Torex Gold Resources Inc.

Torex Gold Resources Inc. (TSX: TXG) is a gold mining company engaged in the exploration, development, and exploration of its wholly owned Morelos Gold Property.

Key Highlights:

• Drastic Reduction in total debt: During the last few quarters, the company has consistently reduced its total borrowings, which is encouraging. Notably, in Q2FY21, the company reported its total debt at USD 4.5 million, considerably lower than USD 225.2 million in the previous corresponding period (pcp). A decline in debt indicates a healthy balance sheet and reduces interest cost.
• Positive outlook from Morelos property: Within the Morelos property, the company made multiple targets for its drilling purpose and infill drilling program across the region has been expanded to 83,000 metres from 44,000 metres. The company conducted 8 drill rigs and will be extending its exploration program in 2022. As per the management, a significant portion remains unexplored across Morelos, and as per the magnetic anomalies report, the place offers strong potential for mineralization.
• On track of achieving full year production and cost guidance: The company expects its FY21 production in between 430 koz to 470 koz, while it has already achieved a 247.6 koz of production in the first half of FY21. Total cash cost is expected in between USD 680/oz to 720/oz, while in H1FY21, TXG reported a cash cost of USD 606/oz, which is encouraging. All-in Sustaining Costs for H1FY21 stood at USD 874/oz, significantly lower than the company’s guidance of 920/oz to 970/oz for the full year.

Source: Company Presentation

• Operations update: During the second quarter of FY21, the company confirmed its expansion of the El Limón open pit, which is forecast to add ~150,000 oz of gold production during late-2023 and mid-2024.

Q2FY21 Financial Highlights:

• TXG impresses with its second quarter result, wherein the group reported metal sales of USD 205.9 million, jumped from USD 109.1 million in the previous corresponding period (pcp). The growth was driven by higher gold sales (111,424 oz v/s 63,147 oz in pcp), coupled with higher average realized gold prices (USD 1,816/oz vs/ USD 1,712/oz in Q2FY20).
• Earnings from mine operations stood at USD 86.2 million, which soared from USD 17.7 million in pcp, supported by higher income, partially offset by higher production costs (USD 68.4 million v/s USD 44.4 million in pcp).
• The company reported a net income of USD 60.7 million, up from USD 3.8 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in gold prices would hinder the realization price and would subsequently dampen the overall performance of the group.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company commands better margin than its peers, which indicates better operational efficiency. Notably, the group reported EBITDA margin and operating margin at 64.2% and 38.8%, respectively in Q2FY21, which higher than the industry median of 40.1% and 25.8%. Additionally, the company reported its net margin at 29.5% in Q2FY21, higher than the industry median of 15.7%. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like New Gold Inc, OceanaGold Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 13.33 on September 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

One-Year Technical Price Chart (as on September 17, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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