Analysts' Ideas of the Week - Rising M&A and Significant Cash on the Sidelines Positive for Juniors - Baystreet.ca
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Analysts' Ideas of the Week
Rising M&A and Significant Cash on the Sidelines Positive for Juniors
May 19, 2020
www.researchfrc.com
Page 2
Update on COVID-19 and Weekly Mining Commentary
The number of new cases in the U.S. and Europe continue to follow a declining trend.
Cases in Russia have started declining also. India and Brazil continue to experience a
significant increase in new cases.
Source: https://www.worldometers.info/coronavirus/
With North America and Europe slowly reopening businesses, we now feel more
confident that activities will pick up in the coming weeks, as seen in China. The
following charts on China, which indicate a surge in economic activity, restaurant sales
and iron ore prices (from rising steel production in China), are good leading indicators
for the demand for base metals in North America and Europe.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 3
The inventory levels of copper on the LME and SHFE (Shanghai Futures Exchange)
increased WoW in the past week. However, with North American and European
markets reopening, we expect inventory levels will start declining in the coming
weeks.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 4
The rise in copper inventory levels barely impacted prices. As shown below, among
the mainstream metals, silver was the best performer in the past week. On a YoY
basis, gold is leading the group as prices are up 35% YoY.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 5
With U.S. M2 money supply growth at record highs, we have a positive outlook on
near-term gold prices. Three out of the six key factors in our model below support gold
prices. We continue to expect prices to remain volatile.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 6
We are raising our 2020 year-end gold (from $1,650 to $1,700) and silver ($15.00 to
$17.50) forecasts, while maintaining all other forecasts.
Valuations – The valuations of gold and base metals surged again last week. 12 out of
the 13 gold producers, and five out of the seven base metals producers, used in our
analysis, experienced WoW gains.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 7
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 8
We expect the valuations of gold producers to remain strong or even edge higher based
on our positive near-term outlook on gold prices, and a recent rise in M&A activities.
SSR Mining Inc. (TSX: SSRM) and Alacer Gold Corp. (TSX: ASR) decided to merge to
form an entity with a market capitalization of US$4 billion. As detailed in our report last
week, Gran Colombia Gold (TSX: GCM) made a bid to acquire Gold X Mining Corp.
(TSXV: GLDX) and Guyana Goldfields Inc. (TSX: GUY). GUY had previously entered
into a definitive agreement to merge with Silvercorp Metals (TSX: SVM). GCM’s offer
was $0.90 per share versus SVM’s $0.67 per share. Last weekend, SVM upped its offer
to $1.30 per share. These moves clearly indicate that we will see more
consolidation and M&A activities in the near-term. With significant cash on the
sidelines (chart below), we are expecting an active capital market environment for
mining companies and juniors.
In the following section, we review other companies that announced key developments
in the past week.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 9
Mining / Exploration
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Corvus Gold TSX: KOR $3.20 $3.75 May-13-2020
Inc.
PR Content FRC Opinion
Announced a large discovery below the Positive – This is very positive as it
Mother Lode deposit; results included: supports our estimate that the Mother Lode
project has significant resource expansion
• 125.5m @ 2.6 g/t gold, including potential. We believe an updated resource
14.8m @ 8.9 g/t gold and 24.7m @ 4.9 estimate, expected this year, will
g/t gold. significantly improve the already robust
economics displayed by a PEA completed
in 2018. This PEA had shown an After Tax-
Net Present Value (“AT-NPV”) of US$586
million, and an After Tax – Internal Rate of
Return (“AT-IRR”) of 38%, even at a gold
price of US$1,250 per oz. Corvus is also
evaluating a low CAPEX option to quickly
advance the North Bullfrog deposit to
production. The PEA had used an initial
CAPEX estimate of $424 million.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 10
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Monarch Gold TSX: MQR $0.25 $0.60 May-14-2020
Inc.
