Victoria Gold: Seasonal Weak Quarter Is Behind Us, All Eyes On 2023

Een jongenshand die een uiterst kleine pluk van gouden schilfer houdt

Akchamczuk/iStock via Getty Images

Introduction

Victoria Gold (OTCPK:VITFF) is a gold producer in Canada’s Yukon Territory. Although the company will produce less than 200,000 ounces of gold this year, it plans to increase its production rate to a quarter of a million ounces per year over the next few years. The share price has recently been under pressure due to weakness in the sector while a large shareholder also sold a substantial block of shares.

Victoria Gold stock price
Data by YCharts

Victoria Gold has its primary listing on the Toronto Stock Exchange where it is trading with VGCX as its ticker symbol. With an average daily volume of about 300,000 shares per day, the TSX is clearly more liquid than the VITFF listing in the USA where the average daily volume is just 31,000 shares per day.

A positive free cash flow, which helps to keep the balance sheet under control

Victoria’s production rate has been slightly disappointing in the past few years and in the current financial year, Victoria expects to produce 165,000-190,000 ounces of gold at an AISC of $1225-1425 per ounce. As the company is operating in Canada’s Yukon Territory, the harsh winter weather means there’s a very important seasonal factor which also means the winter quarters are the toughest. Despite reiterating a full-year production guidance of 177,500 ounces of gold for the entire year, the Q1 production came in below 25,000 ounces.

Victoria Gold Production Results

Victoria Gold Investor Relations

This also means investors cannot simply annualize the Q1 performance and it makes more sense to look at Victoria Gold on full-year basis as that cancels out the seasonal impact.

Just over 25,500 ounces of gold were sold and this resulted in a revenue of just under C$60M for a gross profit of just over C$26M after deducting the COGS and taking the depreciation expenses into account.

Victoria Gold Income Statement

Victoria Gold Investor Relations

This also means Victoria Gold was profitable despite also recording a loss on derivative instruments which was the main factor boosting the Q1 2021 results. Excluding the impact from unrealized gains and losses on securities and derivatives, the pre-tax income in Q1 2022 increased to C$24.2M, from C$21.5M in Q1 of last year.

The bottom line shows a net income of C$16M for an EPS of C$0.25. While that’s less than half the C$0.51 EPS generated in Q1 2021 keep in mind last year’s first quarter was positively impacted by non-recurring items while the share count was approximately 2% lower as well.

The operating cash flow before changes in the working capital position were C$36.7M. This includes the deferral of the C$6.1M in taxes as Victoria Gold so adjusting the result for this, as well as for the C$1.7M in interest expenses and C$0.2M in lease payments, the operating cash flow was C$28.7M.

Victoria Gold Cash Flow Statement

Victoria Gold Investor Relations

This was just sufficient to cover the C$28.4M in capex but not high enough to cover the C$3.2M in capitalized exploration.

That’s not immediately something to be worried about. Keep in mind the first quarter is a particularly bad quarter for this gold producer. The gold production rate will jump in the next few quarters which also means the operating cash flow will be boosted. And just to provide some evidence to this claim: in calendar year 2021 the first quarter clearly was the worst. There was a small improvement in the second quarter but in excess of 60% of the production occurs in the second half of the year.

Victoria Gold Historical seasonality

Victoria Gold Investor Relations

So seeing the company breaking even on the cash flow front in the first quarter is encouraging. I anticipate seeing a small positive free cash flow in Q2 but the majority of the free cash flow result will obviously occur in the second half of this year.

Additionally, 2022 will be a transition year as Victoria Gold is executing its ‘Plan 250’ aiming to increase the gold production rate to 250,000 ounces next year. This upgrade will require less than C$20M in capex and should be completed by the end of the current financial year. Despite these investments, Victoria Gold expects to sharply reduce its gross debt by the end of this year. This will reduce the interest expenses and further increase the free cash flow result of the company.

Victoria Gold Planned Debt Reduction

Victoria Gold Investor Relations

As you can see, the majority of the anticipated C$75M debt reduction compared to the end of Q1 2022 will occur in the second semester. And even more interesting (and important): the company had hedged 15,000 ounces of gold for delivery in the current semester. The fixed price for these deliveries is US$2,003/oz which means the timing of this hedge was excellent.

The recent share sale by Coeur has put pressure on the stock

The share price came under pressure last week as Coeur Mining (CDE), Victoria’s largest shareholder, announced it was selling 5 million shares of Victoria Gold at C$10.90 for total proceeds of C$54.5M. I believe this sale has nothing to do with the performance of Victoria Gold but with Coeur’s own balance sheet and investment programs.

Investment thesis

I think Victoria Gold is attractively priced at the current level. The share price has fallen back as 2021 was not as good as I had expected it to be, but buying Victoria Gold now is buying into the growth story. The plan to increase the production rate to 250,000 ounces per year seems feasible but that also means it now is an execution story. Fortunately, the capex to expand the mine is relatively minimal so the risk is pretty low if it doesn’t work out.

I have a long position in Victoria Gold and will be looking to add to my position, either by buying more stock on the open market or by writing put options.

Be the first to comment

Leave a Reply

Your email address will not be published.


*