Ero Copper Corp (TSX: ERO) is a base metals mining company mainly aiming towards the production and sale of copper from the Vale do Curaca Property in Brazil. The company also focused on selling of gold and silver produced as the by-products. Ero's operations are segmented between MCSA, NX Gold, and corporate.

Key highlights

• On track Milling and Mining Operations: The company is poised to achieve high end full year production guidance for FY21, where MCSA Mining Complex processed 572,666 tonnes of ore grading 1.90% copper, producing 10,057 tonnes of copper in concentrate during the quarter after metallurgical recoveries of 92.4%. Additionally, year to date 2021 copper production totaled 33,593 tonnes based on approximately 1.7 million tonnes processed at copper grades of 2.11% and metallurgical recoveries of 92.3%.
  

• Robust Exploration Results: During Q3 2021, the company has revealed strong exploration results both in-mine and near-mine at the MCSA Mining Complex and the NX Gold Mine. Hence, enabling the company towards the positive year end and higher mineral reserve and resource update. Additionally, the company is focusing on new advanced target zones and new mineral resources for enhancing the production in the near to long term.
  

• Announced Feasibility Study for the Boa Esperance Project: The Company has announced feasibility study report on Boa Esperanca Project stating that life of copper mines has increased to further 12 years, estimating copper production to reach around 27,000 tonnes per annum in the first five years of production and then approximately 35,000 tonnes per annum.
  

• Higher Cash flow from operations: In the third quarter of 2021, the firm reported a greater cash flow from operations of USD 150.7 million, up from USD 44.4 million in the third quarter of 2020. A USD 8.4 million rise in gross margins due to higher copper prices, as well as USD 100.0 million in revenues from the NX Gold Transaction, boosted cash flow from operations.

Source: Company’s Presentation  

• Production Guidance: For FY 21, the company has given production guidance in the range of 42,000 to 45,000 tonnes of copper in concentrate at the MCSA Mining complex and 34,500 to 37,500 ounces of Gold at the NX Gold Mine. The Company expects to achieve the high-end of its full-year production guidance at the NX Gold Mine despite lower planned grades in Q4 2021 due to mine sequencing within the Santo Antonio Vein.
  

Risks associated with investment           

Since, the company competes in a highly competitive market, it must adapt to and compete with rapid changes in global metal prices, volatility of commodity prices, USD/BRL exchange rates and governmental actions, interruption of production, and client preferences to stay afloat. This could result in significant input costs, which might bring high variations in metal prices. 

Financial overview of Q3 2021 (In thousands of USD, except share and per share amounts)

Source: Company’s Filing

• The company has increased its revenue by 18.51% to USD 111.79 million in Q32021 from USD 94.33 million in Q3 2020, due to 75% increase in copper export sales; totaled USD 61.07 million in Q3 2021.
• Company’s cash flow from operations in third quarter was at record USD 150.7 million, an increase of USD 106.3 million from USD 44.4 million in Q3 2020. Cash flow from operations benefited from an increase higher copper price, as well as received USD 100.0 million in proceeds from the NX Gold Transaction.
• The net income of the company in third quarter was USD 26.4 million compared to USD 31.4 million in Q3 2020. The decrease was mainly attributed to a USD10.4 million unrealized mark-to-market adjustments on the Company's foreign exchange derivatives and partially offset by higher gross margins.
• During the quarter, the Company repaid USD 100.0 million of principal on its USD 150.0 million senior secured revolving credit facility. As a result, loans and borrowings was USD 51.66 million in Q3 2021 compared to USD 155.56 million in Q3 2020.

Valuation Methodology (Illustrative) EV to EBITDA Based

Analysis by Kalkine Group

Stock recommendation

The Company is reaffirming its 2021 production guidance ranges for both the MCSA Mining Complex and the NX Gold Mine and is well-positioned to achieve the high-end of both ranges. During Q3 2021, the Company completed the second and final phase of preventative mill maintenance at the MCSA Mining Complex in preparation for expanded operations and higher throughput volumes. Now it is expected to drive higher mill throughput volumes and lower average processed copper grades during Q4 2021. The Company expects to achieve the high-end of its full-year production guidance at the NX Gold Mine despite lower planned grades in Q4 2021 due to mine sequencing within the Santo Antonio Vein.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 19.10 on January 4, 2022.

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

Technical Summary Analysis

One-Year Price Chart (as on January 4, 2022). Source: REFINITIV, Analysis by Kalkine Group

OceanaGold Corporation

OceanaGold Corporation (TSX: OGC) is engaged in the exploration, development of gold and other minerals and has a presence across Philippines, New Zealand, and, to a lesser extent, the United States.

Key Highlights:

• Robust Margins: The group commands an impressive profit margin compared to the industry median, which is a key positive as it indicates improved operational efficiency. Notably, in Q3FY21, the company posted EBITDA and operating margins of 42.7% and 18.3%, respectively, compared to the industry median of 7.9% and 7.8%, respectively. Moreover, its net margin for the quarter stood higher at 21.9%, versus the industry median of 6.4%.

• Lower cash conversion period indicates improved operational efficiencies: The company has an extremely lower cash conversion period of 9.9 days in Q3FY21, as compared to the industry median of 51.9 days. The above indicates that the group takes relatively lower time to convert its raw materials to cash flows.
  

• Strong operating performance from Haile mine: The company posted strong operating performance, and produced 147,491 ounces of gold in 9MFY21, which is 67% higher on y-o-y basis. The company expects its FY21 production of 175,000 to 180,000 ounces of gold from its Haile mine, higher than the previous guidance of 160,000 to 170,000 ounces. The above is expected to support the company’s operations in the coming days.
  

Risks: The company’s operations might be hindered by events like delay in execution of its upcoming projects, volatility in commodity prices etc. Moreover, being unable to report the expected result from the new drilling area would likely impact the company’s upcoming performance and its mineral reserves.

Q3FY21 Financial Highlights:

• OGC announced its quarterly result, wherein the company reported revenue of USD 204.6 million, jumped from USD 97.9 million in pcp. The surge was driven by higher gold sales (97.4 koz v/s 60.8 koz in pcp) coupled with a higher average gold price (USD 1,797/oz vs USD 1,601/ oz in pcp) received.

• Operating profit stood higher at USD 37.5 million, as compared to an operating loss of USD 22.2 million in the previous corresponding period (pcp). The quarter was marked by increase in cost of sales and a surge in the general & administration costs.

• The group turned profitable and reported a net profit of USD 44.9 million, as compared to a net loss of USD 96.8 million in pcp. The increase was supported by an elevated revenue and operating profit.

Q3FY21 Income Statement Highlights (Source: Company Report)

Valuation Methodology (Illustrative): Price to Cash flow

Analysis by Kalkine Group

Stock Recommendation:

The company has prudent working capital management and reported its quick ratio and current ratio of 0.88x and 1.51x, respectively, in Q3FY21, versus the industry median of 0.60x and 0.96x, respectively. The above indicates better utilization of resources as compared to the industry median.

We have valued the stock using the price to cash flow-based valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Resolute Mining Ltd, Endeavour Mining PLC etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of OGC at the last traded price of CAD 2.16 on January 04, 2022.

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

Technical Summary Analysis

One-Year Technical Price Chart (as on January 04, 2022) Source: REFINITIV, Analysis by Kalkine Group

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

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.