PR Content FRC Opinion
Entered into a MOU with Glencore (LSE: Positive – This is very encouraging as a toll
GLEN) to potentially use Glencore’s milling option will allow MQR to advance its
concentrator in Timmins, Ontario, for the flagship asset into production quicker and at
treatment of ore from MQR’s Wasamac a lower CAPEX. A Feasibility Study (“FS”)
gold property. MQR will conduct a viability on Wasamac, completed in late 2018, had
study. If positive, the parties will likely returned an AT-NPV @ 5% of $311 million,
enter into a toll milling arrangement. and an AT-IRR of 18.5%, at US$1,300 per
oz gold. The initial CAPEX was estimated at
$464 million. However, management had
indicated at the time that toll milling would
lower the CAPEX by about $230 million.
This new development also enhances the
likelihood of finding a suitable JV partner.
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Lumina Gold TSXV: LUM $0.75 $1.06 May-13-2020
Corp.
PR Content FRC Opinion
An airborne ZTEM (Z-Axis Tipper Positive – This demonstrates the potential
Electromagnetic System) geophysical to further expand the already large resource
survey at the 100% owned Cangrejos estimate at Cangrejos of 10.4 Moz gold and
gold-copper project in Ecuador indicated 1.40 Blbs of copper indicated, and 6.3 Moz
that two-thirds of the prospective areas gold and 0.79 Blbs copper inferred. We are
are yet to be drill tested. expecting an updated PEA this year, with
significant improvement in economics over
the 2018 PEA, which returned an AT-NPV
at 5% of US$920 million at US$1,300 per oz
gold.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 11
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Los Andes TSXV: LA $0.25 $1.31 May-14-2020
Copper Ltd.
PR Content FRC Opinion
Announced an update on the Pre- Positive – Although we would have liked to
Feasibility Study ("PFS") work on the see the PFS sooner, we were pleased with
Vizcachitas project in Chile. Management the update. A PEA, completed in 2019, had
indicated that COVID-19 has not delayed returned a AT-NPV at 8% of US$0.81 billion
their main engineering study. The press at a copper price of US$2.50 / lb. The
release outlined developments on a company recently received approval from
number of aspects of the PFS. One item the Regional Environmental Committee to
that stood out for us was that conduct drilling over the next four years.
management now feels that a HPGR This approval covers the required drilling for
circuit (grinding alternative) is feasible for the PFS as well as for exploration.
the project. This would enhance recovery
rates and lower energy consumption /
costs. The PFS is expected to be
completed by the end of Q1-2021.
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
GR Silver TSXV: GRSL $0.42 $0.98 May-13-2020
Mining Ltd
PR Content FRC Opinion
Continues to report high-grade drill Positive - These results, which are from
results at its newly acquired Plomosas one of the six priority areas, indicate the
silver project in Sinaloa, Mexico. presence of high-grade gold-silver
mineralization. As mentioned last week, the
• 1.8 m at 30.6 gpt Au and 118 gpt Ag, company is completing a bought deal
including 0.6 m at 86 gpt Au and 36 financing for $8.10 million at $0.27 per unit
gpt Ag (one share and half warrant at $0.40 per
share for one year). We believe the project
has signs to be a good addition to GRSL’s
portfolio. GRSL’s flagship high-grade San
Marcial silver project has an indicated
resource of 36 Moz at an average grade of
147 gpt AgEq, and an inferred resource of
11 Moz at 108 gpt AgEq.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 12
Company Name: Ticker Current Share FRC Fair Value Date of PR:
Symbol Price: Estimate:
Voyageur TSXV: VM $0.07 $0.39 May-11-2020
Pharmaceuticals
PR Content FRC Opinion
Signed an LOI with an undisclosed Neutral – VM is planning to develop a daily
international mining company that has supplement using C-60 to help people
developed a low-cost patent-pending increase their immunity, as well as C-60
technology to extract carbon molecules, radiographic contrast drugs. As detailed in
C-60 to C-90, from naturally occurring our initiating report earlier in the year, VM
resources. Management claims there is holds barium and iodine projects, and is
currently no other technology that can developing a business to manufacture and
mass produce C-60 at low cost. C-60 has market contrast agents (made with barium
a wide range of applications, including in and/or iodine compounds) used for
contrast agents and drug delivery. radiology digital imaging in the healthcare
Another interesting feature is that it is a industry. We will publish an update report if
highly effective super antioxidant and has and when the LOI is finalized and once
anti-aging applications. management discloses further details on the
new initiative.
