Equinox Gold Corp.

Equinox Gold Corp, (TSX: EQX) is a Canadian mining company with a portfolio of production, near-production and exploration-stage projects. The company's principal assets are - Aurizona gold project in Brazil and Castle Mountain.                                  

Key Highlights:

• Higher Realized prices: In the recent past, the company saw a surge in the realized gold price, which immensely contributed to the group’s topline growth. Realized gold price per oz sold stood higher at 1,799/oz in H1FY21, as compared to 1,654/oz in pcp. The increase was driven by higher price realization from its Aurizona Gold Mine and Mesquite Gold Mine.

• Reducing Debt: In recent quarters, the company reported a decline in its borrowing amidst the current sluggish scenario. D/E ratio stood at 25x in Q2FY21, improved from 0.56x in Q2FY20. Notably, the company reported total debt of USD 599 million, significantly lower than USD 760.9 million a year ago. The company operates in a capital intensive business, and a decling total debt is a key positive. Manwhile the company’s long-term borrowings to total capital stood at 18.8% in Q2FY21, improved drastically from 35.4% in Q2FY20. A falling long-term borrowings to total capital is a positive sign.

• Upcoming Projects to contribute in future growth: The company has a robust pipeline of four projects, which are in the development stage and are expected to add improved business prospects to the company. The list of these projects is provided below:

1. From the Santa Luz Construction (in Brazil), the group expects an average 110,500 oz annual production for the first five years, while initial mine life is expected at ~9.5 years. The group completed ~50% of its development and expects gold production from Q1FY22 onwards.
2. The group is developing additional open-pit and underground mines at Los Filos mine (in Mexico), while it finalized a study of 8,000 t/d carbon-in-leach plants for high-grade ore. The above mine has the potential to increase reserves and extend its mine life.
3. From the Greenstone Project (holds 60% stake), the group expects an average 414,000 oz annual production for the first five years. Notably, the above mine has 14-years of mine life and can be added from near-mine and underground resources.
4. The company is also developing its mining activities across Castle Mountain, which is located in California, and expects an average of 218,000 oz gold per year during Phase 2 operations.

Q2FY21 Financial Highlights:

• EQX announced its quarterly results, wherein the company reported revenue of USD 226.223 million, higher than USD 215.387 million in the previous corresponding period (pcp). The increase was driven by higher average gold price of 1,806/oz to 1,708/oz in pcp. Meanwhile, the company reported gold sales of 124,712 oz, down from 125,824 oz in pcp.
• Earnings from mine operations slide to USD 45.577 million, from USD 67.158 million in Q2FY20. The decline was primarily due to a surge in the operating expenses (USD 139.843 million, v/s USD 113.029 million in pcp) coupled with a higher depreciation and depletion costs (USD 40.803 million v/s USD 35.200 million in pcp).
• Income from operations stood at USD 18.199 million, came lower from USD 32.090 million in pcp, due to lower earnings from mine operations, coupled with higher exploration and general & administration costs.
• The company turned profitable and posted a net income of USD 325.736 million, as compared to a net loss of USD 77.768 million in Q2FY20 as other income soared during the quarter.

Source: Company Report

Valuation Methodology (Illustrative): Price to Cash Flow

Risks: Volatility in the international gold prices, along with any delay in the project development activity, would affect the overall performance of the company.

Stock Recommendation:

For FY21, the company expects production in the range of of 560,000 - 625,000 oz, which reflects solid performance at Brazil sites, while Cash Costs is expected 1,025 - 1,075/ ounce. With the upcoming addition of new gold mines, we expect the production to remain elevated in the coming years. We have valued the stock using the Price to CF value-based relative valuation method and have arrived at a target upside offering lower double-digit (in percentage terms) potential. For the said purposes, we have considered peers like Torex Gold Resources Inc, B2Gold Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 7.69 on August 12, 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 12, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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