SouthGobi Resources Ltd. (TSX: SGQ) together with its subsidiaries is an integrated coal mining, development, and exploration company. Its reportable operating segment is Coal Division which is principally engaged in coal mining, development, and exploration in Mongolia and logistics and trading of coal in Mongolia and China.

Key Highlights:

• Increase in average realized coal prices: The group reported an increase in the average realized selling price of coal to USD 55.4 / tonne in Q4FY21 as compared to the average realized selling price of USD 35.53/ tonne in Q4FY20. The higher average realized selling price is supporting revenue, which is a key positive.

• Poor liquidity profile: The group’s quick ratio for Q4FY21 was reported at a lower level of 0.04x, as compared to the industry median of 0.92x. Further, the company’s current ratio was stated at 0.57x for Q4FY21, against the industry median of 1.01x. The lower quick ratio and current ratio state the company’s inability to meet its short-term obligations falling within one year time, which can hamper the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

• Industry lagging profitability margins: During Q4FY21, the company reported declining profitability margins on account of inefficient cost management, as compared to the industry median.

Source: Refinitiv, Analysis by Kalkine Group

• Technical overview: The stock has been very volatile, which is evident from the spikes it has made by increasing more than 300% on various occasions. The prices have been continuously in a declining trend, forming lower lows and lower highs. The most important trend determining indicators: are 50 DMA & 200 DMA, both are above the stock price, indicating there can be a stiff resistance at those levels, indicating further selling from there.

Stock Recommendation:

The company has reported increased net loss of USD 11.42 million in Q4FY21 as compared to the net loss of USD 8.73 million in Q4FY20. Though the average realized sales prices of coal has increased but the total quantity of coal sold decline in Q4FY21 to 0.02 million toinne as compared to 0.95 million tonne in Q4FY20, resulting in the lower revenue. On the technical front, the stock is very much volatile with various spikes in between, and the downward trend also restricts any fresh upside momentum from here on. On EV/ Sales based multiple, the stock is currently trading at 2.9x as compared to the industry (energy) median of 2.6x, suggesting the stock is still overvalued at current levels.

Therefore, based on the above rationale and technical analysis, we recommend a “Watch” rating on the stock of SGQ at the last closing price of CAD 0.175 on May 26, 2022.

One-Year Technical Price Chart (as of May 26, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

Investors can evaluate the stock based on the support and resistance levels provided in the report in case of keen interest taking into consideration the risk-reward scenario. 

 Technical Analysis Summary

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