Methanex Corp

Methanex Corp (TSX: MX) is a Canada-based leading producer and supplier of methanol to international markets in North America, Asia Pacific, Europe and South America. The company’s customers use methanol as a feedstock to produce end-products like adhesives, foams, solvents, and windshield washer fluids.

Key highlights 

• Strong production guidance: Through the second quarter of 2021, market conditions remain tight due to strong methanol demand, low global inventory levels, and persistent industry supply problems. The company raised its 2021 output forecasts from 11 plants to 6700,000 tonnes. It is also noteworthy that they want to raise their yearly operational capacity from 9,250 to 11,150 tonnes in the future.
• Elevated cash flows: In Q2 2021, the company clocked higher Cash flows from operating activities at USD 243 million compared with USD 186 million in Q2 2020. The increase in cash flows was primarily as a result of higher methanol pricing and higher earnings. The company’s average realized price increased to USD 376 per tonne compared to USD 363 per tonne in the first quarter of 2021.
• Healthy liquidity: In Q2 2021, the company reported a healthy cash balance of USD 764 million and USD 900 million of undrawn backup liquidity. The company also undertook several prudent steps to continue to strengthen its balance sheet and enhance the financial flexibility.

• Positive long-term industry outlook: Methanol is expected to develop steadily as an essential ingredient in various chemical derivatives and as a building block in the production of a wide range of consumer and industrial goods. Strong methanol demand and ongoing industry supply challenges supported higher methanol prices in the second quarter, with tight market conditions continuing into the third quarter of 2021. We assume that the business would profit from the demand-supply imbalance.
  

Financial overview of Q2 2021 (In thousands of U.S. dollars)

Source: Company

• In Q2 2021, the company registered higher revenue to USD 1,068.3 million, against USD 512.2 million in the previous corresponding quarter. The increase was primarily due to higher average realizations.
• Operating income stood at USD 156.9 million in the reported period compared to a loss of USD 63.5 million in pcp, mainly due to higher revenue.
• The company posted income before tax at USD 153.5 million in Q2 2021, against a loss of USD 92.6 million in pcp. It increased mainly due to higher operating income and a rise in associates' earnings.
• On the back of the rationales discussed above, the company posted a healthy net income at USD 123.8 million in Q2 2021, compared to net loss of USD 61.5 million in pcp.
  

Risks associated with investment

The company is highly exposed to the volatility in the methane prices in the international market, which can weigh on the group’s performance. Further the company is exposed to the forex risk as well.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company witnessed favorable industry conditions continue through the first half with positive momentum leading into the third quarter. The company raised its 2021 output forecasts from 11 plants to 6700,000 tonnes. Moreover, the group wants to increase their yearly operational capacity from 9,250 to 11,150 tonnes in the future. Also, the company undertook several prudent steps to continue to strengthen its balance sheet and enhance the financial flexibility. Strong methanol demand and ongoing industry supply challenges supported higher methanol prices and we assume that the business would profit from the demand-supply imbalance. We have valued the stock using EV to Sales based valuation metrics and used industry (Basic Material) median multiple as proxy to target multiple. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 39.94 on August 17, 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 17, 2021). Source: REFINITIV, Analysis by Kalkine Group

Atico Mining Corp

Atico Mining Corp (TSXV: ATY) is engaged in copper-gold mining and related activities. Its activities include the exploration, development, extraction, and processing in Colombia.  It earns revenue from contracts with customers related to its metals concentrate sales.

Key highlights 

• Shared preliminary Q2 2021 production numbers: Recently, the company announced its operating results for Q2 2021 from its El Roble mine. Production for the quarter totaled 4.46 million pounds of copper and 2,732 ounces of gold in concentrates.  The performance was within expectations of the management in almost all metrics despite a very challenging in country situation caused by unprecedented protests along with extreme weather conditions during this period.
• Healthy production guidance: The operation remains on track to deliver on set guidance throughout the remainder of the year. The company expects a production between 9,100 and 9,500 tonnes of copper and the gold production would be in the range of 10,500 and 11,500 ounces.
• Decent cash flow from operations and free cash flows: Company generates significant cash flow through the operation of the El Roble mine and is developing its high-grade La Plata VMS project in Ecuador. On TTM basis, on the back of healthy production and higher average realization price of commodities, the company has clocked cash flow from operations of USD 28.3 million while the free cash flow for the same period stood at USD 23.4 million.
• Appointed new CFO: Recently the company announced the appointment of Mr. Matias Herrero, as Chief Financial Officer effective July 2, 2021.
  

Financial overview of Q1 2021

Source: Company 

• Sales in the reported period increased 155% to USD 19.3 million against USD 7.6 million in the previous corresponding period. The increase was mainly due to higher provisional invoicing of 10,125 DMT V/s 8,588 DMT in pcp.
• The average realized price per metal on invoicing was USD 4.05 (Q1-2020 - USD 2.18) per pound of copper and USD 1,728 (Q1-2020 - USD 1,578) per ounce of gold.
• Despite higher G&A expenses and share-based payments, the company clocked income from operations at USD 5.3 million against a loss of USD 2.6 million in pcp.
• Net income stood at USD 1.2 million compared to a loss of USD 1.5 million in pcp.

Risks associated with investment

The company’s financial performance is dependent on the prices of underlying commodities, in which it deals in. Hence, volatility in commodity prices would affect the overall performance. 

Stock recommendation

This was a particularly challenging quarter given the operational setbacks resulting in loss production and an increase in cash cost, partially mitigated by higher realized metal prices leading to a cash margin of USD 2.38 per pound of payable copper. Additionally, the company closed the quarter showing a strong cash position of USD 9.2 million and USD 18 million in trade receivables, which were mostly realized in early April. On TTM basis the company has clocked free cash flow of USD 23.4 million, which is a key positive. Moreover, the company has shared its FY 2021 production guidance and its operation remains on track to deliver on set guidance. On the valuation front, the stock trades at an EV to Sales multiple of 0.3x on an NTM basis, as compared to the industry median of 1.5x. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 0.485 on August 17, 2021, with a lower double-digit upside potential (in % terms).

Technical Analysis Summary

One-Year Technical Price Chart (as on August 17, 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.