Aurora Cannabis

Aurora Cannabis (TSX: ACB) is a leading licensed producer of cannabis products focused on providing premium, innovative products to patients and consumers globally.

Key Highlights:

• Emphasizing on cost-savings: In the recent past, the company encountered higher input costs, which has reduced profitability. Hence, in order to cope up with the changing industry dynamics, the company is shifting to a higher variable cost structure, leveraging outsourcing, and exploring prospects for partnership across the value chain. Notably, the company managed to lower its SG&A and R&D expenses by ~43% on y-o-y in Q3FY21, which is a key positive.                
• Focusing on high-margin products: The cannabis market in North America has grown in the recent few years, while the opportunity remains high considering the current demand scenario. The company is focusing on current consumer traits and has planned to offer products accordingly, which looks promising. Notably, considering the growing demand for adult-use cannabis products, the company launched three new proprietary cultivars under the Company's premium brand San Rafael '71, which are available from July 2021.
• Improved Cash position: The company reported an improved cash in hand on y-o-y basis, which is worth mentioning. Notably, the company held cash & cash equivalent of CAD 470.238 million and restricted cash of CAD 50 million in Q3FY21, which is higher than the cash balance of CAD 162.179 million in pcp.

Q3FY21 Financial Highlights:

• ACB announced its quarterly result, wherein the company posted net revenue of CAD 55.161 million, lower than CAD 73.541 million in the previous corresponding period (pcp).
• The group posted its gross loss of CAD 85.461 million, as compared to a gross profit of CAD 19.645 million in pcp. The above was primarily due to a higher cost of sales (CAD 127.545 million, as compared to CAD 50.656 million in pcp.
• Loss from operations stood at CAD 142.956 million, as compared to a loss of CAD 83.426 million in pcp. Input costs like general and administration expenses, sales and marketing expenses and research and development stood lower during the quarter.
• Net loss widened to CAD 164.650 million, from CAD 139.339 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks:  The products are fairly new to the consumers; hence, lower acceptability of the products might take a hit on the company’s sales volumes. Moreover, the arrival of any new player might lower the company’s market share.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation: The company is focusing on utilizing its product development and innovation expertise to launch novel and innovative products to market and prioritized its core and premium brands across all major consumer categories. The company is a leading licensed producer of cannabis products focused on providing premium, innovative products and has a wide customer-base across the globe. Notably, the company has rights of more than 100 patents and patent applications related to extraction & production systems & methods, genetics & biosynthesis, medical & recreational products etc., which is sufficient to meet the changing customer needs.  We have valued the stock using EV/Sales-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Green Thumb Industries Inc, Canopy Growth Corp etc. for the above purpose. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 8.37 on September 13, 2020.

*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 September 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

Golden Star Resources Ltd

Golden Star Resources Ltd (TSX: GSC) is a gold mining company which owns and operates the Wassa underground mine in Ghana, West Africa. The mine has mineral proven and probable mineral reserves of approximately 1.5 million ounces (oz).

Key Highlights

• Repaid Convertible Debentures: Recently, the company repaid USD 51.5 million in cash and settled the Convertible Debentures in full. This deleveraging event removes the significantly more expensive facility from its balance sheet and therefore lowers the cost of capital. It is also positive to see the Convertible Debentures repaid in cash, with no equity dilution.

• Revised production guidance for 2021: The company's projected ore tonnes for 2021 would be reduced by 21% due to a delay in the completion of the paste plant. It does, however, set a production target of 145-155 koz, with expenses projected to rise to USD 1,150-1,250 per ounce. Moreover, it would also maintain the level of capital spending in 2021, with a focus on increasing development and drilling activities, to support further volume increases for production growth and enhanced cash flow generation.
• Generated free cash flow: In Q2 2021, the company’s continuing operations generated USD 2.4 million of free cash flow, despite the significant working capital outflow during the quarter of USD 10.3 million and capital investment of USD 12.2 million.
• Investing in infill drilling and development at Wassa mine: In Q2 2021 the company continued to put investment in infill drilling and development at Wassa, ahead of planned future production expansion. The group is focused on delivering strong margins and free cash flow from the Wassa mine.

Financial overview of Q2 2021 (in thousands of USD)

Source: Company

• The company reported lower revenues in Q2 2021, decreased by 15% to USD 64.3 million, compared to USD 75.3 million in the previous corresponding period, due to lower gold sales, in part offset by a 5% increase in the average realized gold price.

• Lower revenue and higher depreciation cost in the reported period dragged the Mine operating profit lower at USD 25.4 million compared to USD 35.5 million in pcp. Although the mine operating profit was supported by higher average realization price of gold.

• On the back of higher other expenses which elevated to USD 17.7 million in Q2 2021, the company posted net loss at USD 10.4 million, against a profit of USD 8.3 million in the previous corresponding period.

Risks associated with investment

The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance.

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The company's total output in H1 2021 was 78.0 koz at an AISC of USD 1,140/oz, and it is on pace to meet the newly updated production forecast of 145-155koz for 2021. In addition, the company completed major infrastructure projects and is increasing its investment in infill drilling, which is likely to support greater production rates in the future, boosting the company's cash flow. Furthermore, the business repaid USD 51.5 million of Convertible Debentures, which is a favorable sign because the debt was repaid in cash with no equity dilution. Despite the large working capital outflow, the firm achieved free cash flow of USD 2.4 million, which is impressive. Therefore, based on the rationales discussed above and valuation, we recommend a "Speculative buy" rating on the stock at the closing price of CAD 3.16 on September 13, 2021. We have considered Galiano Gold Inc, Aura Minerals Inc, Karora Resources Inc, etc., as the peer’s group for 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 Price Chart (as on September 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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