Bet_Noire
Introduction
It is my opinion that all gold mining stocks are speculative investments, and nobody should own them who is not a speculator. Even the elite gold miners, such as Barrick Gold (GOLD) and Agnico Eagle (AEM) should be treated as speculative bets. This recent sell-off should drive home that point.
Since gold mining stocks are speculative investments, I think we should focus on big returns. A 100% or 200% return should not get us excited. We should be going after outsized returns.
I think Equinox (NYSE:EQX) has great upside potential at $2,500 gold. Moreover, they are a growth stock and should do even better in the long term. While big upside is always an important factor for choosing gold mining stocks, what I like most about this company is their quality properties and quality management team. Their properties and people are what make this company special.
Equinox Gold
|
Stock Name |
Symbol (US) |
Type |
Category |
Share Price (US) |
FD Shares |
FD Mkt Cap (9/21/2022) |
|
Equinox Gold |
EQX |
Gold |
Mid-Tier Producer |
$3.48 |
354M |
$1.2B |
Company Overview
Equinox Gold is a major in the making. They are a 650,000 oz. producer with 40 million oz. of gold resources, and development projects to take them to 1 million oz. of production in about 2-3 years. They have 6 or 7 producing mines and about 4 development projects. Break-even costs (free cash flow) are around $1,500 per oz. They have $300 million in cash and $500 million in debt.
Their gold mines are in Brazil, Mexico, Canada, and the USA. They also have a 350 tpd toll mill (Koricancha) that provides approximately $5 million in free cash flow. Other projects include Warintza, a 1.8 billion lb copper project in Ecuador; Elk, a 400,000 oz (6 gpt) gold project in British Columbia; and Ricardo, an early exploration gold project in Chile on 42,000 acres. Plus, they have a 30% JV with AngloGold Ashanti (AU) for 500,000 acres in Brazil.
They also own 25% of i-80 Gold, which is valued at over $500 million and could be heading to $1 billion. This could be a potential merger partner in the future, creating a large major.
With a $1.2 billion FD market cap, they are currently cheap. Ross Beaty is the Chairman and wants to build a large gold mining company. He is also the Chairman of Pan American Silver (PAAS), of which he was the founder. With Ross Beaty in charge, I think they will likely accomplish their goal. I expect this stock to do well.
I recently met with them at the Beaver Creek mining conference and came away impressed. This is a team that knows what they are doing in my opinion.
Property Overview
Mesquite (California): 120,000 oz annual production.
Castle Mountain (California): Permitting due in 2024. Short one-year build. $400 million capex to produce 220,000 oz for 14 years.
Greenstone (Ontario, Canada): Production is scheduled for 2024 at 240,000 annually. So far, no cost overruns. Likely to increase production (district size).
Filos (Mexico): 200,000 oz of annual production. Likely to increase production (district size).
Aurizona (Brazil): 150,000 oz of annual production. Likely to increase production (district size).
Santa Luz: 50,000 oz annual production. Likely to increase production (district size).
Company Info
Cash: $305 million
Debt: $530 million
Current Gold Resources: 650,000 oz.
Estimated Future Gold Resources: 30 million oz.
Estimated Future Gold Production: 1 million oz.
Estimated Future Gold All-in Costs (breakeven): $1,500 per oz.
Scorecard (1 to 10)
Properties/Projects: 8
Costs/Grade/Economics: 7.5
People/Management: 8
Cash/Debt: 7
Location Risk: 7.5
Risk-Reward: 8
Upside Potential: 8
Production Growth Potential/Exploration: 8
Overall Rating: 7.5
Strengths/Positives
Significant upside potential
Good management
Quality properties
Growth potential
Risks/Red Flags
High debt
Costs are high
Location risk in California and Mexico
Valuation (at $2,500 gold prices)
Production estimate for the long term: 1 million oz.
All-In Costs (break-even): $1,500 per oz.
1 million oz. x ($2,500 – $1,500) = $1 billion annual FCF (free cash flow).
$1 billion x 10 (multiplier) = $10 billion
Current FD market cap: $1.2 billion
Upside potential: 700%
Note: I used a $2,500 gold price to identify their future value because I am a long-term investor who plans to wait for what I think will be higher gold prices.
Note: My All-In Costs are the expected costs that will generate FCF (free cash flow).
Note: I used a future FCF multiplier of 10 to be conservative. It’s likely that the quality gold miners will have much higher multiples at $2,500 gold. If their break-even costs do not exceed $1,500 by very much, then a 700% return is very conservative and could be double that amount at potential $2,500 gold prices.
Balance Sheet/Costs
Equinox has $530 million in debt, but most of this is not due until 2026, so they are in good shape. They do have $120 million in convertible debt that is due in 2024. They have $300 million in cash and are currently generating around $125 million in FCF at $1,700 gold prices.
Risk/Reward
The main risk is the gold price. Unless it rises, the upside potential could not only limited, but negative. In fact, a volatile gold price could put you underwater at some point and perhaps significantly down. Another risk factor is taxes and royalties, which can increase and zap the share price. Inflation or other factors can push up costs. A myriad of things can go wrong.
While the allure of higher gold prices makes Equinox attractive, it currently has somewhat high costs and its share price is struggling. We are betting on higher gold prices and for Equinox to get their costs under control.
Investment Thesis
I want to be overweight gold producers, and own as many high-quality mid-producers as I can find. Moreover, I like to find undervalued producers that I think could increase in price by 5 times at $2,500 gold and potentially even 10x. I think Equinox fits this strategy perfectly.
I don’t know which companies will perform the best, so I use a low cost-basis strategy to lower my risk for individual companies. Instead of using concentrated positions, I prefer to allocate 1% or less per stock. This takes the emotion out of it and reduces the need to trade. As a result of this strategy, I tend to own a lot of stocks.
The more quality stocks like Equinox I own the better, but they are hard to find, especially at good entry prices. A company like Equinox, I plan to hold for the long term. I will consider selling 80% at around $3,000 gold, and then let the last 20% stop-out on its own using a trailing stop. Quality names like Equinox I will sell last.
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