Torex Gold Stock: Another Strong Quarter in Q2 (OTCMKTS:TORXF)
It was a tough few months for investors in the Gold Miners Index (GDX), which capped off what was a brutal 22 months. Indeed, they had to endure a cyclical bear market for 18 months but found themselves thrown from the frying pan into the fire during this recent step towards new corrective lows. Despite Torex Gold (OTCPK: TORXF) operational excellence, the stock was unable to reverse the trend, approaching its first quarter 2020 lows, even with a much higher gold price. The drop left Torex at a very cheap valuation, making it a solid bet for investors with high risk tolerance.
Just over a month ago, I wrote about Torex Gold (“Torex”), noting that I saw better opportunities elsewhere in the sector but that further weakness should present a buying opportunity. Further weakness has certainly materialized, with the Torex plunging 20% since then, breaking support at US$9.15. However, it is important to note that this is not company specific. In fact, Torex has an operational and safety record that it could pit against any producer in the industry, with CEO Judy Kuzenko leading the team through another strong quarter. This was demonstrated by the company reporting high production in El-Limon Guajes [ELG] while simultaneously developing a new mine south of the Balsas River. Let’s take a closer look below:
Torex released its preliminary second quarter results this week, reporting quarterly production of approximately 123,200 ounces of gold, an increase of more than 4% over the prior year period. This is due to higher grades from the ELG pits as well as record ore production from the ELG basement. In fact, underground ore production reached a record high of 1,580 tonnes per day, an improvement of more than 10% from the previous record of 1,430 tonnes per day reached in the second quarter of 2021. The strong performance placed l on track to meet and potentially beat its fiscal 2022 median target of 450,000 ounces.
Looking at the graph above, we can see that despite the supply chain headwinds of the pandemic and exclusions related to COVID-19, Torex is one of the few producers that continues to show a higher production compared to pre-COVID-19 levels. Equally important, the company’s safety performance has been phenomenal, recording 10 million additional hours worked without a lost-time injury. Based on approximately 235,600 ounces produced year-to-date, Torex should be able to beat forecasts again this year, an impressive feat given that some producers appear to be struggling to meet forecasts after a weak first quarter due to Omicron and labor shortages. for multiple names.
So what caused the title weakness?
Apart from a low gold price which has penalized the sector, Torex’s next mine, Media Luna, happens to have a copper component, with annual payable copper production of around 34 million pounds. So, like Barrick (GOLD), Torex has suffered a double whammy, with falling gold and copper hitting the stock, even though it is not yet mining copper with start-up Media Luna in 2024. The good news is that the project had an after-tax NPV of nearly $500 million (5%) at a conservative metal price ($1,600/oz gold, $3.50/lb copper, 21. $00/oz silver). However, some investors might believe that after the recent decline in commodity prices, these last two prices seem a bit less conservative.
While this is a reasonable assumption to make with silver below $19.00/oz and copper below $3.50/lb, it is important to note that it is These are life of mine price assumptions from 2022 to 2033. So while these assumptions may seem high for Q3 2022 on silver and copper, these prices look very conservative from 2022 to 2033. Indeed, if this electrification trend continues, silver and copper will be in much higher demand, and there simply isn’t the supply to meet that demand. Therefore, in my view, Torex is being unfairly punished by the recent drop in commodity prices.
That said, the initial investments for Media Luna are well above my estimates at around $850 million, which was the result of inflationary pressures, degrading the after-tax NPV (5%) of the project. So, while I think the stock’s most recent decline was unwarranted, I wasn’t too surprised to see the stock drop from the $11.00 level after its Morelos technical report was released. day (cost figures higher than expected). The good news is that despite increased capital spending, Torex should have no problem financing the project, with over $400 million in cash and expecting up to $300 million in debt as well as cash flow. cash from its existing operations.
Torex plans to shift mining from its current El-Limon Guajes mine to Media Luna, a gold-copper project south of the Balsas River. The company has reduced the risk of this transition with a slack at ELG to give it more time to tunnel under the river, but a concern earlier this year was that development rates were coming in a bit below planned levels. Fortunately, this appears to be correcting, with the company advancing the Guajes Tunnel to 2,100 meters, with development rates improving to 6.7 meters per day in June.
Meanwhile, advance rates at the Lower South Portal Tunnel have improved significantly after experiencing difficult ground conditions in March/April. Fortunately, the tunnel has now been advanced by 700 meters, which represents an advance rate closer to 4.0 meters per day, well above the update’s advance rate of 2.3 meters per day. previous day, which was tracking 50% below forecast levels (4.5 – 5.0 meters). Given these recent improvements, investors can be a little more comfortable that there will be no major setbacks in the transition from mining at ELG to Media Luna. Let’s see the valuation:
Evaluation and technical image
Based on Torex’s 85 million shares outstanding and a share price of $7.10, the stock currently trades at a market capitalization of approximately $604 million. This is a very cheap valuation for a 400,000 ounce per year producer, especially when some juniors are trading at higher valuations with no financing in place. In fact, this valuation leaves Torex trading at 0.48x, against an estimated net asset value of around $1.28 billion. So, for investors comfortable with a single-asset producer in a riskier state of Mexico (Guerrero), Torex is arguably one of the cheapest producers in the business. If the company was in a better jurisdiction, I wouldn’t be surprised to see the company taken over, but the list of major gold companies looking to add operations in the state of Guerrero is probably very small.
Based on what I believe to be a more conservative multiple of 0.90x P/NAV, I see a fair value for the stock of $13.55 (18-month target price). This marks an 89% rise from current levels, suggesting that the risk of transitioning from one mine to another seems more than factored into the headline. Therefore, from a strict valuation perspective, Torex is in a low-risk buy zone at US$7.10. However, I only see it as a medium-term swing trading vehicle, given that it is a single-asset producer, and I prefer not to hold these companies for the long term. An acquisition by Torex would solve this problem, but I don’t see one as likely until at least 2025.
Unfortunately, while the stock is cheap from a valuation perspective, the stock doesn’t quite meet the low-risk buy criteria from a technical perspective. Indeed, the previous support is likely to become a new resistance at US$9.35, which could cap the stock at this level in the medium term. Meanwhile, the next strong support level only comes in at $6.20, which translates to a reward/risk ratio of 2.50 to 1.0, which is based on $0.90 downside potential for support and $2.25 upside potential for resistance.
In general, I prefer a minimum reward/risk ratio of 5.0 to 1.0 for single-asset producers, requiring a drop below $6.70 per share for the stock to enter a zone of low risk purchase. This doesn’t mean Torex needs to drop, but given that the fundamental and technical buy zones don’t line up, I wouldn’t rule out further declines. Yet, from a valuation perspective, Torex has rarely been more attractive, and I see a strong likelihood that the company will achieve its goals in this transition period under the impressive leadership of Kuzenko, who has always been overdelivering. .
Torex has had a great start to the year and is in rare air, beating its midterm guidance as it heads into the second half of 2022. Unfortunately, that was overshadowed by weak commodity prices. , and the recent break of support has left the possibility on the table that the stock could test its March 2020 lows near US$6.20. With a valuation below 0.50x P/NAV, Torex is arguably one of the cheapest producers in the industry, making it a low-risk entry point for patient investors with high risk tolerance. However, I remain on the sidelines for now with a neutral rating, as I see more attractive ways to gain exposure to the sector, such as Alamos Gold (AGI).