Maverix Metals Inc.

Maverix Metals Inc (TSX: MMX) is a precious metals royalty and streaming company, which offers a mining-related investment that provides exposure to metal price appreciation and exploration and expansion potential, but without the risks associated with ongoing capital costs, operating costs and environmental liabilities.

Key Highlights:

• Balanced Portfolio: On the geographic front, the company has a balanced revenue mix, which indicates lower dependence on one region. In H1FY21, the company derived ~40% and ~60% of its revenue from silver and gold segments as compared to ~22% and 77% in pcp.                 

Source: Company Report

• Elevated Production profile: In H1FY21, the company reported total production of (including royalty mines) 15,182 GEOs, as compared to 12,283 (Gold Equivalent ounce) GEOs in pcp, supported by strong production growth from Beta Hunt and Moss mines. Revenue from the company’s mines galloped to USD 12.507 million in H1FY21, from USD 6.401 million in pcp, supported by higher production from El Mochito mines, coupled with higher realization prices (USD 1,804 in H1FY21 vs/ USD 1,650 in pcp).
• Impressive margin profile: The group reported a higher profitability margin in Q2FY21 as compared to its peers, which is a key positive and indicates improved operational efficiency. Notably, EBITDA margin and operating margin stood at 71.5% and 43.9%, respectively, higher than the industry median of 40.1% and 25.1%, respectively. Moreover, the net margin stood at 25.9% in Q2FY21, significantly higher than the industry median of 15.7%.
• Rise in dividend distribution: Amidst the current turbulence, the company raised its dividend distribution supported by robust cash flows. Dividend distribution stood at USD 3.173 million in H1FY21, as compared to USD 2.393 million in pcp.

Q2FY21 Financial Highlights:

• MMX announces its quarterly result, wherein the company posted total revenue of USD 14.309 million, higher than USD 10.971 million in pcp. The increase was driven by elevated realization rates (USD 1,816 vs/ USD 1,711 in pcp).
• The company reported a gross profit of USD 8.834 million, higher than USD 6.036 million in pcp. The increase was driven higher top line, partially offset by higher cost of sales (USD 5.475 million, v/s USD 4.935 million in pcp).
• Income from operations surged to USD 6.280 million, as compared to USD 4.228 million in pcp. In Q2FY21, the company reported higher administration expenses and project evaluation expenses.
• Net income stood at USD 3.708 million, as compared to USD 3.076 million in pcp.

Q2FY21 Income Statement Highlight (Source: Company Reports)

Risks: Volatility in underlying commodity prices would affect the margin and profitability. Moreover, a temporary suspension of mining activities due to the COVID-19 pandemic might lead to lower production.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

Net cash provided by operating activities stood at USD 22.292 million in H1FY21, surged from USD 11.462 million in pcp. The above was supported by higher net income from operations (USD 18.477 million v/s USD 3.936 million in pcp). For FY21, the company expects its production in between 27,000 to 30,000 attributable GEOs at ~90% cash margin coupled with ~99% of expected revenue derived from gold and silver. 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). Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 5.60 on August 25, 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 25, 2021). Source: REFINITIV, Analysis by Kalkine Group

Gear Energy Ltd

Gear Energy Ltd (TSX: GXE) is engaged in the business of acquiring, developing, and holding interests in petroleum and natural gas properties and assets. Its oil-focused operations are located in three core areas: Lloydminster Heavy Oil, Central Alberta Light/Medium Oil, and Southeast Saskatchewan Light Oil.

Key highlights

• Successfully drilled one light oil well and one heavy oil well: The group successfully drilled one light oil well in Tableland, Saskatchewan and one multi-lateral unlined heavy oil well in Wildmere, Alberta. The Tableland light oil well was completed in July and is expected to be on production in August. Additionally, during the quarter, the company received regulatory approval for three water flood projects, which is a key positive.
• Strong improvement in funds from operations: In Q2 2021, the company clocked an impressive improvement in its funds from operations, which increased 48% to CAD 12.2 million compared to the previous corresponding period. The increase was a result of significantly higher commodity prices, lower operating costs, and increased production. Second quarter realized prices increased from CAD 50.46 per barrel in the first quarter of 2021 to CAD 59.90 per barrel. 
• Minimizing net debts: The company reduced its net debt by 52% to CAD 33.4 million in Q2 2021 against CAD 70.2 million in Q2 2020 and 22% on a sequential basis. The debt has been lowered as a result of funds from operations significantly exceeding capital investment. Additionally, it also retired its convertible debentures worth CAD 13.2 million in the first half of 2021 through the issuance of 41.2 million common shares.
  

Financial overview of Q2 2021

Source: Company

• In Q2 2021, the company reported total revenue of CAD 19.7 million against CAD 3.5 million in the previous corresponding quarter. The rise in revenue was primarily due to due to higher realized commodity prices and increased sales volumes.
• Total expenses in the reported period stood at CAD 20.4 million against CAD 8.8 million in pcp. The expenses were on the higher side mainly due to higher operating expenses and higher depreciation.
• On the back of higher revenue, the company lowered its net loss to CAD 0.7 million in Q2 2021, compared to a net loss of CAD 5.3 million for the same period in 2020.

Risks associated with investment

The company is exposed to a variety of risks ranging from Commodity price risk, Currency Transition risk, and Interest rate risk. Further, the company is exposed to the next wave of covid-19 as it can hamper production. Also, production is exposed to weather condition. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

For the quarter and six months ended June 30, 2021, sales production volumes averaged 5,440 and 5,388 boe per day compared to 2,749 and 4,746 boe per day in the same periods in 2020. At present, although the commodity prices are witnessing a volatility, but we believe this is for a short period only. Going forward the greater commodity prices and increased production are expected to boost the company’s fund from operations in fiscal 2021. Furthermore, by deleveraging the balance sheet, a higher commodity price realization combined with strong cost management efficiency would improve the company's financial health. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 0.66 on August 25, 2021. We have considered Birchcliff Energy Ltd, InPlay Oil Corp, Spartan Delta Corp, etc., as the peer group for the comparison. 

*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 25, 2021). 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.