Seven Generations Energy Ltd.

Seven Generations Energy Ltd. (TSX: VII) is an independent energy company focused on the acquisition, development, and optimization of high-quality, tight rock, natural gas resource plays. 

Key Updates:

• Collaboration with ARC Resources: Recently, ARC Resources Ltd. (ARC) and Seven Generations agreed to combine their respective businesses and entered into a business combination agreement dated February 10, 2021. It will be an all-share transaction structured as a plan of arrangement, where the combined business is valued at CAD 8.1 billion, inclusive of net debt. The transaction is expected to close on April 6, 2021, subject to shareholders approval. Under this, Each Seven Generations share will be exchanged for 1.108 ARC shares. Moreover, the Seven Generations shareholders will receive ARC’s dividend post-closing (currently CAD0.24 per share per year). Once the transaction completes, the combined company will operate as ARC Resources Ltd. and remain headquartered in Calgary, Alberta. 

• Lucrative Synergies: The combination will immediately deliver accretive free funds flow per share to all shareholders, yielding synergies that are expected to deliver approximately CAD 110 million in annual cost savings by 2022.

FY20 Financial Highlights:

• VII announced its full-year result, wherein the company posted total revenue of CAD 2,479.0 million, as compared to CAD 2,729.4 million in FY19. The decline was primarily attributable to a slight dip in total sales volumes (183.9 mboe/day versus 203.0 mboe/day in FY19). Moreover, total Realized prices stood lower at CAD 26.21/boe versus CAD 34.44/boe in FY19).
• The company reported a net loss of CAD 2,806.4 million, as compared to a net profit of CAD 490.0 million in FY19. The decrease was primarily due to an inclusion of Impairment loss amounting to CAD 2,855.6 million.
• Cash and cash equivalents were recorded at CAD 4.7 million, while total assets were recorded at CAD 5,692.3 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: The group’s performance is correlated to the international oil and gas prices, and price volatility would affect the company’s overall performance.

Stock Recommendation:

The company entered into an agreement to combine with ARC Resources and form Canada’s premier Montney Producer. The combined company will continue to focus on significant free funds flow generation through a responsible and disciplined approach to development while creating superior and enduring value for all shareholders. The deal is a win-win for both the shareholders. The Business Combination is expected to be completed on or about April 6, 2021, subject to the satisfaction of all closing conditions. A special meeting for Seven Generations’ shareholders will be held on March 31, 2021 to consider and vote on resolutions in connection with the proposed Business Combination of Seven Generations and ARC Resources Ltd. Considering the aforesaid facts, current price movement, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 8.43 on March 08, 2021. 

One-Year Price Chart (as on March 8, 2021). Source: Refinitiv (Thomson Reuters)

Sierra Metals Inc

Sierra Metals Inc (TSX: SMT) is a precious and base metals producer in Latin America. The company acquires, explores, extracts, and produces mineral concentrates consisting of silver, copper, lead, zinc and gold in Mexico and Peru.

Key Updates:

• Better than Industry Margins: During Q3FY20, the company reported higher EBITDA margin, Operating margin and a net margin of 50.4%, 35.4% and 26.6%, respectively, as compared to the industry median of 41%, 23.9% and 8.7%, respectively. An improved margin over the industry median indicates strong operational efficiency.

• Positive Macros: The company derives a significant part of its revenue from copper sales, and the rising demand for copper is likely to support commodity prices. The future growth is expected from increase adaptation from Electric Vehicles and its battery. Moreover, the growing usage of Solar power systems would support copper usage as it is used in heat exchangers of solar thermal units.

• Event Update: The company would disclose its Q4FY20 Financial Result on March 18, 2021.

Q3FY20 Financial Highlights:

• SMT announced its quarterly results, wherein the group posted revenue of USD 73.211 million, higher than USD 64.551 million in the previous corresponding period (pcp). The increase was driven by higher sales from the Bolivar mine, supported by higher realized metal prices and higher copper equivalent payable pounds, attributable to a 24% increase in throughput.
• Gross profit stood at USD 33.021 million, higher from USD 18.320 million in Q3FY19. The growth was supported by higher sales and lower mining costs (USD 29.247 million versus USD 35.782 million in pcp), while a marginal increase in depletion, depreciation and amortization (USD 10.943 million versus USD 10.449 million in pcp) stood as a drag.
• The company reported a slightly lower general and administrative expense (USD 4.516 million versus USD 4.858 million in pcp), a decline in selling expenses (USD 2.600 million versus USD 2.689 million in pcp) and a lower interest expense and other finance costs (USD 1.025 million versus USD 1.417 million in pcp).
• The group reported its net income of USD 19.490 million, as compared to USD 3.232 million in Q3FY19.

Income Statement Highlights (Source: Company Report)

Risks: The income of the company is related to international commodity prices, and price volatility would lead to a slide in the overall performance of the company.

Valuation Methodology (Illustrative): Price to CF based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

During the third quarter of FY20, the company reported a strong growth in revenue, operating income and net profit at USD 73.21 million, USD 25.91 million and USD 17.53 million, respectively, as compared to USD 41.90 million, USD 5.13 million and USD 0.15 million, respectively recorded in Q2FY20.  The company expects 2021 production between 130.0 - 141.0 million copper equivalent pounds vs. 2020 production of 118.2 million pounds. The group expects its EBITDA for 2021 is expected to be between USD 155 million to USD 170 million at consensus price estimate. However, EBITDA at current spot prices is expected to be between USD 170 million to USD 185 million. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Trevali Mining Corp, Foraco International SA and Major Drilling Group International Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 3.32 on March 8, 2021.

1-Year Price Chart (as on March 8, 2021). Source: Refinitiv (Thomson Reuters)

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