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
NxGold Ltd TSXV: NXN $0.03 N/A May-14-2020
PR Content FRC Opinion
Announced a 1:10 share consolidation Positive – Of the two properties, only Ben
and a $1 million financing. NXN also Lomond has a resource estimate - 8 Mlbs
entered into an option agreement with indicated at 0.27%, and 3 Mlbs inferred at
Mega Uranium Ltd. (TSX: MGA) to 0.21% U308. We estimate that uranium
acquire a two-year option on the Ben juniors are currently trading at $1.83 per lb
Lomond and Georgetown uranium (100% M&I and 50% Inferred), implying a
projects in Australia. NXN will have the valuation of $17 million on Ben Lomond.
right to acquire the Ben Lomond property Therefore, NXN’s acquisition price is very
for $2.50 million (cash or shares). reasonable. With this new deal, it is clear
that NXN has decided to change focus from
gold to uranium. As our previous fair value
estimate was based on NXN’s gold projects,
we are temporarily retracting our rating and
fair value until the latest deal is completed.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 13
Change in Ratings / Coverage Update
• We have suspended coverage on Sugarbud Craft Growers Corp. (TSXV: SUGR)
due to their lack of response on getting an update report completed.
• We have also suspended coverage on Telson Mining (TSXV: TSN) as Telson has
not met the required payments outlined in our research agreement.
As a result, our fair value estimate and risk rating on both companies are no longer
valid.
Cannabis
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
AgraFlora CSE: AGRA $0.07 $0.38 May 15, 2020
Organics
International
PR Content FRC Opinion
Announced that its edibles manufacturing Neutral – We are pleased to see
facility in Winnipeg, Manitoba has construction be completed at the edibles
completed construction. AgraFlora plans facility. With that said, the timeline for the
to submit the application for a processing edibles facility has fallen significantly behind
license before the end of May 2020. our expectations. We had expected a
Expected revenue generation date of this processing license to be received by Q1-
facility is Q4-2020. 2020.
Weekly Cannabis Commentary
Cannabis Industry Performance
As a proxy for the performance of the cannabis market, we show the performances of:
• Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ / “HMMJ”),
• Standard & Poor’s/MX International Cannabis Index (“MCAN”),
• Standard & Poor’s/TSX Cannabis Index (“XCAN”).
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 14
Note: MCAN and XCAN was launched on November 18, 2019 and January 20, 2020, respectively.
Source: TMX Money, FRC
Over the past week, the HMMJ, MCAN, and XCAN generated a return of 12%, 14%,
and 22%, respectively. Performance of the cannabis market improved week-over-
week due to better-than-expected Q3 earnings by Aurora Cannabis Inc. (TSX:
ACB). Shares of Aurora soared after a large revenue beat and a significant curtail to its
cash burn rate. Strong results by Aurora have brought much-needed investor interest
back to the cannabis industry. We expect shares of cannabis companies to remain
volatile in the coming weeks.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 15
Valuation of Select Canadian LPs
The following shows the average Enterprise Value to Revenue (“EV/R”) that the
aforementioned cannabis companies are currently trading at.
Average EV/R (October 2019 – May 2020)
Source: S&P Capital IQ, FRC
Source: S&P Capital IQ, FRC
The average EV/R, as of May 19, 2020, was 8.4x – a improvement from an average
EV/R of 8.2x as of May 11, 2020. The average EV/R, from October 7, 2019 to date, is
12.6x. As a number of companies are not EBITDA positive, we have refrained from
tracking the average Enterprise Value to EBITDA (“EV/EBITDA”).
