Hochschild Mining PLC

Hochschild Mining PLC (LON: HOC) is a FTSE 250 index quoted Mining Company, which focuses on gold and silver deposits. The Company has been operating over the past 50 years, and has operations in the region of Argentina, Chile, and Peru.

Rationale for Valuation – SPECULATIVE BUY at GBX 151.10

• As per the Public Health England, the estimated range for England's COVID-19 reproduction "R" number has reduced further, reflecting a lower infection rate.
• HOC affirmed solid second-quarter results across all operations with reduced Lost Time Injury Frequency Rate of 1.31 (H1 FY20: 1.38).
• HOC reiterated the FY21 production targets at the all-in sustaining cost of US$1,210 and US$1,250 per gold equivalent ounce. The gold prices also remained strong as a haven amid rising concern about the delta variant of the coronavirus.
• HOC Company has substantial cash resources to meet the challenges ahead and investing in the future.
• From a technical standpoint, 14-day RSI (43.92) is in the oversold position, while the stock price is trading close to the lower Bollinger Band.
• On a forward 12-month basis, valuation metrics – EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book are quite undervalued against the Basic Materials industry.

Key Risks

• The financial performance of HOC is highly dependent on the Gold prices, and the Gold market is cyclical and sensitive to the economic changes and numerous factors, which are beyond the Company’s control.
• The Global Covid-19 pandemic could result in the suspension of operations and increase labour absenteeism, and thus, the operation costs.

Recent News

OTCQX Trading: HOC announced the commencement of trading on the OTCQX Best Market to enhance the accessibility of the Company to U.S. investors.

Production Report for the 6 months ended 30 June 2021 (as on 21 July 2021)

(Source: Company Website)

• Following the solid operational performance in Q2 FY21, HOC remained-on track to achieve FY21 production and cost targets.
• As of 30 June 2021, net cash stood at US$51 million, while Net Cash/LTM EBITDA was approximately 0.131x.
• The Snip project in Canada also reported positive were results as further high-grade drill results achieved at Skeena Resources.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Hochschild Mining has touched its 52-week low in the last week and giving an attractive opportunity to buying the dip. In Q2 FY21, HOC witnessed further positive results from the Snip project in Canada, while the resources from the Inmaculada project remained encouraging. All Covid-19 associated safety protocols all remained in place at all operations. In FY21, HOC expects to produce 360,000-372,000 gold equivalent ounces and 31.0-32.0 million silver equivalent ounces. Moreover, the Company has substantial cash reserves to pursue value-accretive acquisition opportunities. Furthermore, HOC has a considerable brownfield programme scheduled for FY21 and attractive optionality in Greenfield to generate substantial shareholder return. The stock made a 52-week High and Low of GBX 285.00 and GBX 144.10, respectively.

Considering the resilient financial performance, favourable metal price environment, operational recovery, healthy balance sheet, reiterated guidance, substantial resource base, encouraging industry dynamics, and support from the valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on Hochschild Mining PLC at the current market price of GBX 151.10 (as on 17 August 2021, 7:40 AM GMT) with lower double-digit upside potential based on 11.77x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Petropavlovsk PLC

Petropavlovsk PLC (LON: POG) is a FTSE 250 listed company engaged in mining precious and non-precious metals. It has been operating continuously in the Far East of Russia for over 25 years.

Investment Rationale – SPECULATIVE BUY at GBX 19.41

• POG is on track to meet its full-year gold production of 430 - 470koz, supported by the production from the new Pioneer flotation plant and increased 3rd-party concentrate.
• The average realized gold prices were 9% higher in H1 FY21 versus H1 FY20.
• On 1 June 2021, POG announced the launch of the Pioneer flotation plant, which shall provide the full advantage of substantial refractory ore reserves for the POX (Pressure Oxidation) Hub. The plant is expected to produce around 60 kilo tonnes of concentrate in FY21.
• As per valuation metrics, EV/Sales, Price/Earnings, EV/EBITDA, and Price/Book multiples of the Petropavlovsk PLC are currently lower as compared to the corresponding multiples of the Metals & Mining industry.
• From a technical standpoint, 14-day RSI (26.66) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bolling Bands.

Risk Assessments

• The resurgence in Covid-19 cases due to the delta variant has significantly impacted the consumer sentiments.
• The US Dollar strengthening and earlier asset tapering by Federal Government can impact the gold prices in the short-term.
• Regarding the risk factors, the Company’s performance is subject to various kinds of risk, such as inflation cost associated with the ramping up of POX Hub, operational risk arising from the potential supply chain disruption due to Covid-19, and lack of funding to pursue the growth opportunities.

Recent News

Tender Offer: On 13 July 2021, POG launched 8.125% Guaranteed Notes due 2022 for an aggregate principal amount of up to US$200 million.

Production Update (for the quarter ending 30 June 2021, as on 21 July 2021)

 (Source: Company Website)

• During H1 FY21, gold production stood at 195.0koz (kilo-ounces), reflecting a 39% decrease on H1 FY20.
• Likewise, lower volumes of concentrate available for purchase led to a 66% decline in 3rd-party concentrate gold production against H1 FY20.
• The gold sales aggregated 187.1koz in H1 FY21 (H1 FY20: 312.4koz).
• The average realized gold prices was 9% higher in H1 FY21 at US$1,795/oz (H1 FY20: US$1,640/oz).

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Petropavlovsk is prepared to launch the Pioneer flotation plant and will become a producer of refractory concentrate to feed its Pokrovskiy POX hub. The Company has world-class asset with the scalable capacity to deliver incremental value. Overall, the Company has enhanced operational governance and shall capitalize on the POX hub to create sustainable value for its shareholders. POG has a long-life mineral resource base with high expansion potential. Moreover, it is an established explorer, developer, and miner of Gold, with distinctive technological expertise and R&D capabilities over peers. The stock made a 52-week high and low of GBX 39.50 and GBX 17.76, respectively.

Based on the high average realized gold price, reiterated production guidance, robust cash position, no material Covid-19 outbreak at sides, supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Petropavlovsk PLC at the current market price of GBX 19.41 (as on 17 August 2021, 7:25 AM GMT), with lower double-digit upside potential based on 16.89x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).  

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.