Torex Gold Resources Inc.

Torex Gold Resources Inc. (TSX: TXG) is a gold mining company engaged in the exploration, development, and exploration of its wholly owned Morelos Gold Property.

Key Highlights:

• Impressive Production guidance: FY20 has remained as a successful year for TXG, and the management expects production for FY21 to remain strong as well. The corporation expects FY21 gold production to remain within the range of 430,000 to 470,000 ounces, higher than the FY20 production of 430,484 ounces. Moreover, total Cash Costs and All-in Sustaining Costs expected to be in line with FY20, which would further support the company’s margins.

Source: Company Presentation

• Zero-debt balance sheet with ample liquidity: The company has successfully repaid its existing borrowings in Q1FY21, and currently, the company has a debt-free balance sheet, which is worth mentioning considering the capital-intensive nature of the business. Moreover, the group reported the available liquidity levels of USD 320 million, which includes USD 150 million of undrawn credit facility and USD 172 million of cash and short-term investments. This seems to be sufficient to meet the company’s short-term and long-term capital needs.

Source: Company Presentation

• Encouraging exploration update from Morelos Gold Property: In Q1FY21, the company reported impressive exploration updated from Morelos property situated in Mexico. The group identified more than ten well-identified target areas through surface mapping, sampling and remote sensing work. The company is focusing on increasing the mine life of the current project from its current reserves and allocated ~USD 2.4 million of capital expenditure for its Morelos Gold Property. An increase in the mine life would enhance the company’s scope of production in the coming years.

Q1FY21 Financial Highlights:

• TXG impresses with its results, wherein the group reported metal sales of USD 231.2 million, surged from USD 172 million in the previous corresponding period (pcp). The increase was driven by higher gold revenue (USD 229.6 million v/s USD 169.8 million in pcp) on account of higher average realized gold prices (USD 1,778/oz vs/ USD 1,571/oz in Q1FY20).
• Earnings from mine operations stood significantly higher at USD 99.3 million, v/s USD 27.9 million in Q1FY20, supported by higher income coupled with lower production costs (USD 69.4 million v/s USD 82.9 million in pcp).
• The company turned profitable and posted a net income of USD 55 million, as compared to a net loss of USD 47 million in pcp. The quarter witnessed a derivative gain of USD 3 million, against a derivative loss of USD 37.8 million in pcp coupled with higher General & administrative costs amounting USD 5.4 million v/s USD 3.3 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risk: The company’s income is correlated with the price of gold. Volatility in gold price would affect the realization price, cashflows and margins.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

Recently, the group collaborated with global renewable energy producer, Scatec, wherein the later would build a new 8.5-megawatt solar plant in the Morelos property, which is likely to lower the Scope 2 greenhouse gas emissions by 8.6%. Moreover, the above project is expected to save ~USD 1 million per year in energy costs over a period of a 20-year. Further, the group deleivered a strong quarterly result and the management expect production profile to remain strong. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Alamos Gold Inc, Endeavour Mining Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of TXG at the last closing market price of CAD 17.91 on June 02, 2021.

One-Year Technical Price Chart (as of June 02, 2021). Analysis by Kalkine Group

Real Matters Inc.

Real Matters Inc. (TSX: REAL) is a Canadian network management services provider for the mortgage lending and insurance industries. The company's platform combines proprietary technology and network management capabilities with tens of thousands of independent qualified field agents.

Key Highlights:

• Operations remained unaffected amidst economic slowdown: In the recent past, the U.S economy saw an upsurge in home construction, and hence, demand for refinance of mortgages remained high as consumers are willing to take advantage of 50 to 70 bps reduction in interest rate, v/s the rate on their current mortgage. Going forward, the management believes that the default rate is likely to remain low, and the purchase market activity would return to more normalized levels on a longer-term basis. This would support the company’s U.S. Appraisal segment since it services both purchase and refinance mortgage origination transactions.

• Elevated financial performance: Over the years, the company delivered consistent growth in its net revenue and adjusted EBITDA, supported by a strong performance from the U.S. Appraisal Segment, which has remained the backbone of the company’s operations. Notably, the company has entered the U.S. Title Segment in 2016 with the acquisition of Linear Title & Closing Ltd. and has delivered exponential growth since then by leveraging the company’s existing network within the U.S. Mortgage industry. 

• Approval for increase the number of common shares: On May 12, 2021, the company received approval for increase its common shares in the public float to 6 million, from earlier 4 million under the NCIB plan. Additionally, REAL received approval for increase its purchase price for the shares purchased under the NCIB from CAD 70 million to CAD 100 million. 

Q2FY21 Financial Highlights:

• REAL declared its second quarterly result, wherein the group reported higher revenues of USD 128.828 million, as compared to USD 109.643 million in the previous corresponding period (pcp). The growth was driven by strong traction from the U.S. Title segment (USD 40.050 million v/s USD 30.808 million in Q2FY20.) coupled with impressive growth from the U.S. Appraisal segment (USD 76.3 million, up 7% on y-o-y basis).
• Adjusted EBITDA was recorded at USD 19.013 million, grew 30.2% on y-o-y basis. The increase was driven by higher volumes and margin expansion from the company’s U.S. Title segment.
• The period was marked by an increase in the operating expense (USD 28.206 million v/s USD 21.977 million in Q2FY20) coupled with an increase in transaction costs (USD 82.170 million v/s USD 73.703 million pcp).
• Net income declined to USD 11.674 million, from USD 18.652 million in Q2Y20, primarily due to a net foreign exchange loss of USD 1.515 million v/s, a gain of USD 12.419 million in Q2FY20.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The operation of the company depends upon the current mortgage market situation, which is cyclical in nature and is impacted by several factors, such as broader economic conditions, changes to interest rates, changing regulations etc.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company is focusing on its long-term plan of capturing 7-9% of the total addressable market for purchase mortgage origination activity within the U.S. Appraisal segment till FY25. The company expects its net revenue margins at 26-28% and Adjusted EBITDA margins of 65-70%, respectively by FY25. The company derives a comparatively less income from its Canada segment. However, in Q2FY21, the group reported a whopping 65.6% growth in revenue from the above segment coupled with an increase in market share and market volumes. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like CGI Inc, Descartes Systems Group Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 16.94 on June 02, 2021.

One-Year Technical Price Chart (as on June 02, 2021). Analysis by Kalkine Group

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

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