Ero Copper Corp

Ero Copper Corp. is engaged in the sale and production of copper. The group produces copper as main product and gold and silver as byproduct from Vale do Curaçá Property in Brazil. The Company's primary asset includes a majority stake in Brazilian copper mining company, Mineração Caraíba S.A.

Due to the ongoing COVID-19 pandemic, ERO did not experience any disruption to its operations, supply chains or sales channels. However, the ongoing correction in the copper prices remained a drag. The Company reported US$ 22.9 million of cash and US$ 30 million of available credit lines as on December 31, 2020. The company has revised its existing credit facilities (US$ 150 million) to boost the liquidity. The Company informed that it would disclose its first-quarter results on May 08, 2020.

FY19 Financial Highlights: For the period ended December 31, 2020, ERO reported an impressive set of numbers, wherein the company reported revenue of US$ 284.84 million, up from US$ 233.11 million in FY18. Operating income stood higher at US$ 78.45 million, as compared to US$ 50 million, thanks to higher gross profit, partially offset by higher general & administrative expense and increased share-based compensation costs. Net income stood at US$ 92.46 million against a loss of US$ 2.99 million in the previous corresponding period, thanks to a decline in finance expense and foreign exchange loss. The Company reported a capital expenditure of US$ 106.74 million, lower than US$ 100.97 million in FY18 due to addition in mineral property, plant and equipment. The company exited the quarter with cash and cash equivalents of US$ 21.485 million and a total asset of US$ 462.674 million.

FY19 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology (Illustrative): EV/EBITDA based approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of ERO is made a sharp correction of ~42% in the last nine months and currently trading at CAD 14.31 with a market capitalization of CAD 1.23 billion on 24 April 2020 market close. The correction was led due to a sharp decline in the international copper prices on account of declining industrial activities across the globe. Since China is getting back on work, we expect the demand to copper to see an upward tick gradually. The company has a decent fundamental and seems to have ample liquidity to tackle the short-term pressure. Also, the company has mentioned that it has not witnessed any disruption in its operation due to COVID-19 outbreak. We have valued the stock using EV/EBITDA method and we have consider companies such as Capstone Mining Corp (TSX: CS), Lundin Mining Corp (TSX: LUN), First Quantum Minerals Ltd (TSX: FM) etc. as peer group and arrived at a target price offering lower double-digit upside (in % terms).  Hence, we recommend a ‘Buy’ rating on ERO stock at the closing price of CAD 14.31 as on April 24, 2020.

ERO 1 Year Price Performance (Source: Thomson Reuters)

Premier Gold Mines Limited

Amidst Higher Gold prices, Near-term Challenges persists: Premier Gold Mines Limited (TSX: PG) is engaged in the exploration of gold and silver. The company operates through two segments viz. Mercedes; and South Arturo. The group operates in three geographies – The US, Canada and Mexico.

On April 8, Premier Gold Mines Limited informed that Centerra Gold had rejected the group’s offer to acquire 50% stake (held by Centerra) in Greenstone Gold Mines Partnership for a price of US$ 205 million. The company is scheduled to announce its Q1FY20 results on May 6, 2020.

Q1FY20 Operational Highlights: For the period ended March 31, 2020, PG reported total production of 18,317 ounces of gold and 52,832 ounces of silver. The company’s South Arturo mine had a strong quarter, beating management’s expectations. However, the Mercedes Mine produced 11,587 ounces for the period due to the ramping down of production amid COVID-19 outbreak. The company reported the shutdown of its mines across Mexico owing to the COVID-19. The development work was continued in the quarters as the group is targeting to access the higher-grade areas of the mines. Higher grade products is expected to help the company in improving performance via higher productivity, grade control and cost reduction. The Mining activities at South Arturo normally operated with no significant halt in operations.

FY19 Financial Highlights: For the period ended December 31, 2020, PG reported a lower revenue of US$ 93.75 million, as compared to US$ 113.87 million in FY18. The company sold less gold and silver in FY19 as compared to FY19. The average realized price of gold stood at US$ 1,332, higher than US$ 1,264 million in FY18. The company reported an operating loss of US$ 34.45 million, higher than US$ 17.94 million. The Loss for the year stood at US$ 19.95 million, improved from US$ 20.43 million in FY18. Free cash flow from operation stood positive at US$ 23.2 million, as compared to negative cash flow of US$ 10.7 million. Capital expenditure stood at US$ 52.2 million, as compared to US$ 27 million in FY18.

Stock Recommendation: PG stock remained volatile in the recent past, showing a correction of more than 21% in the last nine months while soared ~65% in the last one month. Significant price appreciation of gold prices augurs well for the company. However, we prefer to remain on sidelines as an expected decline in gold sales and operation halt in the Mexico region could impact its financials. Lower than planned grades have hindered the near-term production outlook. The company reported a decline in its top line followed by a higher operating cost, which has taken a toll on the profitability. Given the near-term weakness and pressure on financials, we recommend a ‘Watch’ stance on PG stock at the closing price of CAD 1.83, up 2.23% on April 24 market close.

PG Daily Price Chart (Source: Thomson Reuters)

Disclaimer

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