With major economies reopening amid the COVID-19 pandemic, the race to a vaccine
is top-of-mind for pharmaceutical companies. Below, we discuss cannabis as a potential
therapy for COVID-19.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 16
Cannabis to Combat COVID-19?
A study from the University of Lethbridge, which has been uploaded to Preprints, details
how some cannabis extracts may help in the prevention and treatment of COVID-19.
Source: University of Lethbridge
Coronavirus, like many respiratory viruses, is primarily transmitted through tiny droplets
ejected from an infected patient. When a healthy host inhales these tiny droplets, the
virus enters the body through attaching itself to a specific receptor found on certain cells,
called ACE2 (Source: Stat News). Many virologist and experts believe that targeting
ACE2 is key in unlocking a vaccine or treatment for COVID-19.
Illustration of COVID-19 attaching to ACE2
Source: Promo Cell
According to the study, some cannabis extracts have shown the ability to lower
human cell production of ACE2. In other words, some cannabis extracts reduce the
risk of infection. With that said, it is important for readers to note that the study is
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 17
preclinical and has not been peer reviewed. Nonetheless, this study bodes well for
cannabis and outlines its therapeutic benefits.
If a treatment or vaccine for COVID-19 involves the use of cannabis, it will greatly bring
cannabis into the limelight as a substance that has significant medical properties.
Canadian Retail Cannabis Pricing
Source: Online Provincial Cannabis Stores, FRC
The average retail price per gram remained unchanged at $11.49.
In the long-term, we continue to reiterate our view that the retail price per gram of
cannabis will decrease to combat the black market for cannabis. According to
Statistics Canada, the average price of illegal cannabis in Q4-2019 was $5.73. The
following shows the trend in pricing for illegal cannabis:
Illegal Cannabis Pricing
Source: Statistics Canada, FRC
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 18
Canadian Retail Cannabis Pricing
As of May 19, 2020, there are 903 retail cannabis stores across Canada. This is a 2%
increase from a week ago.
Number of Retail Cannabis Stores in Canada
Source: Provincial Websites, FRC
The following shows retail cannabis stores by province/territory:
Source: Provincial Websites, FRC
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 19
A key thing to note is that the number of retail cannabis stores in Ontario was
unchanged week-over-week (we believe this is due to the COVID-19 pandemic).
Growth in Canada’s cannabis market hinges on more retail cannabis store openings in
Ontario, which is currently the most underserved province in terms of population to store.
The below chart shows Canadian retail dried cannabis flower pricing since we began
price coverage.
Canadian Retail Dried Cannabis Flower Pricing
Source: Online Provincial Cannabis Stores, FRC
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTPage 20
Disclaimers and Disclosure
The opinions expressed in this report are the true opinions of the analyst(s) about any companies and industries mentioned. Any
“forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we
believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our
forecasts will materialize. Actual results will likely vary. Companies mentioned in this report may be covered by FRC under an issuer
paid model or be candidates for coverage. FRC or companies with related management, may hold shares in some companies
mentioned in this report. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on
this report then made available to delayed access users through various other channels for a limited time.
To subscribe for real-time access to research, visit https://www.researchfrc.com/website/subscribe for subscription options.
This report contains "forward looking" statements. Forward-looking statements regarding the Company, industry, and/or stock’s
performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements.
Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's
products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive
factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and
other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms
filed with the various securities regulators. By making these forward-looking statements, Fundamental Research Corp. and the
analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this
report.
Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE
OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A
PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY
OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE
YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE,
OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR
UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR
SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an
offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or
developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise
stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional
information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT
OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting
information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be
legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local
regulations or which would require any registration requirement within such jurisdiction.
©2020 Fundamental Research Corp. “17+ Years of Bringing Undiscovered Investment Opportunities to the Forefront”
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORTYou can also read
