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:

• Impressive FY22 Guidance: The company expects its FY22 production in between 430,000 to 470,000 ounces, versus 468,203 ounce in FY21. For the first quarter of FY22, the company reported production of 112,446 ounce, improved from 109,411 ounce in Q4FY21. The group expects its quarterly production to be higher through remainder of year supported by expected stronger mineral grades. Additionally, the management expects total cash costs and all-in sustaining costs to remain lower. This is likely to boost the company’s upcoming margins as well.

• Favorable prospects from the Morelos property: The company hold 100% stake Morelos Property, located in southwest of Mexico City. The principal assets include the El Limón Guajes Mining Complex, Media Luna Project, processing plant and related infrastructure. This area is largely unexplored, while the company reported positive results from the initial technical report for the Morelos Complex. As per the current report, the mine has an initial mine of 11.75 years with an ending time of Q4FY33. The company expects to add annualized revenue of USD 605 million and mine-site EBITDA of USD 298 million.

• Industry beating margins: In Q1FY22, the company reported its EBITDA margin and operating margin of 55.8% and 31.2%, respectively, as compared to the industry median of 39.8% and 26%, respectively. This indicates a robust cost management and is a key positive. Moreover, the company reported its net margin of 19.3%, which is higher than the industry median of 14.9%.
  

Risks associated with the Investment:

The company’s operations might be impacted due to lower commodity prices, currency volatility, high input costs, etc. Moreover, changes in drilling and well-servicing technology, along with the impact of any adverse weather conditions, might also dampen the ongoing operation of the company. 

  Q1FY22 Financial Highlight:

Q1FY22 Income Statement Highlights (Source: Company Report)

• In Q1FY22, the company reported its metal sales of USD 207.7 million, slide from USD 231.2 million in pcp. This was primarily due to lower gold sales, partially offset by increased in the realization price.
• The quarter was marked by a higher production cost (USD 79.6 million v/s USD 69.4 million in pcp), while a lower royalties expense along with a dip in depreciation & amortization expense partially supported the company’s profitability. Earnings from mine operations stood lower at USD 75.5 million v/s USD 99.3 million in pcp due to lower sales and higher input costs.
• The group reported its net and comprehensive income of USD 40 million v/s USD 55 million in pcp. The decline was primarily attributable due to lower earnings from mine operations coupled with higher general & administrative expense, partially offset by lower income tax expenses and a gain from derivative.

  Valuation Methodology (Illustrative): Price to Cash Flow based

 Analysis by Kalkine Group

Stock Recommendation:

The company has a debt free balance sheet and reported higher quick ratio and current ratio of 2.15x and 2.97x, respectively, in Q1FY22, as compared to the industry median of 1.55x and 2.66x, respectively. This indicates prudent working capital management and is a key positive. 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). For the said purposes, we have considered peers like Dundee Precious Metals Inc, OceanaGold Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of TXG at the last closing price of CAD 12.48 on May 18, 2022. 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 of May 18, 2022). Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV 

 Technical Analysis Summary

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