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. The remaining 34% interest is held by Erdenes Oyu Tolgoi LLC (Erdenes), a Mongolian state-owned entity.

Key highlights

• Healthy production in FY 2021: The company’s full year copper production is of 163 thousand tonnes vs guidance range of 150 – 180 thousand tonnes, whereas the gold production came to 468 thousand ounces vs guidance range of 400 – 480 thousand ounces.
• Elevated Q3 2021 performance: The company reported decent performance in the Q3 2021, with revenue surged by 135% to USD 622.7 million, against USD 264.5 million on a YoY basis, gross profit elevated to USD 420.0 million, against USD 96.5 million and Income from operations before taxes rose by 731% to USD 331.4 million compared to USD 39.9 million in the previous corresponding period.

Source: Company Filing

• Robust Net cash generated from operating activities: In the reported period the company generated robust cash from operations at USD 350.6 million compared to USD 77.6 million in the previous corresponding period, primarily due to an increase in gross profit from higher revenue, partially offset by unfavorable movements in working capital and deferred revenue.

• Industry beating margins: The company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q3 2021, which exhibits the competitive advantage of the company within the industry.

Source: REFINITIV, Analysis by Kalkine Group 

Risks associated with investment: The company's business is significantly exposed to the volatility in gold and copper prices. Any decline in the commodity prices would lead to a lower realization for the company and would subsequently hinder the company’s overall performance.

Financial overview of Q3 2021

Source: Company Filing

• In Q3 2021, the company posted revenue of USD 622.7 million, significantly higher from USD 264.5 million in the previous corresponding period. The tremendous surge was aided by strong surge in gold and copper segment.
• Gross profit stood at USD 420.0 million, surged from USD 96.5 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 22.9 million, as compared to USD 161.7 million in pcp. The period was marked by an income tax expense of USD 308.5 million, as compared to an income of USD 121.8 million in pcp.

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock recommendation

Despite the tough environment created by COVID-19, the company posted strong results, with revenue of USD 622.8 million, up 135.6 percent from USD 264.4 million in Q3 2020. The company's asset "Oyu Tolgoi" had strong operating performance, with copper output of 41,935 tonnes up 16% year over year and 14% higher than Q2 2021. In addition, the mine produced 130,799 ounces of gold in the quarter, up 256% from the same quarter last year and 16% more than in Q2 2021. We also expect copper prices to remain stable in the next few months, as most governments across the world have eased shutdown restrictions, allowing more industrial activity to resume. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 19.42 as on January 21, 2022.

One-Year Technical Price Chart (as on January 21, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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