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.

Why Should Investors Book Profit?

• Forecasts lower production for FY22: Oyu Tolgoi the company’s asset is expected to produce 110 to 150 thousand tonnes of copper and 115 to 165 thousand ounces of gold in concentrates in 2022 from processing of open pit and underground development material as well as stockpiles. Gold and copper production is forecast to be lower in 2022 vs 2021 due to stripping of the next cutback and processing lower grade stockpile material.

• Higher Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 107.4 days compared to an industry median of 54.4 days.

• Highly Leveraged Balance Sheet: The company’s debt to equity ratio at the end of September 2021 stood at 0.42x, which was higher than the industry median of 0.24x. Additionally, its % LT Debt to Total Capital stood at 31.6% against the industry median of 13.9%. These factors imply higher balance sheet risks.

• Stretched Valuation: TRQ’s shares are available at an NTM EV/Sales multiple of 5.4x compared to the industry (Metal & Mining) median of 1.9x. While on NTM Price/ Cash Flow multiple it trades on 14.2x against an industry median of 2.5x. This implies that the shares are overvalued against the industry. The matrix below reflects that the company is overvalued against an industry on many multiples.

Source: REFINITIV, Analysis by Kalkine Group

• Trading above the upper band of the Bollinger Bands: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the stock is testing its historical resistance.
  

Valuation Methodology (Illustrative): EV to Sales

Analysis by Kalkine Group 

Stock recommendation

Despite the challenging climate created by COVID-19, the company performed well, with revenue of USD 622.8 million, up 135.6 percent from USD 264.4 million in Q3 2020. Copper output of 41,935 tonnes, up 16 percent year over year and 14 percent higher than Q2 2021, was a solid operating performance for the company's asset "Oyu Tolgoi." However, management recently cut its output projection for its assets in FY22, which is a cause for concern. Furthermore, the company is heavily leveraged, offering a balance sheet risk, and it has a longer Cash Cycle (Days), meaning that it takes longer to convert inventories to cash. Even the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the current market price of CAD 23.67 at 9:45 am Toronto Time on January 27, 2022.

One-Year Technical Price Chart (as on January 27, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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