Analysts' Ideas of the Week - Gold Producer Raising $40M February 3, 2020
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Analysts' Ideas of the Week
Gold Producer Raising $40M
February 3, 2020
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Mining / Exploration
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Gran Colombia TSX: GCM $5.43 $6.49 Jan-27-2020
Gold Corp.
PR Content FRC Opinion
Announced a non-brokered private Positive – This financing is likely a result of
placement of up to $40 million by issuing the strong production results announced
7.14 million units at $5.60 per share. recently. 2019 production was 240 Koz (214
Each unit will consist of a common share Koz from Segovia and 26 Koz at Marmato),
and one full warrant at $6.50 per share (3 up 10% YoY and beat our estimate of 235
years). Koz. GCM is currently in the process of
completing a reverse takeover, and spin-out
of its Marmato project into a TSXV listed
company, to be renamed Caldas Gold
Corporation.
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Guyana TSXV: GYA $0.07 $0.33 Jan-28-2020
Goldstrike Inc.
PR Content FRC Opinion
Signed a definitive gold forward purchase Positive – Although the company is pre-
agreement for proceeds of up to US$9 selling gold at US$300 per oz (US$9 million
million for the Marudi gold project in divided by 30 Koz gold), we feel this
Guyana. An initial payment of US$2 transaction is positive for GYA for two
million is expected on or before April 14, reasons - a) it is non dilutive to the
2020. In return, the company has agreed company’s share structure, and b) 30 Koz
to deliver a total of 30 Koz of gold only accounts for 10% of the current
(approximately 10% of the current resource. The company is planning to
resource), at 3 Koz per year, once Marudi commence a drill program and a US$9
is advanced to production or 3 years from million capital infusion will enable the
the initial payment, whichever is earlier. company to advance the project without any
share dilution.
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Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
White Rock ASX: WRM A$0.005 A$0.06 Jan-29-2020
Minerals Ltd.
PR Content FRC Opinion
Discovered two significant surface Positive – We expect the company to focus
geochemical anomalies (one gold and on the gold anomaly first; note that Alaska
one zinc-copper) at its 100% owned Red holds world class deposits such as Donlin
Mountain project in central Alaska. Creek and Pogo. Sandfire Resources NL
(ASX: SFR) is funding exploration. The
project already has an inferred resource of
16.7 Mt at 8.9% ZnEq, including a high-
grade portion of 9.1 Mt at 12.9% ZnEq.
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Sonoro Metals TSXV: SMO $0.135 $0.32 February-3-
Corp. 2020
PR Content FRC Opinion
Continuing discussions with China-based Positive – We were pleased to hear that
Engineering, Procurement and the company has already entered into one
Construction companies and investors to MoU and three others are in negotiations.
finance a heap leach pilot operation at its Note that the project is likely to be a low
Cerro Caliche project in Sonora, Mexico. CAPEX / OPEX project as a majority of the
SMO has already entered into one MoU, resource is highly oxidized, and potentially
and three additional MOUs are in amenable to open-pit heap leach
negotiations. SMO’s management was operations. Our models were based on an
planning to visit China this month for initial CAPEX of US$15 million.
follow-up meetings, but the trip is likely to
be rescheduled due to the current health
concerns related to the Coronavirus.
SMO has representatives in China who
will continue to advance discussions.
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Special Situations
Company Name: Ticker Current Share FRC Fair Value Date of PR:
Symbol Price: Estimate:
Voyageur TSXV: VM $0.07 $0.39 February-3-
Pharmaceuticals 2020
Ltd.
PR Content FRC Opinion
Test results by SGS confirmed that VM’s Positive – This supports VM’s “From the
Frances Creek barium sulfate meets all Earth to the Bottle” business model to form
specifications under US Pharmacopeia a fully integrated pharmaceutical company.
(USP) guidelines. Their business plan basically involves
mining their own minerals, processing those
minerals into active pharmaceutical
ingredients, and manufacturing end-
products in the digital imaging / radiographic
healthcare space. By producing high quality
products at its Frances Creek project, the
company will have a significant ingredient
cost advantage over its competitors. VM is
currently awaiting Health Canada approvals
on its first set of products.
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Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Marble CSE: MRBL $0.18 $0.42 January 30,
Financial Inc. 2020
January 29,
2020
PR Content FRC Opinion
Announced a $0.75 million debenture Positive – As of September 30, 2019, the
offering. The debentures have a one-year company reported a sufficient liquidity
term, accrue interest at a simple rate of position – a cash position of $2.75 million, a
12% per annum, and is payable quarterly. short-term debt position of $1.14 million and
Net proceeds from the offering will be a current ratio of 1.98x. We believe this
used to fund development costs of the debenture offering may signal that the
Marble Platform as well as general company has been deploying, or is
working capital and corporate purposes. expected to deploy, its cash position to
source additional loans.
Announced a partnership with Magical Positive – This partnership is expected to
Credit, a lender of short-term loans. help drive the number of loans that Marble
Magical Credit will market Marble’s Fast- sources.
Track credit rebuilding product on its
platform.
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Cannabis
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
AgraFlora CSE: AGRA $0.09 $0.38 January 31,
Organics 2020
International
Inc.
PR Content FRC Opinion
Announced that construction of the Negative – It would appear that the facility’s
Winnipeg Edibles Facility is expected to earliest commercial operation date (with a
be completed in the next 60 days. 60-day construction lead time and the time
required to receive the relevant licenses
after construction is completed) is mid Q3-
2020. In our initiating report, we had
expected a commercial operation date of
mid Q1-2020. With that in mind, this news
has no impact on our valuation on the
company. Our current valuation on
AgraFlora is based on the company being a
pure dried cannabis flower cultivator.
Weekly Cannabis Commentary
As a proxy for the performance of the cannabis market, we show the performances of
the:
Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ / “HMMJ”)
Standard & Poor’s/MX International Cannabis Index (“MCAN”)
Standard & Poor’s/TSX Cannabis Index (“XCAN”)
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HMMJ MCAN XCAN
Current Current Current
$8.76 $200.64 $199.64
Price Price Price
1-Week 1-Week 1-Week
-0.01% 1.01% -1.04%
Performance Performance Performance
1-Year 1-Year 1-Year
-59.88% NM NM
Performance Performance 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 HMMJ, MCAN, and XCAN generated a return of -0.01%,
1.01%, and -1.04%, respectively. Performance of the cannabis market has remained
relatively unchanged on a week-over-week basis. The following are notable earnings
dates to keep in mind for the coming weeks:
Company Name Expected Earnings Date
Aurora Cannabis Inc. February 10
Canopy Growth Corp. February 13
Cronos Group Inc. February 11
Tilray Inc. February 11
Hexo Corp. March 16
CannTrust Holdings Inc. February 4
The Supreme Cannabis Co., Inc. February 12
Source: Earnings Whispers, FRC
This week, cannabis news was sparse, with one of the most notable headlines being
New Zealand’s announcement to hold a vote to legalize cannabis. Our discussion this
week, in addition to touching upon New Zealand’s vote to legalize cannabis, will be the
going concern problem faced by small/mid-sized cannabis companies.
New Zealand Vote to Legalize Cannabis
On January 28, 2020, the New Zealand government announced that its cannabis
referendum will be held on September 19, 2020 – the same time as its general election.
A ‘yes’ vote would allow cannabis for recreational and non-prescription therapeutic use.
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Currently, only medical cannabis is legal through a special permit or license. The
regulatory environment of New Zealand (“NZ”) is illustrated below.
Source: Prohibition Partners
Recent polls have pointed to a majority of citizens supporting recreational legalization
(Source: Prohibition Partners). Shown below, the recreational cannabis market is
expected to hit a US$634.1 million valuation by 2028.
Source: Prohibition Partners
We note that the forecasted recreational cannabis market in NZ is not expected to be
large. We believe that this is due to the small population of NZ (NZ has a population that
is approximately 1/10th that of Canada). Although we welcome news of the potential
legalization of recreational cannabis in NZ, the expected small market size is not
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likely to make NZ an extremely attractive cannabis market to establish operations
in.
With that said, the legalization of recreational cannabis in NZ may pave the way for
neighbouring countries to follow suit. As outlined below, recreational cannabis is
currently illegal in a vast majority of regions in Oceania.
Source: Prohibition Partners
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Prohibition Partners has estimated the Oceania cannabis market could reach a
recreational cannabis market value of US$6.2 billion by 2028 – nearly 10x the expected
recreational cannabis market value of NZ. We speculate that cannabis companies
may enter the NZ recreational cannabis market as a means to target other, more
attractive, regions. Readers should note that this is a highly speculative point. We
currently do not have details regarding (1) if recreational cannabis will be legalized in
NZ, (2) how the NZ government plans to award cannabis licenses, and (3) export/import
regulations.
Source: Prohibition Partners
Next, we touch on the going concern issue faced by many small/medium-sized
cannabis companies.
Going Concern Issue Faced by Cannabis Companies
As we have previously outlined, given the current state of the Canadian cannabis
market, we predicted that a number of small/medium-sized cannabis companies would
face a going concern issue.
On January 30, 2020, Sundial Growers Inc. (NASDAQ: SNDL) announced the
resignation of its Chief Executive Officer (“CEO”) and Chief Operating Officer (“CEO”).
Sundial went public on August 1, 2019, with a valuation of roughly $1 billion and has
since lost 84% in value.
