Equinox Gold Corp. (TSX: EQX) is a growth-focused gold producer operating entirely in the Americas, with projects in Canada, the USA, Mexico and Brazil. The company has seven operating mines and a clear path to achieve more than one million ounces of annual gold production from a pipeline of development and expansion projects.

Why should Investors make an EXIT?

• Restrained financials: In Q3 2021, the company showcased week financial numbers where its revenue was almost constant at USD 245.1 million against USD 244.4 million in pcp. Furthermore, the cost of sales increased due to which its earnings from mine operations and net income declined significantly.

Source: Company Filings

• Lower margin profile v/s Industry: In Q3 2021, the company failed on maintaining its pace and witnessed lower performance under operating margin matrix, consisting of gross margin, EBITDA margin, operating margin and net margin, which exhibits the extreme pressure on the company.

Source: REFINITIV, Analysis by Kalkine Group

• 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 148.1 days compared to an industry median of 54.4 days.

• Stretched valuations: EQX shares are available at an NTM Price/Cash Flow multiple of 5.6x compared to the industry (Metal & Mining) median of 4.4x, while on NTM EV/Sales multiple, it is trading at 2.1x compared to the industry median of 1.6x. This implies that the shares are overvalued against the industry. Higher valuations against an industry with fading financials draws a caution line.

Source: REFINITIV, Analysis by Kalkine Group

• Hovering near the upper band of Bollinger band indicator: At the daily price chart, the stock of EQX closed above the upper range of its 20-days Bollinger band, indicting a possible correction from the recent level.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): Price to Cash Flow based

Analysis by Kalkine Group

Stock recommendation

The company's financial results were soft in the last quarter, with flat topline numbers and higher operational expenses, which impacted the bottom line. It also had a lower margin profile compared to the industry, indicating that the company is under a lot of pressure. Its cash cycle days are also longer, implying a negative liquidity profile. Furthermore, the stock is trading at a premium to the industry on numerous metrics on an NTM basis. Higher valuations compared to the sector cast a shadow on investors' thoughts. Furthermore, technical indicators indicate that the stock price may consolidate or correct from here. Hence, considering the aforesaid rationales and valuation done, we have given a “Sell” recommendation in the stock at the closing price of CAD 9.25 on January 19, 2022.

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

Disclaimer

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