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Analysts' Ideas of the Week Shares of Gold Producer up 20% from a US$110M Royalty Deal
June 22, 2020
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Weekly Mining Commentary Rising concerns of a second wave dominated the headlines in the past week. Twenty-
four states in the U.S. are reporting a surge in new cases. Iran’s second wave has been
ongoing for over a month. South Korea announced that they are in the midst of a
second wave. Although Russia and Peru have gotten past the first wave, countries such
as India and Mexico are continuing to see a rising number of new cases.
Source: https://www.worldometers.info/coronavirus/
As mentioned last week, since most nations have been able to contain the first wave,
we believe that a second wave can also be contained with strict lockdowns. The
Spanish flu, which struck the world a hundred years ago, came in three waves, as
shown below. We would not be surprised if the current pandemic followed a similar
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pattern. We recently spoke with a public health nurse who believes that we would be
able to contain a second wave with less economically damaging policies, based on
experience gained from the first wave. She mentioned that she believes that
advances in things like contact tracing, would alleviate the need for strict, or total
lockdowns, as experienced in the first wave. This would be positive for the economy,
and ultimately, stock prices.
Despite rising concerns of a second wave, European and Asian markets did well last
week relative to U.S. and Canadian markets.
Source: FRC / Various
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The following chart shows the performance of some of the major stock indices. Most of
them have recouped 90% of their losses from COVID-19. On average, they are
down 10% from pre-COVID levels.
Source: FRC / Various
For the first time in several weeks, the prices of all five mainstream metals
strengthened WoW.
The rise in base metal prices was primarily due to the strong rebound in business
activities across the globe, as indicated by the following data.
1. WTI oil prices were up 10% in the past week, to over US$40 a barrel, from rising global demand.
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2. Car sales in China have surpassed 2019 levels. Unemployment in the country is declining.
Car Sales in China
3. U.S. retail sales increased 18% MoM in May. Retail traffic is up in June, as shown in
the chart below.
Source: Reuters
Small businesses’ credit card transactions are on the rise.
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4. Consumer confidence is Canada is also increasing, as indicated by the chart below and the strong rebound in home sales.
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5. The inventory levels of copper declined on the SHFE (Shanghai Futures Exchange), but increased on the LME. We feel the increase in inventory on the LME was likely due to weekly volatility, and not due to any real decline in demand, especially considering that all the other data points have been positive for demand.
Valuations – The valuations of gold producers increased, while that of base metals producers stayed flat last week.
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Despite a strong rebound in business activities, we feel the biggest market risk is the
high unemployment, and the ability of businesses to rehire and bring jobs back to the
market. A sustained period of high unemployment will be catastrophic. One of the
metrics we track to gauge economic health is delinquency rates. As shown below, credit
card delinquencies in the U.S. have been rising.
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As a result of the current high unemployment rate, and concerns of a second wave, we believe upside is limited for base metal prices in the short term. Prices of copper, zinc and nickel have increased significantly in the past few weeks, and are currently at pre-COVID levels.There is no indication that the current fundamentals are better than pre-COVID levels.
We remain bullish on gold as four out of the six factors in our model (presented below) support higher prices, before falling to our long-run average of $1,400/oz.
In the following section, we review companies that announced key developments in the
past week.
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Mining / Exploration
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Caldas Gold
Corp.
TSXV: CGC $2.40 $3.47 June-16-2020
PR Content Signed a non-binding term sheet with Wheaton Precious Metals (TSX: WPM) to receive US$110 million. As per the agreement, WPM will purchase 6.5% of gold production, and 100% of silver production from CGC, until 190 Koz of gold and 2.15 Moz silver is delivered. Thereafter, purchases will drop to 3.25% of gold production and 50% of silver production for the life of mine. WPM will pay CGC 18% of spot gold and silver prices until delivery targets are met, and 22% of spot gold and silver prices thereafter. CGC also announced a US$150 million financing through gold-linked notes and another C$50 million equity financing.
FRC Opinion Positive – CGC’s share price is up 20% since we launched coverage last week. These proposed financings are to fund the US$269 million CAPEX to expand the current 25 Koz per year gold operation to a 150 Koz per year operation. After plugging in the terms of the proposed deal with WPM in our models, we estimate that the net present value of the production offered to WPM, over a 20 year mine life, is US$96 million, based on a long-term gold price of US$1,400 per oz and a 11.5% discount rate. Since this is lower than the upfront payment of US$110 million offered to CGC, we feel the deal is attractive for CGC. WPM’s offer is probably generous because they expect upside from a higher gold price, and a longer mine life. An updated resource estimate, and a Pre-Feasibility Study on Marmato, are expected to be completed in the coming weeks, which will give us more clarity on the updated CAPEX / OPEX / mine life estimates.
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Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
GR Silver
Mining Ltd
TSXV: GRSL $0.46 $0.98 June-18-2020
PR Content Completed a previously announced bought deal financing of $9.15 million.
FRC Opinion Positive – The proceeds will be used to fund resource expansion and drilling at the Plomosas and San Marcial projects in Sinaloa, Mexico. The newly acquired Plomosas project has been consistently returning high grade drill results. The 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.
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Latin Metals
Inc.
TSXV: LMS $0.095 $0.43 June-16-2020
PR Content Announced rock sampling results from two areas on its projects in Santa Cruz, Argentina. Eight samples from one area (Estero) returned gold values between 0.11g/t gold and 0.57 g/t gold. Three samples returned high-grade silver values between 118 g/t silver and 470 g/t silver. 14 samples were collected from the second area, of which, two returned gold values of between 0.53 g/t and 0.77 g/t gold.
FRC Opinion Positive – We are encouraged by results from Estero. The company is planning additional work, including detailed structural mapping, and soil geochemical sampling over outcrops. LMS is following a prospect generator / joint venture model to advance its projects. Flagship assets are the Esperanza copper-gold project in San Juan province, the Organullo gold project in Salta province (optioned out to Yamana / TSX: YRI). YRI is fully funding a 3,300 m / 16 hole drill program. LMS is also actively evaluating projects in Peru.
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Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Nexus Gold
Corp.
TSXV: NXS $0.06 N/A June-19-2020
PR Content Commenced a 1,000 m drill program at its 100% owned McKenzie gold project in Red Lake, Ontario.
FRC Opinion Neutral – NXS is using the proceeds from a recently completed $0.71 million financing to fund this program. Results of this program are highly anticipated as historic drilling from the project has returned high grade values such as 7.49 gpt over 8.2 meters, 15.54 gpt Au over 0.8 m, 4.47 gpt gold over 1.4 m, and 2.15 gpt Au over 5.5 m. The company’s portfolio includes 11 exploration projects in West Africa and Canada.
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Bayhorse Silver TSXV: BHS $0.08 $0.68 June-17-2020
PR Content Commencing a drill program (10 holes / 1,500 m) at its Brandywine gold-silver project in B.C.
FRC Opinion Neutral – Historic drilling has returned high grade values such as 36.9 g/t over 1.52 m and 14.4 g/t over 3.4 m, including 1.52 m of 20 g/t. BHS is pursuing a $625k financing to fund the program. The company had recently announced encouraging assay results from ore-sorting at the Bayhorse silver mine in Oregon. We are expecting updates from this project.
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Special Situations
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Siyata Mobile
Inc.
TSXV: SIM $0.12 $1.14 June 18, 2020
June 16, 2020
PR Content
Received a $0.30 million purchase order
(“PO”) for its UV350 device from an
undisclosed purchaser in Australia.
Launched its portfolio of 4G cellular signal
boosters on Amazon.com (NASDAQ:
AMZN).
FRC Opinion
Positive – This marks the company’s first
major PO in Australia. The ability for Siyata
to sell its UV350 internationally speaks to
the demand for its product.
Positive – We have verified that Siyata’s
portfolio of 4G cellular signal boosters are
available for purchase on Amazon.com.
Although the company’s portfolio of 4G
cellular signal boosters are not the main
driver of revenue, we are pleased to see
Siyata expand the sales channel for its
products.
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Cannabis
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Namaste
Technologies
Inc.
TSXV: N $0.38 $0.70 June 22, 2020
June 17, 2020
PR Content
Announced that it has been granted an
exclusive license by IGNITE International
Brands, Ltd. (CSE: BILZ) to utilize certain
brand trademarks on cannabis products
for sale in Canada in exchange for certain
royalty payments (details undisclosed).
Furthermore, CannMart has received
approval to begin listing Cannabis 2.0
products in the provinces of Alberta and
Ontario.
The CEO of Namaste Technologies (Mr.
Meni Morim) has resigned as a director of
Choklat (Namaste’s interest-owned
company), due to disagreements (details
undisclosed). CannMart has terminated
its existing purchase order with Choklat.
FRC Opinion
Positive – We are pleased to see Namaste
continually expand its roster of brands. The
ability to begin listing Cannabis 2.0 products
in the provinces of Alberta and Ontario are
expected to provide a material boost to
revenue. We have already accounted for
this in our valuation of the company.
Negative – In our initiating report, we had
modeled Choklat to provide nominal income
for Namaste. In a worst-case scenario
where the income potential from Choklat is
nil, the exclusion of Choklat would not have
a material impact on our valuation of
Namaste.
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Weekly Cannabis Commentary Cannabis Industry Performance
Note: MCAN and XCAN was launched on November 18, 2019 and January 20, 2020, respectively.
Source: TMX Money, FRC
Over the past week, the Horizons Marijuana Life Sciences ETF (TSX: HMMJ / “HMMJ”), the Standard & Poor’s/MX International Cannabis Index (“MCAN”), and the Standard & Poor’s/TSX Cannabis Index (“XCAN”) generated a return of -2%, -1%, and -3%, respectively. The worst performer on the list of companies that we track is HEXO Corp. (NYSE: HEXO). On June 17, 2020, HEXO closed the sale of its Niagara, Ontario facility for proceeds of $10.25 million. According to The Deep Dive, the property was acquired as part of the Newstrike Brands acquisition one year ago. The value of the acquisition was $262 million, with property, plant and equipment (“PPE”) valued at $46 million (the value attributed specifically to the Niagara facility was undisclosed). Furthermore, HEXO lost its spot on the S&P/TSX Composite Index today due to not having a minimum average price of $1 over the previous three months.
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Valuation of Select Canadian LPs
The following shows the average Enterprise Value to Revenue (“EV/R”) of the cannabis
companies that we track.
Average EV/R (October 2019 – June 2020)
Source: S&P Capital IQ, FRC
Source: S&P Capital IQ, FRC
The average EV/R, as of June 22, 2020, is 10.7x – a slight deterioration from an
average EV/R of 10.9x as of June 15, 2020. The average EV/R, from October 7, 2019
to date, is 12.4x. As a number of companies are not EBITDA positive, we have refrained
from tracking the average Enterprise Value to EBITDA (“EV/EBITDA”).
Below, we discuss the highly anticipated retail sales numbers in Canada.
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April 2020 Retail Sales in Canada
Retail sales in Canada for the month of April 2020 were $34.7 billion – a 26% month-
over-month (“MoM”) decrease and a 33% year-over-year (“YoY”) decrease.
Source: Statistics Canada
The least impacted, on a percentage basis, were food and beverage stores
(unsurprisingly). Consistent with our thesis that cannabis sales are highly resilient
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to an economic downturn, cannabis stores only declined 1% MoM. Given that
March 2020 and April 2020 has 31 days and 30 days, respectively, retail cannabis
sales actually increased 3% MoM when comparing average sales per day.
March 2020 April 2020
$181 million / 31 days = $5.84 million /
day $180 million / 30 days = $6 million / day
We believe April 2020 retail cannabis sales figures are impressive, considering the
following headwinds:
• Ontario cannabis stores were forced to close in early April 2020 after removal
from the “essential” list (this decision was reversed later in the month) – Ontario
houses 39% of Canada’s population,
• The unemployment rate in April 2020 was 13% – indicating lower household
discretionary spending; CERB payments are unlikely to offset the total lost
income of those affected, and
• The lack of international tourism to Canada due to border shutdowns, and
provincial travel restrictions – in the state of Nevada (a tourism heavy state),
cannabis sales dropped 30% from March 2020 to April 2020 (Source: Marijuana
Business Daily).
Given that Canada has been continually increasing the number of retail cannabis stores
throughout the country (discussed later), and the additional day in May 2020 (31 days
versus 30 days in April 2020), we believe that retail cannabis sales in May 2020 will be
higher than April 2020. May 2020 retail sales are expected to be published on July 21,
2020, to which we will provide an update.
If we assume zero seasonality flat-line growth from April 2020 onwards, Canada’s
retail cannabis market is expected to reach $2.1 billion in 2020 – a 76% YoY
increase from 2019.
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Retail Cannabis Sales in Canada
Source: Statistics Canada, FRC
Our outlook on Canada’s recreational cannabis market remains positive.
Canadian Retail Cannabis Pricing
Source: Online Provincial Cannabis Stores, FRC
The average retail price per gram decreased 0.46% week-over-week to $11.43.
Over 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
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Statistics Canada, the average per gram 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
Retail Cannabis Stores
As of June 22, 2020, there are 955 retail cannabis stores across Canada. This is a 1%
increase from a week ago.
Number of Retail Cannabis Stores in Canada
Source: Provincial Websites, FRC
The following shows the number of retail cannabis stores by province/territory:
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Source: Provincial Websites, FRC
As shown above, Ontario and Quebec are the two largest underserved provinces for
cannabis, with a population / store of 157k and 202k, respectively. Growth in Canada’s
cannabis market hinges on more retail cannabis store openings in the two
aforementioned provinces.
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
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