Torex Gold Resources Inc.

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

Key Highlights:

• Q2FY21 Operational Updates: In the second quarter of Q2FY21, the company reported total gold production of 118,050 oz, which resulted in total gold production of 247,550 oz in the first half, in-line with the FY21 annual production target of 430,000 to 470,000 oz. Average Plant throughput in Q2FY21 stood at 11,980 tpd, while average Underground Ore Mined reported at 1,420 tpd.

Source: Company Report

• Industry Beating Margin profile: The company reported an improved margin in Q1FY21, which reflects higher operational efficiencies. Notably, EBITDA margin and operating margin stood at 67% and 40.2%, respectively, which was higher than the industry median of 40.2% and 25.8%, respectively. Net margin stood at 23.8%, higher than the industry median of 9.1%.

• Encouraging Drilling results: Recently, the company announces an updated Mineral Resource estimate for its Media Luna project, which has a gold equivalent indicated resource of 3.54 million ounces, with an average grade of 5.27 grams per ton. This reflects a 58% surge in contained Gold Equivalent (Au) metal in the Indicated Resource category from the previous estimate. The Indicated Resource includes ~61% of gold, and ~31% of copper, while the rest is expected to be silver.

• Negligible Debt: The company’s operations are capital intensive in nature and requires significant capital investments for drilling and exploration activities. Despite the above facts, the group managed to lower its total debt to USD 4.7 million in Q1FY21, from USD 155.2 million in Q1FY20. This indicates prudent capital management and would lead to lesser finance cost.

Source: Company Presentation 

Q1FY21 Financial Highlights:

• TXG impresses with its first quarter result, wherein the group reported metal sales of USD 231.2 million, jumped from USD 172 million in the previous corresponding period (pcp). The growth was driven by higher gold revenue (USD 229.6 million v/s USD 169.8 million in pcp), supported by higher average realized gold prices (USD 1,778/oz vs/ USD 1,571/oz in Q1FY20).
• Earnings from mine operations surged to USD 99.3 million, from USD 27.9 million in pcp, supported by higher income combined with lower production costs (USD 69.4 million v/s USD 82.9 million in pcp).
• The company turned profitable and posted a net income of USD 55 million, as compared to a net loss of USD 47 million in pcp. The quarter witnessed a derivative gain of USD 3 million, against a derivative loss of USD 37.8 million in pcp coupled with higher General & administrative costs (USD 5.4 million v/s USD 3.3 million in pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

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

Valuation Methodology Illustrative: Price to Cash Flow:

Stock Recommendation:

The company’s liquidity level stood at USD 320 million at the end of Q1FY21, which includes USD 150 million of cash and short-term investments, and USD 172 million of credit facilities. The current liquidity level seems to be sufficient to meet its short term working capital needs and as well as its capital investments. 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, Dundee Precious Metals Inc and Centerra Gold Inc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 13.68 on July 16, 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 July 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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