Agnico Eagle

Agnico Eagle (TSX: AEM) is a Canadian gold mining company which produces precious metals since 1957. The group’s operating mines are situated in Canada, Finland and Mexico, while its exploration and development activities are located in each of these countries as well as in the United States, Sweden and Colombia.

Key Highlights:

• Ample Liquidity: The company reported a strong liquidity of USD 132 million in cash and cash equivalents and USD 1.2 billion, and a USD 300 million in undrawn credit lines available. With the above funds, we believe the company would be able to meet its working capital needs. Moreover, in FY21, the company do not have any debt maturity, and after that the company has a manageable debt maturity, which would not challenge the liquidity of the company.           

Source: Company Presentation

• Impressive Guidance: Amidst the turbulent economic situation, the company has maintained its FY21 gold production guidance at 2,047,500 ounces. Moreover, AISC per ounce is expected within the range of USD 950 to USD 1,000. The company expects its cash costs per ounce in between USD 700 to USD 750.

Q1FY21 Financial Highlights:

• AEM announced its quarterly results, wherein the company posted revenue of USD 934.392 million, significantly higher than USD 671.878 million in the previous corresponding period (pcp). The increase was driven by higher gold sales of 513,286 ounces versus 410,883 ounces in Q1FY20. Gold realization price stood at USD 1,780/oz, higher than USD 1,579/oz in pcp.
• The quarter was marked by higher production costs (USD 412.400 million v/s USD 356.102 million in pcp) and higher amortization costs (USD 181.115 million v/s USD 153.509 million in pcp) coupled with a surge in general and administrative expense (USD 44.933 million v/s USD 30.543 million in pcp). However, a lower exploration and corporate development costs of USD 28.709 million v/s USD 29.643 million in pcp, which supported the profitability. Income and mining taxes expense stood at USD 229.588 million v/s USD 23.331 million in Q1FY20.
• Net income for the period stood at USD 136.148 million, as compared to a net loss of USD 21.656 million in Q1FY20.
• Cash and cash equivalent stood at USD 126.466 million, while total assets were recorded at USD 9,552.816 million.

Source: Company Report

Risk: Volatility in the international gold prices is likely to affect the company’s performance. Moreover, the management expects that its general and administrative expenses are expected in between USD 90 million to USD 100 million, higher than its previously expected figures of USD 80 million and USD 90 million, due to a surge in higher costs related to compensation and benefits expenses. This may put pressure on the margins.

Valuation Methodology (Illustrative): EV to EBITDA Based Valuation

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

Stock Recommendation:

During Q1FY21, the company reported a higher operating cash flow per share of USD 1.47, as compared to USD 0.68 per share. The company expects a 24% of production growth between FY20 to FY24, which is expected to drive the company’s free cash flows. During Q1FY21, the company reported its EBITDA margin and Pretax margin at 48.4% and 24.6%, respectively, higher than the industry median of 41.5% and 21.2%, respectively. We have valued the stock using EV to EBITDA based relative valuation method and arrived a target price offering high single digit return (in % terms). We have considered Alamos Gold Inc, Altius Minerals and Kinross Gold Corporation as a peer group for the comparison purpose. Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 82.18 on May 3, 2021.

One-Year Price Chart (as on May 3, 2021). Source: Refinitiv (Thomson Reuters)

Tourmaline Oil Corp.

Tourmaline Oil Corp. (TSX: TOU) is in natural gas and crude oil producer which is engaged in the acquisition, exploration, development, and production and operates in the Western Canada Sedimentary Basin.

Key Highlights:

• Stable Dividend Payment: In the last few years, the company reported consistent dividend payment, backed by stable cash flows, which is a key positive. Notably, in FY20, the company reported a higher dividend payment of CAD 161.626 million, compared to CAD 124.995 million in FY19.     

Source: Refinitiv (Thomson Reuters)

• Outperformed the Industry Margin: The company delivered a decent performance and outperformed the industry median margin profile. In FY20, Gross margin and EBITDA margin stood at 97.8% and 54.3%, respectively, significantly higher than the industry median of 56.1% and 35.1%, respectively. Moreover, the company reported its net margin at 28.6% in FY20, as compared to a net margin of -8.1% (industry median). Over the years, the company focused on lowering its operating costs and general administrative costs, which has led to enhanced margin scenario v/s the industry median. 

Source: Refinitiv (Thomson Reuters)

• Event Update: The company would disclose its Q1FY21 result on May 11, 2021.

FY20 Financial Highlights:

• TOU declared its full-year result, wherein the company posted total revenue of CAD 2,160.445 million, increased marginally from CAD 2,076.577 million in the previous corresponding period (pcp). The growth was driven by the higher income from commodity sales from production (CAD 2,200.911 million v/s CAD 1,846.195 million in FY19), while a loss on risk management activities of CAD 106.001 million remained a drag.
• The corporation reported total expenses of CAD 1,485.149 million, declined significantly from CAD 1,713.847 million in pcp. The decline in expenses was mainly attributed to higher gains registered from acquisitions and divestitures although all other expenses increased during the quarter.
• Income from operations stood at CAD 675.296 million, increased significantly from CAD 362.730 million in the previous year.
• The group reported a net income and comprehensive income of CAD 618.553 million, soared from CAD 320.028 million in FY19.
• At the end of FY20, the company reported cash and cash equivalents at CAD 220.168 million, while total assets were recorded at CAD 12,790.2 million.

Source: Company Reports

Risks:  Volatility in the oil and gas prices may hamper the company’s income, cash flow and margins. Moreover, the company reported a constant surge in total debt in recent years, which is an area of concern, as it would dampen the financial flexibility of the company.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The company is a leading name across North America and is the largest natural gas producer in Canada. The company enjoys economies of scale, which helps the company in improving cost. The company has transitioned from a previously growing liquids profile to a methodical liquids growth company and expects a 5% CAGR organic growth in the next five years.

Source: Company Presentation

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 Peyto Exploration & Development Corp, Paramount Resources Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of TOU at the last traded price of CAD 27.15 on May 03, 2021.

One-Year Price Chart (as on May 03, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.