Turquoise Hill Resources Ltd.

Turquoise Hill Resources Ltd. (TSX: TRQ) is a global mining company that primarily mines copper, gold, and coal in the Asia-Pacific region. The company holds a 66% interest in Oyu Tolgoi, one of the world's largest copper-gold-silver mines, which ships concentrate to customers in China.

Key Updates:

• Cash flow turned positive: In 9MFY21, the company reported a positive cash flow from operating activities of USD 426.701 million, as compared to a cash outflow of USD 28.566 million in pcp. The above was primarily driven by strong operational performance on account of improved commodity grade coupled with~43.8% higher average copper prices, which lead to higher realization.
  

• Better margin than the industry: In Q3FY21, the company reported strong profit margins as compared to the industry median, which indicates improved operational efficiency. The company reported gross margin and EBITDA margin of 61.4% and 61.7%, respectively, higher than the industry median of 50.2% and 41.0%, respectively. Notably, the company reported its operating margin of 53.60%, significantly higher than the industry median of 27.0%.

• Updated budget allocation for Oyu Tolgoi mine development project: Recently, the company reported confirmation from the Government of Mongolia, wherein TRQ would progress its critical activities in the Oyu Tolgoi underground mine development project. The updated budget allocation is expected to be of USD 75 million. The Company expects that the approved increase should be sufficient to sustain work on the development of the OT underground mine up to mid-January 2022.

Q3FY21 Financial Highlights:

• TRQ announced its quarterly result, wherein the company posted revenue of USD 622.786 million, significantly higher from USD 264.520 million in the previous corresponding period (pcp). The tremendous surge was aided by strong surge in gold and copper segment.
• Gross margin stood at USD 420.096 million, surged from USD 96.529 million in pcp. The growth was supported by higher sales coupled with lower cost of sales.
• The quarter was marked by a higher operating expense, partially offset by lower corporate administration expenses.
• The group reported a net profit of USD 22.938 million, as compared to USD 161.764 million in pcp. The period was marked by an income tax expense of USD 308.541 million, as compared to an income of USD 121.803 million in pcp.

Q3FY21 Income Statement highlights (Source: Company Report)

Risks: Decline in the commodity prices would lead to a lower realization for the company and would subsequently hinder the company’s overall performance.

Valuation Methodology (Illustrative): Price to CF based 

Stock Recommendation:

For FY21, the company expects its copper and gold production of 150kt to 180kt and 400kt to 480koz, respectively. Furthermore, the company expects the commodity price to remain broadly consistent with Q2FY21.

We have valued the stock using the P/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 Pretium Resources Inc, First Quantum Minerals Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 18.46 on December 06, 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 December 06, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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