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 Updates:

• Robust Production growth and surge in realization price: The company reported a higher gold sale during the first half of FY21 at 247,563 oz, significantly higher than 168,045 oz in the previous corresponding period. Moreover, the group’s performance was supported by higher commodity prices which further lead to higher realization price. Average realized gold prices stood at USD 1,795/oz in H1FY21, rose from USD 1,623/oz in pcp. Notably, the company expects its momentum to continue for the rest of the year and FY21 gold production is estimated at 430,000 to 470,000 oz.
• Strong Cash flow growth: In H1FY21, the company reported a growth in its cash from operation, which stood at USD 147.6 million v/s USD 31.7 million in pcp, supported by net income of USD 115.7 million in H1FY21, as compared to a loss of USD 43.2 million in pcp. Moreover, the company reported free cash flow of USD 31.2 million in H1FY21, as compared to a deficiency of USD 26.4 million in pcp.
• Updates on upcoming operations: The company would commence its exploration activities in El Limón open pit and expects additional gold production of around 150,000 ounces in between 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 jumped to USD 86.2 million 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, rose from USD 3.8 million in pcp. The group reported a lower general & administrative expense while a higher exploration & evaluation costs and an increase in foreign exchange expenses stood as a drag.

Source: Company Report

Risks: The company’s financial performance is dependent on the prices of the underlying commodities, it deals in. Volatility in commodity price would hinder the realization price and subsequently dampen the overall performance of the group.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company reported an exceptional growth in its operations and posted adjusted EBITDA of USD 267.0 million during the first half of FY21, as compared to USD 116.7 million in pcp, which is impressive. Notably, the company has completed 44,000 meter infill drilling programs for Media Luna and would also conduct Feasibility Study during Q1FY22. Additionally, the group also successfully completed Muckahi rate test program during the first half of FY21. 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) potential. 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 13.45 on August 13, 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 August 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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