Ero Copper Corp.

Strong Start to FY20 and Record Quarterly Cash Flows: Ero Copper Corp. (TSX: ERO) is a base metals mining company which is focused on the production and sale of copper. As on 11 May 2020, the market capitalization of the company stood at CAD1.379 billion.

Quarterly Financial Highlights (For the Period Ended 31 March 2020): The company reported a strong start to FY20 and operated one of the most comprehensive exploration programs globally at a reduced USD cost. During the three months ended 31 March 2020, ERO reported copper production of 10,657 tonnes at record low C1 cash costs of USD0.71 per pound. This contributed to record quarterly cash flow from operations of USD37.3 million. In the same time span, the company generated USD33.4 million in adjusted EBITDA and reported adjusted net income of USD20.8 million. During the quarter ended 31 March 2020, gross margin of the company stood at 45.2%, higher than the industry median of 38.8% and EBITDA margin was at 46.6% as compared to the industry median of 28.6%. ERO ended the quarter with strong liquidity position of USD45.5 million. This was mainly due to the drawdown of its existing USD and BRL denominated credit facilities.

Quarterly Operational and Financial Highlights (Source: Company Reports) 

What is on the Horizon: ERO has reiterated its guidance for FY20 and has lowered its C1 cash cost guidance range to USD0.70 to USD0.85 per pound copper produced. The company is also likely to incur capital costs in the range of USD56 million to USD68 million. It is expecting to produce 41-43 tonnes of copper and 38-40k ounces of gold.  

Valuation Methodology: EV/EBITDA Multiple Based Valuation (Illustrative)

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The underlying strength of the business is reflected in its record quarterly cash flows and record low C1 cash costs. As per TSX, the stock of ERO is trading at attractive levels and hence has a potential for further growth. The stock of ERO gave a return of 39.86% in the past one month. While the global financial markets have taken a hit from the outbreak of the coronavirus, ERO has had no material disruption to operations, supply chains or sales channels and hence is well positioned to withstand unforeseen challenges that may arise as a result of COVID-19. Considering the decent returns in the past one-month, revised guidance for FY20 and strong financial performance midst the pandemic, we have valued the stock using EV/EBITDA multiple based valuation approach and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered Capstone Mining Corp, Champion Iron Ltd, and Osisko Gold Royalties Ltd as peers. Hence, we recommend a “Buy” rating on the stock at the current market price of CAD16.12 on 12 May 2020.

ERO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Morguard Corporation

MRC Ready to Ride the Growth Wave: Morguard Corporation (TSX: MRC) is a real estate company that acquires, owns, and develops properties in Canada and the United States. As on 11 May 2020, the market capitalization of the company stood at CAD1.588 billion.

Quarterly Performance (For the period Ended 31 March 2020): During the quarter ended 31 March 2020, total revenue of the company witnessed an increase of 1% to CAD292.3 million and normalized FFO of CAD51.4 million. In the same time span, MRC reported net operating income of CAD102.6 million. This was mainly due to lower NOI from the retail and hotel portfolios, partially offset by higher NOI from the net impact of acquisitions and dispositions. The company reported consistent occupancy across all asset classes, supporting its business objective of generating stable and increasing cash flow through its diversified portfolio of real estate assets. MRC has liquidity of approximately CAD300 million and has also narrowed down the scope of its capital expenditure program. The decent financial and operational performance enabled the Board to declare a dividend of CAD0.15 per common share.

Quarterly Operational and Liquidity Performance (Source: Company Reports)

Future Expectations and Growth Opportunities: The unprecedented outbreak of the coronavirus has demonstrated the strength and resilience of the company. The company has coordinated efforts across portfolios and has implemented measures to mitigate the risk of uncertainty. Despite the recent volatility in the markets, core philosophy of the company remains strong with a defensive and diversified position in real estate. This is likely to generate more stable and reliable financial performance in the coming years. MRC has conservative debt ratios and is implementing various initiatives to reduce or defer operating expenses.

Valuation Methodology: Price to Earnings Multiple Based Valuation (Illustrative)

Price to Earnings Multiple Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Though the duration and impact of COVID-19 is unknown, MRC has demonstrated resilience financial performance in the times of uncertainty. The stock is inclined towards its 52-weeks’ low level, offering a good opportunity for the investors to enter the market. The decent financial performance in the current quarter along with positive long-term outlook is likely to mitigate the risks of softer markets. During the quarter ended 31 March 2020, gross margin of the company stood at 60.4%, higher than the industry median of 46.6%. In the same time span, EBITDA margin of the company was 37.5% as compared to the industry median of 12.7%. Considering the trading levels, positive long-term outlook and resilient financial performance, we have valued the stock using the price to earnings multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of CAD 138.11 on 12 May 2020.

MRC Daily Technical Chart (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.