The Gold Miners Index (GDX) fourth quarter earnings season is set to begin next month, and one of the first companies to report preliminary results is Equinox Gold (EQX). Despite a slower start to 2021 due to a blockade at Los Filos, Equinox finished strong, producing ~210,400 ounces, a record quarter for the company. This strong performance helped the company increase production by 26% year-on-year. Looking ahead to fiscal 2022, production should increase by at least 20%, but I expect another very expensive year. With a few high-margin Tier 1 jurisdiction producers paying dividends and trading near 1.0x P/NAV, I see more attractive opportunities elsewhere in the sector.

Equinox Gold last week released its fourth quarter and full year 2021 results, reporting quarterly gold production of approximately 210,400 ounces, a new record and a 50% sequential increase (Q3 2021 : ~139,800 ounces). This was helped by an explosive Mesquite quarter, which produced ~66,900 ounces, an increase of over 130% from Q3 2021 levels, and well above my estimates. Given the strong performance, Equinox was nearly 2% above its guidance midpoint of around 593,000 ounces and should have no problem meeting its cost guidance of $1,300/oz to $1,375/oz. oz.

Given the impressive fourth quarter performance with high double-digit production growth, the company also reported record annual production, with gold production up 26% year-over-year. This despite a much milder year at Los Filos, which was affected by a nearly 2-month hiatus due to an illegal blockade at the mine. With what should be a full year of contribution from this asset in 2022 and the start of production at Santa Luz in the first quarter, Equinox has more growth ahead and a very strong year ahead in 2022.

Digging a little deeper into the results, we can see that all of the company’s operations had a strong performance in the fourth quarter, with the two highlights being Mesquite and Aurizona. At Aurizona, Equinox produced approximately 41,300 ounces, an increase of approximately 11% year over year, which helped the mine meet its 135,000 ounce targets. Finally, at Los Filos, while the forecast was revised down due to the blockade (180,000 oz to 130,000 oz), it at least exceeded the revised forecast with a strong year-end (54,600 oz) . Among the portfolio, the only real misfires were RDM and Mercedes, the first being a small contributor and the second divested.

Considering Mercedes’ lackluster performance in 2019/2020 before Equinox acquired the company, I’m not surprised it divested the Mexican asset, and in fact got a solid price. Indeed, Equinox will receive a total consideration of $100 million in cash from Bear Creek Mining (OTCQX: BCEKF), approximately $25 million in stock, as well as a 2% net smelter return royalty on the production of the asset. Given that it was a higher cost asset, this was a solid move by Equinox, allowing it to clean up the portfolio and improve its jurisdictional profile, while also giving a small boost boost to its cash balance and investment portfolio.

It should also be noted that despite the divestiture of this asset, production will still increase significantly next year, with a full year of contribution from Los Filos, higher production from Castle Mountain and commercial production from Santa Luz ( ~111,000 ounces) taking up slack. This is expected to see the company produce more than 725,000 ounces in fiscal 2022, which would translate to another year of production growth of 20% and more. In an industry where even a mid-single-digit increase in production is respectable, this certainly sets Equinox apart from its peers.

However, while production is growing at a much faster rate than its peers, costs are also growing rapidly and are well above the industry average. This is evidenced by an all-in sustaining cost forecast of $1,338/oz at the midpoint of fiscal 2021, an increase of nearly 30% over fiscal 2020 levels. fiscal 2022, I expect to see similar costs, with inflation rates in Brazil well above the industry average (Equinox has four operations in Brazil with Santa Luz) and inflationary pressures related to fuel and consumables, and labor in all jurisdictions. So even after divesting Mercedes and opening a lower cost mine with Santa Luz, I would expect to see FY2022 cash costs of $1,075/oz and all-in sustaining costs close to $1,325/oz.

Looking at the graph above, this would only represent a slight decrease from my previous estimate ($1,115/oz) and a slight increase from the estimated cash costs for FY2021 of $1,070/oz (orientation: $1,050/oz at mid-term). If we compare this to other gold producers in the sector, these costs are well above the peer group. In fact, even if we assume inflationary pressures push industry-wide costs to $855/oz in fiscal 2022 (7% above 2020 levels), cash costs of ‘Equinox would be over 25% above the peer average, making it a much lower margin. producer at the moment.

With lower margins and a poor jurisdictional profile, I see no reason for the stock to command a valuation of 1.0x P/NAV. Some investors will argue that its growth profile and an improving cost trend should warrant a premium multiple. However, we are still years away from significant cost improvement, with the most significant improvement expected to occur when the Greenstone gold project begins commercial production in the second half of 2024 (~240,000 ounces at costs below $750 /oz). So while a revaluation will be in order if Greenstone doesn’t see a capex explosion like Magino and Cote, and once it’s in production, I think a fairer multiple based on the current portfolio is 0 .80-0.85x P/NAV .

The good news is that with an investment portfolio valued at around $450 million, Equinox opportunistically taking profits on its Solaris stock, and additional cash from the Mercedes deal, Equinox can easily fund its plans for growth. That said, I’d be surprised if we don’t see a slight increase in capital spending over the estimates at Greenstone, given that Magino and Cote, which are other larger projects under construction in Ontario, all have two recorded high double-digit increases for their first investment estimates. This could weigh slightly on the asset’s NPV (5%) depending on whether inflationary pressures continue to worsen, given that Equinox began construction much later than IAMGOLD (IAG) next door (Q4 2021 vs. Q3 2020) when inflation was more subdued.

Evaluation and technical image

Equinox currently has approximately 301 million shares outstanding and approximately 350 million fully diluted shares, which translates to a fully diluted market capitalization of approximately $2.62 billion. If we compare that number to its estimated net asset value of around $3.55 billion, the stock is trading at around ~0.74x net asset value, which is a reasonable valuation for one of the best growth stories. sector-wide. Based on what I think is a conservative fair value of 0.85x P/NAV (pre-Greenstone production), I see a fair value closer to $9.00 per share.

While this fair value indicates a 20% upside from current levels, I generally prefer to buy at a minimum discount of 30% from fair value for small- or mid-cap producers. This is necessary to maintain a significant margin of safety to protect against downward metal price volatility. After applying this discount, the low-risk buy zone for the stock approaches $6.30; therefore, I do not see the stock at a low risk buy point currently.

Moving on to the technical picture of EQX, we can see that the stock has a strong support zone at $6.00, which I highlighted in my previous article, and a short-term resistance zone at 8, $15. With the stock now trading at $7.50, it is trading at the upper end of this trading range, confirming that this is not an ideal buy point. That doesn’t mean the stock can’t go higher, but I prefer to buy at or below support when it comes to stocks that I consider to be performing in the sector. Although Equinox enjoys an enviable growth profile, it is a higher cost name, so I am more neutral on short-term stocks.

Equinox finished fiscal 2021 strong, and looking ahead to fiscal 2022, we’re likely to see production growth of at least 20%, even after factoring in the sale of Mercedes. However, while production growth is impressive, it is partially overshadowed by cost increases, with Equinox being one of the highest cost producers in the mid-producer space. That will change drastically once Greenstone comes online, but that’s three years from now. Therefore, with high-margin producers with growth profiles trading near 1.0x P/NAV, I believe there are currently more attractive bets elsewhere in the industry.