Aurora Cannabis

Aurora Cannabis (TSX: ACB), headquartered in Edmonton, Canada, cultivates and sells medicinal and recreational cannabis through a portfolio of brands that include Aurora, CanniMed, Daily Special, MedReleaf, and San Rafael '71. Although the company primarily operates in Canada, it has expanded internationally through medical cannabis exporting agreements or cultivation facilities in more than 20 countries.

Key highlights 

• Opportunities in the US market: The U.S President Biden has stated his support for the legalization of medicinal cannabis, and the organization believes the FDA will have a big impact on a federally controlled medical cannabis program. In addition, the company is evaluating strategic acquisition options in the United States in order to acquire exposure to the THC industry before complete regulation is enacted.
• Made entry in Uruguay: Bidiol, Uruguay's first medicinal cannabis oil manufactured entirely in the country, was just released by the firm. CBD oil comes in 10ml and 30ml bottles and is accessible at pharmacies around the country in concentrations of 3% and 10%. Furthermore, the company is expanding its CBD oil product range in Uruguay, with intentions to do so in the near future.
• Operational efficiency plan & healthy balance sheet: Aurora stated a goal to save CAD 60-80 million in yearly costs over the next 12-18 months, which is commendable. The cost of sales savings is projected to be between CAD 40 and 60 million, with SG&A savings of around CAD 20 million. In addition, it has a healthy cash balance of CAD 440.9 million. This solid financial sheet, we believe, will support organic expansion and may be used for opportunistic M&A, particularly in the United States.
  

Financial overview of Q4 2021

Source: Company 

• The company posted lower revenue at CAD 8 million against CAD 68.4 million in the previous corresponding period. The drop in total revenue was mainly due to lower performance from consumer cannabis net revenue partially offset by higher average net selling price of dried cannabis which increased by 42%.
• In the reported period, the company registered gross profit of CAD 17.2 million against a loss of CAD 66.9 million in pcp.
• Although the company curtailed its operating expenses to CAD 70.8 million against CAD 88.3 million in pcp, still it recorded operating loss of CAD 58.1 million, much lower against a loss of CAD 177.7 million in pcp.
• Net loss for the reported period also minimized to CAD 135.1 million against CAD 1,859.6 million in pcp.
  

Risks associated with investment

The company operate in a highly regulated business and any failure or significant delay in obtaining applicable regulatory approvals could adversely affect the ability to conduct its business. Additionally, change in the laws, regulations, and guidelines that impacts the business may cause adverse effects on its operations.  

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company delivered another excellent yet consistent performance in domestic medical during the quarter, as well as remarkable year-over-year growth in the high-margin international medical segment. Cantek in Israel has also agreed to a long-term supply arrangement, which would offer a consistent stream of high-margin income and might eventually lead to a bigger collaboration. In addition, the company is working to extend its CBD oil product range in Uruguay, with plans to do so in the coming months. Furthermore, the group is hoping to create a big splash in the United States, which would be a huge plus. Therefore, based on the rationales discussed above and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 9.14 on October 21, 2021. We have considered Canopy Growth Corp, Tilray Inc, Cronos Group Inc, 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 October 21, 2021). Source: REFINITIV, Analysis by Kalkine Group

Mandalay Resources Corporation

Mandalay Resources Corporation (TSX: MND) is a Canadian-based natural resource company with producing assets located in Australia and Sweden.

Key Highlights:

• Encouraging Q3FY21 performance: The company reported strong quarterly performance for the period ending September 30, 2021 and reported total production of 33,121 Gold Eq(oz), significantly higher than 25,664 Gold Eq(oz), in the previous corresponding period (pcp). The growth was driven by the inclusion of production from Cerro Bayo mine coupled with increased production from both Björkdal and Costerfield mines. Notably, total gold sales stood at 29,752 Gold Eq(oz), higher than 26,001 Gold Eq(oz) in pcp.
• Strong growth in cash flows: In H1FY21, the company reported a higher cash flow generation supported by impressive profitability during the period. Notably, cash from operating activities stood at USD 36.222 million in H1FY21, higher than USD 17.569 million in pcp. An increase in cash flows from operations indicates higher liquidity.
• Positive Drilling update: Recently, the company conducted drilling activity for its Costerfield operation in Victoria, located in Australia. The company completed one drillhole within the Cuffley and Augusta deposits and recovered quartz veining with multiple visible gold intercepts within horizons not previously encountered. Moreover, the company expects a sizeable system of significantly mineralized gold-bearing veins at depth below the current development.
• Sale of Cerro Bayo mine: Recently, the company reported that it had sold its Cerro Bayo mine to Equus Mining Limited, as later exercised its option to purchase the above mine which was granted through to a binding option agreement in October 2019.

Q2FY21 Financial Highlights:

• MND announced its quarterly result, wherein the company posted revenue of USD 51.352 million, as compared to USD 42.335 million in the previous corresponding period (pcp). The increase was supported by higher gold equivalent sales of 28,115 oz, as compared to 24,916 oz in pcp. Additionally, average realization price stood at USD 1,814/oz, climbed from USD 1,709/oz in pcp.
• Income from mining operations stood at USD 15.262 million, climbed from USD 13.790 million in the previous corresponding period (pcp). The growth was primarily attributable to higher revenue, partially offset by the increase in cost of operations.
• The quarter was marked by lower administration cost, decline in share-based compensation expenses.
• The group turned profitable and posted a net income of USD 4.790 million, as compared to a loss of USD 2.439 million in the previous corresponding period (pcp).

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in the gold and silver prices are likely to affect the company’s income, cash flows and margins.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company reported strong production in the recent past, supported by elevated demand dynamics. Notably, the company reported consolidated production of 90,640 Gold Eq(oz) in 9MFY21, higher than 76,093 Gold Eq(oz) in pcp. We have valued the stock using the P/CF-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Metal & Mining) median on an NTM basis. Considering the aforesaid facts, we give a ‘Speculative Buy’ rating on the stock at the closing price of CAD 2.51 on October 21, 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 October 21, 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.