Torex Gold Resources Inc. (TSX: TXG) is a Canada-based intermediate producer of gold and other precious metals, engaged in the exploration, development, and exploration of its wholly-owned Morelos Gold Property. 

Key highlights  

• Record annual gold production and declining costs: For FY21, the company reported an increase of 8.7% in its annual gold production of 468,203 ounces, as compared to 430,484 ounces in FY20. The total cash cost for FY21 stood at USD 674 per ounce sold, which was still below the given guidance range of USD 680 to USD 720 per ounce. The company’s mining operation turned out to be efficient on account of the lower All-in Sustaining cost of USD 928 per ounce, which is at the lower end of the given range of USD 902 to USD 970 per ounce.

• Improved EBITDA: For FY21, the company reported a growth of 11.7% in the EBITDA at USD 461.6 million as compared to 413.0 million in the pcp. The adjusted EBITDA came at USD 490.8 million for the reported period vs the adjusted EBITDA of USD 431.4 million in pcp. The company improved on the EBITDA and Adjusted the EBITDA front, reflecting the strong earnings captured in the FY21.

• Ample liquidity: The group posted an increase of 46.8% in its cash and cash equivalent balance at USD 255.7 million for the FY21 as compared to the USD 206.2 million in the pcp. To sustain its business operations, the company is holding a credit facility of USD 150 million at the end of FY21. Below is the pictorial presentation, of how the company flared on the liquidity threshold in the past five years.

Source: Company presentation

• Strong Debt management:For Q4FY21, the company maintained a very careful approach towards the debt which can be observed from its ‘zero’ Debt to Equity ratio as compared to the industry median of 0.22x. The total percentage of the company’s Long term debt to total capital was witnessed at 0.1% for the reported period vs the industry median of 13.6%. Below is the graphical representation of the debt metrics. 

Source: Refinitiv, Analysis by Kalkine Group 

Risks associated with investment

The company is currently exposed to the volatility of the gold prices along with its demand and operations restrictions. Further challenges included the hedging cost and foreign exchange volatility which could also impact the financials of the company. On the operational front, the various laws and compliances including the safety issues of its workforces always possess a greater degree of risk to the business. 

Financial overview of Q4FY21 & FY21 (Expressed in millions USD)

Source: Company Filing 

• For Q4FY21, the company reported a decrease in revenue at USD 202.0 million as compared to the revenues of USD 251.6 million in pcp. The decrease was attributed to both lower sales volume of gold, 109,391 ounces and lower average realized price of gold sold at USD 1,798 per ounce versus 133,063 ounces of gold sold in Q4FY20 at the average realized price of USD 1,847 per ounce. On the contrary, for the FY21 the group reported staggering revenue of USD 855.8 million vs 789.2 million in the FY20 due to improvement in both gold sales and realized price.

• The cost of sales for Q4FY21 was reported at USD 135.1 million vs USD 143.0 million in the previous comparable period. On account of the lower volume of gold sold, the company reported a lower cost of sales for the reported period. For FY21, the cost of sales stood at USD 529.3 million as compared to 532.0 million in the pcp.

• The earnings from the mine operations for Q4FY21 were reported at USD 66.9 million as compared to USD 108.6 million. For FY21, the Earnings from mine operations stood at USD 326.5 million vs the USD 257.2 million in the pcp.

• The Net loss for Q4FY21 was reported at USD 0.5 million vs the net income of USD 91.9 million in pcp. Taking the complete financial performance for FY21, the group posted a Net income of USD 151.7 million in FY21 vs USD 109.0 million in FY20. 
  

Valuation Methodology (Illustrative): Price to Cash flow multiples Based

Analysis by Kalkine Group 

Stock recommendation 

The improving gold demand and rising prices are a strong catalyst for the company to enhance production in the coming quarters, and higher prices will boost the average realized prices of gold sold. The lower debt levels of the company are to be considered highly positive, keeping the capital intensive nature of the business and any rise in interest rate would not be a burden on the books of accounts.  On the valuation front, the stock is measured on the Price to Cashflow multiple basis, where the stock is trading at 3.5x  as compared to the Industry median( Basic Materials)  of 4.8x, this implies the stock is undervalued and there is much headroom for the stock to match the industry valuations. We have considered New Gold Inc.  Dundee Precious Metals Inc. and Aura Minerals Inc.as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing market price of CAD 17.11 on March 11, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 11, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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