Sandstorm Gold Ltd.

Sandstorm Gold Ltd. (TSX: SSL) provides financing to companies engaged in gold mining through gold stream and royalty. Geographically, the company has operational footprints in North America, South & Central America, Africa, and Asia & Australia.

Key Highlights:

• Improved efficiency leading to improved margins: The company reported a slide in average cash cost per attributable gold equivalent ounce at USD 227 in Q2FY21, as compared to USD 257/ ounce in Q2FY20. The above resulted in a higher operating margin of USD 1,569 per ounce in Q2FY21 compared to USD 1,458 per ounce in Q2FY20. Hence, EBITDA margin and net margin in Q2FY21 stood at 63.7% and 32.7%, respectively, significantly above the industry median of 40.1% and 15.9%.
• New business prospect: The company reported the addition of Vatukoula Stream in the recent past, which is expected to deliver 25,920 oz for the period of six years with ongoing payment of 20% of spot price as royalty. The above remains an attractive bet for the company, as the above mine contributed gold production of more than 7 Moz and possesses significant exploration upside potential.
• Surge in Cash flows: The company reported a strong surge in its cash from operations of USD 43.720 million in H1FY21, as compared to USD 27.725 million in pcp. The above is aided by a net profit of USD 13.605 million in H1FY21, as compared to a net loss of USD 3.205 million in pcp.

Q2FY21 Financial Highlight:

• SSL announced quarterly result, wherein the company reported revenue of USD 487 million, climbed from USD 12.580 million in the previous corresponding period (pcp). The increase was driven by a higher average realized gold price (1,796 /ounce v/s 1,715/ounce).
• Gross profit stood at USD 547 million, jumped from USD 7.599 million in pcp. The growth was driven by elevated sales, partially offset by a higher cost of sales (USD 12.899 million v/s USD 11.131 million in pcp).
• The company’s net income of USD 636 million increased from USD 7.137 million in pcp. The quarter witnessed a rise in administrative expense, higher project evaluation costs and an increase in foreign exchange costs.

Income Statement Highlights (Source: Company Report)

Risks: The company’s operations are correlated with the gold prices, and volatility in gold prices would impact the group’s margins and cash flows.

Valuation Methodology (Illustrative): Price to CF based

Stock Recommendation:

For FY21, the company expects its existing royalties from gold equivalent would be between 62,000 and 69,000 ounces. The company derives its income from royalty revenue, and its assets-base are located across the globe and has an impressive pipeline of developing assets, which are expected to contribute to the future growth of the company. On a long-term basis, the company’s gold production is expected to be ~130 koz in 2025, from ~65 koz in FY21, reflecting a 100% growth over current production. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Torex Gold Resources Inc., Victoria Gold Corp etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 8.56 on August 16, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

Fortuna Silver Mines Inc.

Fortuna Silver Mines Inc. (TSX: FVI) is a Canada-based precious metals producer, while its business operations comprised of mining and related activities in Latin America, including exploration, extraction, and processing of silver- lead, zinc, and silver-gold and the sale of these products. 

Key Highlights:

• Surge in Metal prices coupled with robust sales: The company reported a solid growth in its operations driven by higher sales volume and elevated commodity prices. For H1FY21, the company’s gold sales stood at 63,852 oz, reflecting a growth of 267% on y-o-y basis, while silver sales volume stood at 3,803,596 oz, grew 22% over pcp. Additionally, silver and gold prices stood 60% and 9% higher than the previous corresponding period. Meanwhile, the company has upgraded its FY21 guidance and expects its gold production with 194 – 223 koz, from higher than the earlier guidance of 178 – 202 koz. The company expects its FY21 silver production at 6.8 - 7.6 Moz.
• Elevated Cash flows: The company reported a higher cash flow from operations at USD 50.689 million in H1FY21 compared to USD 4.506 million in pcp. The growth was supported by a net income of USD 42.584 million, as compared to a net loss of USD 10.153 million in pcp. Moreover, free cash flow from ongoing operations stood at USD 35.8 million in H1FY21, jumped from USD 14.3 million in pcp.
• Long-term debt to total capital is on a down trend: At the end of Q2FY21, the company posted an improved long-term debt to total capital ratio at 5.4%, which stood the lowers in last five quarters. Notably, a lower percentage denotes a prudent capital management is a key positive. The ratio is better than the industry median of 12.2%.

Q2FY21 Financial Highlights

• FVI announced its quarterly result, wherein the company posted a tremendous surge in its topline at USD 120.526 million, as compared to USD 44.484 million in the previous corresponding period (pcp). The growth was aided by a tremendous surge in sales volume coupled with improved metal prices from the previous corresponding period.
• Mine operating income jumped to USD 48.470 million from USD 13.777 million in pcp, while the cost of sales increased to USD 72.056 million, as compared to USD 30.707 million in pcp.
• The company reported operating income of USD 35.865 million as compared to an operating loss of USD 1.290 million in Q2FY20. The quarter was marked by lower general and administration, coupled with an increase in the foreign exchange loss.
• The group turned profitable and reported a net profit of USD 16.182 million, as compared to a net loss of USD 5.655 million in pcp.

Source: Company Report

Risk: The company’s financial performance is dependent on the prices of underlying commodities, in which it deals in. Hence, volatility in commodity prices would affect the overall performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

Surge in the metal prices has led to improved performance in the recent past, which is a key positive. Notably, adjusted EBITDA stood at USD 115.7 million in H1FY21, jumped from USD 25.4 million, a year ago. The above was supported by strong operating results from San Jose Mine, Caylloma Mine and Lindero Mines, despite lower production due to periodic stoppage in mine operations on account of COVID 19 restrictions. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Dundee Precious Metals Inc, SSR Mining Inc and Alamos Gold Inc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of FVI at the last closing market price of CAD 5.28 on August 16, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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