Domtar Corp. (TSX: UFS) is a leading provider of a wide variety of fibre-based products including communication, specialty and packaging papers, market pulp and absorbent hygiene products. The group is serving more than 50 countries around the world.

Key Highlights

• Divestedpersonal care business: Recently, the Company divested its personal care business to affiliates of American Industrial Partners for USD 920 million. This divestiture is a significant milestone in the Company’s strategic transformation to become a leading paper, pulp and packaging company. This divestment programme is part of an ongoing effort to strategically optimize its portfolio, strengthen the balance sheet, and enhance liquidity. The Company plans to use USD 600 million of the proceeds to reduce debt and USD 300 million to repurchase shares. 

• Making an entry in a new segment: The company plans to enter the linerboard market with its Kingsport paper machine's conversion. Once in full operation, the mill would produce and market approximately 600,000 tons annually of high-quality recycled linerboard and corrugated medium. This would provide them a strategic footprint in a growing adjacent market. The conversion is expected to be completed by the end of 2022.

• Cost reduction program:The management initiated some cost reduction measures and targeting USD 200 million in annual run-rate savings to be realized by the end of 2021. Under this programme, the group has already registered an Impairment of long-lived assets.

Financial overview of FY 2020 (In millions of USD)

Source: Company

• For FY2020, the company reported sales of USD 3.65 billion, decreased by 16%, against USD 4.37 billion. This decrease in sales is primarily due to reduced paper sales volumes and a drop in net average selling prices for pulp and paper, partially offset by increased pulp sales volumes.
• The company clocked an operating loss of USD 177 million in 2020 against a profit of USD 179 million in the previous corresponding period. The operating loss was mainly due to the higher cost of sales at 86% Vs 83% and the impairment cost and restructuring cost, which were also on the higher side.
• On the back of the above-stated reasons, the company reported a net loss of USD 127 million in FY2020, against a profit of USD 84 million in pcp, partially offset by an income tax benefit of USD 76 million.  

Risks associated with investment

The Company is exposed to many risks which could adversely affect the results of operations and financial conditions. Some of these risks include current economic conditions and uncertain economic forecast, fluctuations in raw material costs, or the unavailability of raw materials, currency exchange rates, interest rates, etc.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The company expect near-term pulp markets to gradually improve, driven by better demand, maintenance outages and restocking in China. Overall raw material costs are expected to increase moderately, and freight costs are also likely to be higher. Furthermore, the company divested its personal care business to become a leading paper, pulp, and packaging company as part of its ongoing effort to strategically optimize its portfolio and strengthen the balance sheet and enhance liquidity. It also plans to minimize its debt by USD 600 million, further bringing down its interest expense. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 43.8 on March 23, 2021. We have considered International Paper Co, Resolute Forest Products Inc, Westrock Co, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 23, 2021). Source: Refinitiv (Thomson Reuters)

K92 Mining Inc (TSX: KNT) owns and operates the high-grade Kainantu Gold Mine in Papua New Guinea, which is currently operating at a design annualized production rate of approximately 50,000 oz AuEq per annum.

Key Highlights

• Strong production guidance for 2021: The management highlighted that the production in 2021 is expected to grow 16-36% year over year, with Gold Equivalent (“AuEq”) production between 115,000 and 135,000 ounces along with a higher margin with Cash Costs between USD 515-565 per ounce gold and All-in Sustaining Costs between USD 825-875 per ounce gold.

Source: Company

• Record cash flow from operating activities: In Q3 2020, the company generated USD 12.8 million of cash flow from the operation, against USD (2.6) million in Q3 2019. Moreover, for FY2021, the group expect to clock free cash flows of USD 54 million. Currently, the company is under its stage-2 expansion, and after that, the group would be generating higher free cash flows.

Source: Company

• Became debt-free entity: Following the record production reported in Q4 2020, the Company repaid the outstanding balance of USD 5 million due on the Trafigura loan during the current quarter, leaving the Company with no debt and on the historically high cash balance of over USD67 million. 

Financial overview of Q3 2020 (In thousands of United States Dollars)

Source: Company

• In Q3 2020, the Company sold 19,265 ounces of gold at an average realized price of USD 1,815 per ounce and generated revenue of USD 35.6 million, an increase of 70% against USD 21.0 million in FY 2019. The rise in revenue was primarily based on higher realized gold prices and a higher quantity of gold sold.
• Cost of sales in the reported quarter declined to 44% Vs 58% in Q3 2019. The Company posted the cost of sales at USD 15.8 million, against USD 12.2 million in pcp.
• The Company recognized earnings from operations of USD 14.9 million, 247% higher against USD 4.3 million in the previous corresponding period, based on improved operating margins driven by an increase in realized gold prices and reduced total cash costs.
• The reported period's net earnings stood at USD 9.4 million, against a loss of USD 0.4 million in Q3 2019. The Company made a turnaround due to higher revenues and lower cost of sales. 

Risks associated with investment

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

Valuation Methodology (Illustrative): EV to EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The current phase is turning to be a dream phase for the company as it came out with robust performance, a strong cash position and became a debt-free entity, which is commendable. The management raised its production guidance for 2021 with lower operating cost, which is a key positive. Furthermore, after completing its stage-2 expansion program, the company expects to generate higher free cash flows. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 6.41 on March 23, 2021. We have considered Wesdome Gold Mines Ltd, Pretium Resources Inc, Sandstorm Gold Ltd. as the peer group for the comparison.

1-Year Price Chart (as on March 23, 2021). Source: Refinitiv (Thomson Reuters)

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