Venture: Mid-Cap Gold Miner

Issue 19;

Toro.

Torex Gold Resources (TXG CN)

“CONSISTENT OPERATOR WITH INDUSTRY-LEADING SAFETY TRACK RECORD

For the past four years, Torex has consistently met or beaten operational guidance and has done so with an industry-leading safety record. We exited 2022 with no fatalities and a lost-time injury frequency rate of 0.28 per million hours worked on a rolling 12-month basis. We strongly believe that the same things that drive safety excellence drive production excellence. Our operational and financial results prove it.”

TXG is a mid-cap Canadian-listed gold miner with operations in Guerrero, 180 miles southwest of Mexico City, valued at $1 billion. In 2023, TXG was the largest gold producer in Mexico. There are two mines in close proximity, Media Luna and El Limón Guajes (ELG). ELG has been in production since 2016. Media Luna is expected to start production later this year, which will extend the life of the complex.

Probable reserves are reported to be 3.36 million ounces of gold, 18.9 million ounces of silver and 444 million pounds of copper. At today’s prices, that totals over $8 billion. Management believes there is the potential to significantly expand the reserves in the coming years.

Having seen the gold price break to an all-time high, I investigated the gold mining sector for companies that looked to be good quality and undervalued. Venture already holds CEY and HOC, and TXG will become the third gold stock. The gold price high has been a remarkably quiet affair, but it feels very real and very bullish.

Gold stocks have been out of favour as investors have turned to Bitcoin. As ByteTree clients know, Bitcoin and gold will coexist, and the major central banks will not dump gold anytime soon. This presents an opportunity as investors have shunned gold stocks. As gold sentiment improves, I believe TXG will outperform the gold mining sector.

The shares trade at C$16.2, and the analysts’ consensus sits at C$23.7, implying a 47% upside before allowing for a higher gold price. It is notable that earnings forecasts have held firm, and the company has a good record of beating their forecasts.

TXG Earnings Firm

A higher gold price, especially in Mexican Pesos, will boost profits. Gold in US dollars has made an all-time high, as it has done in most currencies, but the Mexican Peso has been strong. Local inflation is 4.8%, and interest rates are 11.25%, meaning the real yield is one of the highest in the world. There will be room for cuts in the not-too-distant future, and gold in Pesos will catch up with gold in dollars. I believe this is a key factor that has held the TXG price back. 

Gold in Pesos Lags

Insiders have been buying stock, which is reassuring, particularly at these levels.

TXG Insider Transactions

The balance sheet is strong, with total debt of C$404 million due to roll over in 2026 with C$172 million cash on hand. Cash generation is expected to reach C$272 million next year, implying a 25% free cash flow yield.

I like the way the enterprise value has come down while sales have held firm. This implies the company is cheap at EV/sales of 0.9x, which compares to the sector median of 2.7x.

TXG Attractive EV/Sales

The major gold mining specialists hold TXG, including BlackRock and Sprott. It is also held by Ruffer, who has a gold team.

The technicals are important. TXG has done more than twice as well as the gold miners’ index. Notice how it has lagged (lower chart) since it went into production in 2016 but has now turned up in the face of a stronger gold price. That makes me think we have a winner for this spanking brand-new gold bull market.

TXG Is Leading the Gold Mining Sector

TXG is a simple way to capture the gold rally with a reasonable expectation of beating it.

Risk

The gold price is an important risk, along with the peso. Other risks include health and safety, which the company prides itself in. This is important because mining is a dangerous business. With recent price volatility of 50%, the shares are more volatile than the gold mining index and three times more volatile than gold itself. The shares are highly liquid for their size, with over C$7m per day (£5m). I deem them to be high risk, perhaps a little less.

Venture Update

You will soon receive a note on the new subscription and pricing for Venture. I suspect this will be the last note under the current regime. For those who don’t stick with Venture, we wish you a warm farewell and will ensure that sell notes will be freely available for the existing holdings.

Keller (KLN) reported good results for 2023 this morning, with profits up 64% and, more importantly, ahead of expectations.

Direct Line (DLG) received a bid approach. The board have rejected the proposed 233p offer.

More generally, you can still see the heavy selling pressure of UK small and mid-caps as the fund experience outflows. There are plenty more undervalued companies to choose from, but in the absence of a catalyst (bids and an economic recovery), this process of value realisation will take time.

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture