Torex Gold: Focus Is On The Media Luna Deposit (TORXF)

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Introduction

The Toronto-based Torex Gold Resources Inc. (OTCPK:TORXF) owns the Morelos Gold property in Southern Mexico, comprising its El Limon Guajes mining complex – ELG for short – and the Media Luna deposit, where it holds 100% interest. It is called the Morelos Complex.

Map — TORXF Morales Property Presentation (Torex Gold)

Note: The Media Luna deposit is one substantial ongoing expansion for the company. In the press release, the CEO Jody Kuzenko said:

“With the Technical Report released, our focus has shifted to bringing Media Luna into production on time and on budget.

Note: According to the company’s release on page 31, the Morelos complex holds a reserve proven and probable of 5.123 Moz AuEq.

1 – 1Q22 Results Snapshot

On May 11, 2022, the company released its first-quarter 2022 results.

The company posted revenue of $207.7 million, down 10.2% compared to the same quarter a year ago, with an income of $40 million or $0.46 per diluted share. The adjusted earnings were $37.2 million.

CEO Jody Kuzenko said in the conference call:

The team has done an excellent job in keeping control on cost despite the current inflationary environment. While it’s early in the year, we’re well positioned to deliver on full-year production and cost guidance and I think probably most notably at the end of the first quarter, we released our updated technical report, which outlines the future of mining the Morelos Gold property.

Media Luna’s first production is expected in 2024. This production will be added to the 2024 outlook after the company released the Media Luna Technical Report, which tripled the LOM to 11.75 years. One crucial element is that the CapEx is estimated at $848 million. The financing of this project will be discussed in this article.

Table — TORXF Technical Report Presentation (Torex Gold)

Furthermore, Torex Gold hedged about 25% of the production between October 2020 and December 2023 through forwarding sales after the release of the technical report.

The company may eventually extend the hedging production into 2024 to minimize the price risk during this sensitive period with significant CapEx.

The goal is to finance the development of Media Luna and ongoing exploration CapEx while maintaining minimum cash of $100 million on the balance sheet.

2 – Stock Performance

The company’s performance continues to be disappointing on a one-year basis, and the stock is down 7%, underperforming the VanEck Vectors Gold Miners ETF (GDX), as we can see below.

TORXF – Financial Snapshot 1Q22 and Gold production: The Raw Numbers

Torex Gold	1Q21	2Q21	3Q21	4Q21	1Q22
Total Revenues $ million	231.2	205.9	216.7	202.0	207.7
Quarterly Earnings $ million	55.0	60.7	36.5	-0.5	40.0
EBITDA $ million	152.8	126.8	119.7	61.5	102.8
EPS (diluted) $ per share	0.62	0.69	0.41	-0.01	0.46
Operating Cash Flow $ million	65.2	82.4	87.8	94.6	46.7
CapEx in $	55.3	60.3	58.0	56.9	65.3
Free Cash Flow in $million	9.9	22.1	29.8	37.7	-18.6
Total Cash in $ million	172.0	196.0	221.6	255.7	237.0
Total LT Debt in $ million	0	0	0	0	0
Shares Outstanding (diluted) in million	86.1	86.2	86.0	86.2	86.09
TORXF Production	1Q21	2Q21	3Q21	4Q21	1Q22
Quarterly Production Oz	129,509	118,054	111,229	109,411	112,446
Gold Price in $/Oz	1,778	1,816	1,786	1,798	1,876
AISC in $/Oz	854	897	900	1,079	1,034

Source: Company filing

Torex Gold Resources – Gold production and balance sheet details

1 – Revenues and Trends: Revenues were $207.7 million in 1Q22

Chart — TORXF Quarterly revenues history (Fun Trading)

Torex Gold posted $207.7 million in revenues this quarter, well below the $231.2 million indicated in 1Q21. The net income was $40 million this quarter from an income of $55 million last year. TORXF posted adjusted net earnings of $37.2 million or $0.43 per share on a diluted basis.

The Net earnings include an unrealized derivative loss of $8.2 million related to gold price contracts entered into during 1Q22 to reduce downside price risk during the construction of the Media Luna Project.

The revenues decreased compared to the first quarter of 2021 mainly due to a 16% reduction in oz of gold sold (108,012 ounces), even though a higher average realized gold price reached $1,876 per ounce.

Production costs were up due to the lower average grade of ore processed and lower recovery rates primarily related to the processing of lower recovery ores from the Guajes open pit. Total Cash Costs were $748 per oz sold.

2 – Free cash flow was a loss of $18.6 million in 1Q22

Note: Generic free cash flow is the Cash from operations minus CapEx. Torex has a slightly different calculation and deducts the interest paid.

Trailing 12-month free cash flow was $71.0 million, and the free cash flow for the first quarter was a loss of $18.6 million.

I expect further losses in Free cash flow in 2022 due to the Media Luna CapEx increasing quarter-over-quarter through the year as the project development advances. The company had a CapEx of $65.3 million in 1Q22.

3 – Torex Gold’s excellent position. The company is net debt-free.

4 – Gold production details: TORXF produced 112,446 Au Oz and sold 108,012 Au Oz in 1Q22.

Gold production weakened with 112,446 Au Oz, down from 1Q21. The company sold 108,012 Au Oz at a gold price of $1,876 per ounce. However, the company has indicated that the production for the 1Q22 is expected to be its lowest quarterly production period of 2022.

CEO Jody Kuzenko said in the conference call:

We had slightly better grades and consistent mill throughput offsetting lower recoveries. Those low recoveries were due to pockets of lower recovery ore mined from the Guajes pit and processed in the quarter.

5 – All-in Sustaining costs – AISC was $1,034 per ounce in 1Q22

Another sign of quality is an AISC of $1,034 per ounce achieved in 1Q22, despite some severe inflationary pressure.

CFO Andrew Snowden said in the conference call:

The strong gold price in tandem with stable costs quarter-over-quarter where we’ve been managing inflationary pressure as well, resulted in a total cash cost margin of 60% and an all-in sustaining cost margin of 44%. These strong margins generated over $110 million in adjusted EBITDA and $47 million in operating cash flow and that’s despite $60 million of total tax and royalty payments paid during the quarter that’s the highest quarter of these payments in the year.

6 – 2022 Guidance

The company expects gold production of 430K to 470K AuEq ounces in 2022 at an AISC between $980 and $1,030 per ounce. The Media Luna project CapEx is $220 to $270 million in 2022 with $20.8 million.

Technical Analysis (Short Term) And Commentary

TORXF forms a descending channel pattern with resistance at $9.5 and support at $7.25.

The strategy has not changed, and it is what I suggest in my marketplace, “The Gold and Oil corner.” The short-term trading strategy is to trade LIFO about 50%-60% of your position and keep a core long-term amount for a much higher payday at around $13.6-$14.

I suggest selling between $9.5 and $9.9 and waiting for a retracement at or below $7.25.

TORXF could experience a breakdown if the gold price loses momentum and cross the $1,800 per ounce support, which was tested successfully on Friday. In this case, TORXF could retest the lower support around $7-$6.25.

Conversely, if the gold price trades above $1,850-$1,875 per ounce, TORXF could reach $13.6 and eventually cross $14.

However, the gold price is weakening due to Fed’s hiking policy on interest, and the gold miners have sold off quite quickly since the recent Fed hike of 75-point, which may be followed by another one this month after the Fed meet between the 22 and 27 this month.

Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States to generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stocks, one for the long term and one for short-term trading.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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