). The decline was primarily attributed to a temporary suspension of operations due to COVID -19. The quarter witnessed a decline in the Gold sales at 63,147 oz, as compared to 113,419 oz in pcp, which contributed to the revenue decline. The decline in volume was partially offset by the higher realized price of USD 1,712 oz as compared to USD 1,314 oz. Earnings from mine operations stood at USD 17.7 million, as compared to USD 35 million in pcp, due to lower revenue and inclusion of care and maintenance cost amounting to USD 11.1 million related to COVID-19, while lower production costs, depreciation & amortization supported the company’s performance. Adjusted EBITDA stood at USD 49.3 million, as compared to USD 76.5 in pcp, due to a rise in total cash costs at USD 740/oz, against USD 606/oz in pcp. The company reported net income at USD 3.8 million, significantly lower than CAD 10.0 million in Q2FY20.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s topline is correlated to the gold prices. Any volatility in gold prices would hamper the group’s financial performance.

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 TXG corrected ~8% in the last one year amid volatility in the equity market. The company’s operations have been hindered due to a temporary suspension of mining activities on account of COVID 19. However, all the mines have resumed the operation at the beginning of June. With the steady-state production run rate reestablished in June, the group is well-positioned to deliver a solid second half of the year. The second half is off to a strong start with 42,630 ounces of gold produced in July, following 38,890 ounces produced in June. The company expects its FY20 gold production within the rage of 390,000 ounces to 420,000 ounces. The company is increasing exploration investment in ELG underground and building a third portal to access underground deposits, is likely to cut the current haulage distance in half, thereby reducing operating costs. On a year to date, the company made principal repayments of USD 42.5 million under the debt facility, which would lower the finance costs. The repayment is in line with the company’s target to become net cash positive before the year-end. Going forward, we expect the gold prices to remain elevated owing to heightened uncertainties about economic recovery along with increasing cases of COVID-19. Also, ETFs are showing no sign of slowing down on the gold purchase, which would further push the gold prices northward. Higher gold prices bode well for the group’s revenue and cash flow. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of double digit (in percentage terms). For the said purposes, we have considered peers like Lundin Gold Inc, New Gold Inc, SSR Mining Inc etc. Considering the aforesaid facts, current price movement, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 19.62 on September 1, 2020.

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

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