Torex Gold Resources Inc.

Torex Gold Resources Inc. (TSX: TXG) is an intermediate gold producer based in Canada. The company is engaged in the exploration, development, and operation of its 100% owned Morelos Gold Property, an area of 29,000 hectares in the highly prospective Guerrero Gold Belt located 180 kilometres southwest of Mexico City.

The company would disclose its third quarter FY20 financial results on November 03, 2020.

Investment Rationale:

Higher Gold Prices to Drive Performance: Gold prices remained elevated in the international market since the end of 2Q20, which is likely to drive the average realized price for the company. Consequently, the company’s revenue and cash flow would increase. We expect the gold price to remain higher in the near to medium term on account of the sluggish economic outlook, which would help the company in reporting improved financial performance.

Strong Gold Production: The company reported second-highest quarter of production till date from its El Limón Guajes (ELG) operations. Furthermore, on a year to date basis and on a yearly basis, the company produced 299,830 ounces, and 133,030 ounces of gold, respectively. We expect the above trend to continue in the coming quarters, driven by impressive mining activities by the company.

Q3FY20 Operational highlights (Source: Company Reports)

Strong Balance Sheet: During the third quarter of FY20, the company reported a higher realization price. The company also repaid USD 72 million from its debt components, which is a key positive. The group closed the quarter in a net cash position, which suggests a lower balance sheet risk.

Q2FY20 Financial Highlights:

• For the second quarter of FY20, the company posted a revenue of USD 109.1 million, lower than USD 150.7 million in the previous corresponding period (pcp). The decline was majorly attributed to a lower sales volume of 63,147 ounces, as compared to 113,419 ounces in Q2FY29 due to temporary suspensions of mining operations on account of COVOD 19 pandemic. Revenue was partially supported by higher realization prices (USD 1,712 per ounce in Q2FY20 vs USD 1,314 per ounce in Q2FY19)
• Earnings from operations stood at USD 17.7 million, as compared to USD 35 million in the previous corresponding quarter, mainly due to a lower sale, partially offset by a lower input cost.
• Net income stood significantly lower at USD 3.8 million, as compared to USD 10 million in Q2FY19.
• The company reported cash and cash equivalents of USD 176.9 million, while total assets stood at USD 1,204.1 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s performance is linked to the prices of gold in the international market. Any volatility in gold prices would affect the group’s financial performance.  

Valuation Methodology: Price to Cash Flow Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of TXG appreciated ~10% and ~15% in the last nine months and one year, respectively, fueled by increasing investor’s interests for Gold stocks. Due to a temporary suspension in the mining activities, the company has lowered its FY20 guidance to 390,000 ounces to 420,000 ounces of gold production from the earlier guidance of 420,000 ounces to 480,000 ounces. We have valued the stock using Price to Cash Flow based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like New Gold Inc, Alamos Gold Inc and Equinox Gold Corp, etc. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 19.32 on October 26, 2020.

TXG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Morguard Corp

Morguard Corp (TSX: MRC) is a real estate company that acquires, owns, and develops commercial, multi-unit residential and hotel real estate properties in Canada and the United States.

Key takeaways

• Improved rental collection:Total Rental revenue collection in July has shown improvement as compared to last month. The Company’s collection of rental revenues since April 2020 is summarized below by asset class:

Source: Company

• Safety Cushion: Company has leased a significant amount of office space to government tenants. The Company's derives ~37% office rental revenue from government tenants. This gives a safety cushion and mitigates the risk of non-payment of rent.

• Gradually Hotels are Opening: The biggest percentage drop in revenues were recorded from the hotel segment due to the closures and lower occupancy led by lockdown restrictions put in place. At present, out of the Company's 38 hotel portfolio, 31 are operational, which is expected to bolster the group’s performance in the second half of 2020.

• Liquidity:The Company has adequate liquidity to pass through challenging times. The company has total liquidity of CAD 469 million, which comprised of CAD 136 million in cash and CAD 333 million available under revolving credit facilities.

2QFY20: Financial overview

Source: Company

• Total revenues posted by the company in their 2Q 2020 were CAD 240.9 million as compared to CAD 300.2 million in 2Q 2019. The decline was driven by lower revenue from hotel properties (down by CAD 56.4 million, or 86.5% to CAD 8.8 million) due to closures of hotels and lower occupancies were seen during the Covid-19 period.
• Total revenue from real estate properties was recorded at CAD 218.5 million, up by 1.1%, compared to CAD 216.1 million in 2Q 2019.
• Net operating income ("NOI") was recorded at CAD 131.2 million, down by 12.6%, compared to CAD 150.1 million in 2Q 2019, as lower NOI was realized from the hotel portfolio and higher bad debt expense.
• The company reported a net loss of CAD 105.0 compared to net income of CAD 69.3 million for the same period in 2Q 2019, driven by a decline in net fair value gain amounting CAD 183.8 million.

Risk associated to investment

The second wave of the COVID-19 may result in closure of hotels and restaurants, which would directly impact the company’s revenue, and its overall performance.

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendation

Within the residential segment, the company collected 95.3% of the rent, which is in-line with the historical trend. Rent collection and occupancy stood stable across Canada and the U.S. region, which is encouraging. In the Retail segment, all of the company's enclosed malls are now open, and the vast majority of tenants are allowed to operate, which is a key positive. With the gradual reopening of shops and other commercial spaces, we expect an improved scenario for the second part of FY20. Therefore, based on the above rationales and valuation, we have given a “Buy” rating at the closing price of CAD 102.50 on October 26, 2020. We have considered Boardwalk Real Estate Investment Trust, SmartCentres Real Estate Investment Trust, and H&R Real Estate Investment Trust etc. as the peer group for the comparison.

1-Year Price Chart (as on October 26, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Enerplus Corporation

Enerplus Corporation (TSX: ERF) produces and develops crude oil and natural gas assets in Canada and the United States. The Company derives the majority of the oil production from the Williston and Waterfloods basins, while Marcellus provides a significant portion of natural gas production. 

Key Updates:

• The Company announced a quarterly dividend of CAD 0.01 per common share, payable on November 14, 2020.
• The company would announce its third quarter FY20 result on November 06, 2020.

Q2FY20 Financial Highlights:

• ERF posted total revenue of CAD 111.174 million, as compared to CAD 348.885 million in pcp. The decline was due to lower production of 87,360 BOE per day, down 13% on y-o-y basis. The average selling price of crude oil of CAD 30.55 per bbl, declined significantly from CAD 74.42 per bbl in the previous corresponding period (pcp). The Group curtailed ~25% of its liquids volumes in May to protect against selling oil at negative margins.
• Loss before taxes was reported at CAD 722.673 million, against a profit of CAD 119.953 million in pcp, primarily attributed to a lower sales, the inclusion of asset impairment and goodwill impairment costs; while lower operating expense, transportation costs, depletion, depreciation and accretion and general and administrative supported the overall performance.
• Net loss, during the quarter, stood at CAD 609.323 million, as compared to a net profit of CAD 85.084 million in pcp.
• The company repaid USD 81.6 million of senior notes from its internal accruals, which is noteworthy.
• As on June 30, 2020, the company reported senior debt to adjusted EBITDA ratio of 1.0x and its net debt to adjusted funds flow ratio was 1.0x, looks impressive. Long-term debt was reduced to CAD 413.491 million, from CAD 500.635 million in FY19.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s topline is correlated to oil prices. Any volatility in the crude oil prices would impact the group’s financial performance.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:  The stock of ERF fell ~73% so far this year. The Company is expecting its FY20 production to be in the range of 88,000 boe to 90,000 boe per day, including 49,000 to 50,000 barrels per day of crude oil and natural gas liquids. Capital expenditure is expected at ~CAD 300 million, and the Company expects to complete its non-operated drilling programs in the Marcellus, and North Dakota, which is a key positive and is expected to improve business prospects in the coming days. We expect, with easing norms and gradual reopening of the manufacturing and industrial activities, the international crude oil price is expected to improve, which would help the group in reporting higher income and improve profitability. We have valued the stock using P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Oil & gas) median on NTM basis. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 2.54 on October 26, 2020.

ERF daily technical chart. Source: Refinitiv (Thomson Reuters)

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