Golden Star Resources Ltd.

Golden Star Resources Ltd. (TSX: GSC) is a Canada based gold mining and exploration company. The company holds interests in various gold exploration projects in Ghana and parts of West Africa, and it also holds and manages properties in Brazil.

The company would disclose its second quarter FY20 results on July 28, 2020.

Q1FY20 Financial Highlights: GSC announced its quarterly results, wherein the company reported revenue of USD 67.371 million, improved slightly from USD 67.257 million in the previous corresponding period (pcp). The improvement was underpinned by higher average realized gold price of USD 1,477/oz from USD 1,257/oz in pcp. A higher realized price was not able to pull the revenue as gold sales declined to 45,601 oz vs 53,496 oz in Q1FY19. The company faced logistic challenges and reported lower shipment on account of COVID-19. Mine operating margin improved to USD 17.606 million from USD 16.591 million in pcp. Income before tax stood at USD 8.247 million, significantly higher than USD 4.543 million in Q1FY19, supported by improved mine operating margin and fair value gain from financial instruments, while higher corporate general and administrative expense and an increase in the other expenses remained a drag. The bottom-line turned green, and the group reported a net profit of USD 0.012 million as compared to a loss of USD 2.659 million in pcp. The company ended the quarter with cash and cash equivalent of USD 41.906 million, while total assets were reported at USD 375.48 million.

Q1FY20 Income Statement Highlights (Source: Company)

Risk: The group’s revenue is directly related to gold prices. Any volatility in gold prices is likely to hamper the group’s financial performance. Further, the group is delivering most of its production to a refinery in South Africa, which exposed the group to concentration risk.

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

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

Stock Recommendation: The company reaffirmed its guidance of 195,000 to 210,000 ounces of production in FY20 with AISC is likely to fall in the range of USD 1,080 to USD1,180 per ounce, which is a key positive. Gold, as an asset class, has remained resilient in the recent past and gold prices continue to march northward owing to the volatility in the equity market and fear of the second wave of the novel virus. Higher gold price bodes well for the group’s topline and cash flow. The stock soared ~16% in the last one month and has closed above its 200-days simple moving average (SMA) of CAD 3.90, indicating a bullish trend. We have valued the stock using EV/EBITDA based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered Roxgold Inc, Goldplat PLC, and Galiano Gold Inc etc., as a peer group. Though elevated gold prices are likely to drive the group’s revenue in the near to medium term, the company is exposed to concentration risk as it delivers most of its production to a refinery in South Africa. Any hiccups in the refinery operation would dent the group’s performance. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 3.94 as on July 15, 2020.

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

Torex Gold Resources Inc

Torex Gold Resources Inc (TSX: TXG) is a resource company based out of Canada. The Group is engaged in the business of exploring, developing and operating of gold at Morelos Gold property located in southern Mexico based Guerrero Gold Belt.

The Company will provide an operational and financial update for Q2 on 5^th August 2020.

Production Results for Q2 FY2020 (9^th July 2020)

The gold production for Q2 FY2020 stood at 59,500 ounces and sold 63,140 ounces of Gold at $1,710 per ounce of average realized gold price. Due to covid-19 outbreak, the Mexican government suspended production activities at ELG (El Limón Guajes) for April and were resumed partially in May. In June, the Mexican government designated mining as an essential activity and resumed full production with underground and open-pit mining operations.

Financial Highlights – Q1 Financial Year 2020 (31^st March 2020, USD, million)

(Source: Quarterly Report, Company Website)

In the first quarter of the financial year 2020, driven by an increase in the Metal sales for the period, the revenue stood at USD 172 million (Q1 FY2019: USD 101.9 million). Driven by higher revenue, the earnings from mine operations stood at USD 27.9 million in Q1 FY2020 (Q1 FY2019: USD 16.8 million). The company reported an LBT (loss before tax) of USD 20.6 million in the first quarter of the financial year 2020 (Q1 FY2019: Profit before tax of USD 4.9 million), due to increased derivative losses and exploration expenses. The net loss stood at USD 47 million in the first quarter of the financial year 2020 (Q1 FY2019: net loss of USD 1.3 million). The cash balance increased to USD 135.7 million as on 31st March 2020 versus a cash balance of USD 161.8 million as on 31st December 2019.

Share Price Performance

Daily Chart as of 15 July 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Torex Gold Resources Inc shares closed at CAD 21.45 at the time of writing after the market close on 15 July 2020. Stock 52 week High is CAD 22.90 and Low is CAD 8.79, respectively.

Key Risks

The market conditions in which the Company operates is full of challenges and might impact the operational performance and reduce financial performance as well. Any change in regulations and government policies could affect the overall business of the Company. The operations of the Company could be impacted by risks related to liquidity and interest rate.

Conclusion

The Company showed a decline in financial performance for the first quarter of the financial year 2020. The Top-line performance has improved, which the bottom-line performance declined and remained in the negative zone for the period. The liquidity position has also declined for the period. The production in the Q2 also declined due to temporary suspension of production activities at ELG in April. The recent increase in the gold prices in the global markets will boost financial performance and bring operational stability. The Mexican government designated mining as an essential activity in the month of June. As a result, the Company resumed full production with underground and open-pit mining operations, which will increase production in coming updates.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 21.45 (as on 15 July 2020).

Disclaimer

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