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Share Price Performance of Sundial
Source: Google
Cannabis companies that are inefficient in their business processes (according to
MarketWatch, Sundial faced numerous issues in regard to product quality and facility
infrastructure) are expected to face a tumultuous 2020. We reiterate our view that a
number of cannabis companies are going to face a going concern issue in the coming
quarters. To gauge which companies may face a going concern issue in the near-term,
readers can look for the following red flags:
1. Weak liquidity position, characterized by a large amount of current debt and a
relatively low cash position.
2. Lack of a prominent or established sales channel, characterized by uncontracted
sales channels.
3. Lack of economies of scale, characterized by small-scale production capabilities.
4. Lack of a dried cannabis flower conversion process (i.e. lack of an edibles
manufacturing facility) – companies that are pure growers face the risk of having
their products commoditized (resulting in lower margins and profitability).
5. Weak management profile – senior management members that do not have
strong track records in driving shareholder value are expected to have immense
trouble navigating in a cannabis market that is unforgiving to unprofitable and
inefficient companies.
6. Operating losses with no near-term profitability in sight – contrary to a year ago
where the main concern was how to raise capital to establish operations,
investors are now looking past that and focusing on companies that are profitable
on an operating basis (characterized by a positive EBIT).
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7. Excessive CAPEX spending – companies that are still building out facilities for
cultivation/processing/manufacturing are to be at a significant disadvantage to
companies that already have established operations. In fact, numerous cannabis
companies have announced the suspension of CAPEX to cut down on costs and
drive operating efficiency.
Performance of Select Canadian LPs
The following shows the performance of select Canadian LPs on a year-to-date (“YTD”)
1-month, 6-months, and 1-year basis.
Company Name YTD 1-Month 6-Months 1-Year
Aphria Inc. -5.84% -1.13% -35.54% -56.86%
Aurora Cannabis Inc. 1.14% 8.13% -70.61% -74.79%
Canopy Growth Corp. 9.84% 10.11% -29.54% -55.53%
Cronos Group Inc. -0.63% 7.60% -48.37% -68.96%
Tilray Inc. 5.24% 11.35% -59.19% -79.22%
Hexo Corp. -21.95% -12.93% -69.45% -79.49%
CannTrust Holdings Inc. 10.48% -10.46% -52.92% -86.50%
Organigram Holdings Inc. 9.84% 19.64% -56.09% -56.89%
The Supreme Cannabis Co., Inc. -23.44% -19.67% -64.49% -77.00%
AVERAGE -1.70% 1.40% -54.02% -70.58%
Source: Google
The average YTD, 1-month, 6-months and 1-year returns were -1.70%, 1.40%, -
54.02%, and -70.58%, respectively. On a YTD basis, notable poor performers were
Hexo Corp. (NYSE: HEXO) and The Supreme Cannabis Co., Inc. (TSX: FIRE).
Hexo Corp.: Announced, on January 17, 2020, a US$20 million equity raise.
This follows an equity raise back in December 2019 for US$25 million. Due to the
dilutive effects of this type of financing, shares of Hexo have performed poorly on
a YTD basis.
The Supreme Cannabis Co., Inc.: Navdeep Dhaliwal, CEO of the company,
departed the company on January 6, 2020. The reason for Mr. Dhaliwal’s
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departure was not indicated. The company has appointed an interim CEO and is
currently seeking a permanent replacement.
Valuation of Select Canadian LPs
The following shows the average Enterprise Value to Revenue (“EV/R”) that cannabis
companies are currently trading at. The companies used in the chart below are outlined
further below.
Source: S&P Capital IQ, FRC
Source: S&P Capital IQ, FRC
The average EV/R, as of February 3, 2020, was 13.1x – a slight decrease from an
average EV/R of 13.9x as of January 27, 2020. The average EV/R, from October 7,
2019 to date, is 15.7x. As a number of companies are not EBITDA positive, we have
refrained from tracking the average Enterprise Value to EBITDA (“EV/EBITDA”).
In the following, we provide commentary on Canadian retail cannabis pricing.
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Canadian Retail Cannabis Pricing
Source: Online Provincial Cannabis Store, FRC
Average retail price per gram increase slightly from $11.56 to $11.62 – a week-over-
week increase of 0.49%. The largest retail price per gram increases were witnessed in
the provinces/territories of British Columbia (of 9.01%) and Yukon (of 2.77%). This was
slightly offset by retail price per gram decreases in the provinces/territories of Nunavut
(of -4.06%) and New Brunswick (of -0.86%). Other provinces/territories had a nominal
increase/decrease in their retail price per gram. Although British Columbia (“B.C.”)
witnessed a large week-over-week increase in retail price per gram, we do note that the
number of available cannabis products in B.C. increased by 38% over the same period.
We believe the large price increase in B.C. was driven by greater higher-priced
products available for sale. We continue to reiterate our view that the average price
per gram will decrease over the long-term to combat the black market for cannabis.
There was no notable cannabis news across Canada this past week.
The below chart shows Canadian retail dried cannabis flower pricing since we began
price coverage.
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Source: FRC, Online Provincial Cannabis Store
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