Analysts' Ideas of the Week · 2 days ago · Analysts' Ideas of the Week Shares of Gold Producer...

Analysts' Ideas of the Week Shares of Gold Producer up 20% from a US$110M Royalty Deal

June 22, 2020

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PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Weekly Mining Commentary Rising concerns of a second wave dominated the headlines in the past week. Twenty-

four states in the U.S. are reporting a surge in new cases. Iran’s second wave has been

ongoing for over a month. South Korea announced that they are in the midst of a

second wave. Although Russia and Peru have gotten past the first wave, countries such

as India and Mexico are continuing to see a rising number of new cases.

Source: https://www.worldometers.info/coronavirus/

As mentioned last week, since most nations have been able to contain the first wave,

we believe that a second wave can also be contained with strict lockdowns. The

Spanish flu, which struck the world a hundred years ago, came in three waves, as

shown below. We would not be surprised if the current pandemic followed a similar



https://www.worldometers.info/coronavirus/


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pattern. We recently spoke with a public health nurse who believes that we would be

able to contain a second wave with less economically damaging policies, based on

experience gained from the first wave. She mentioned that she believes that

advances in things like contact tracing, would alleviate the need for strict, or total

lockdowns, as experienced in the first wave. This would be positive for the economy,

and ultimately, stock prices.

Despite rising concerns of a second wave, European and Asian markets did well last

week relative to U.S. and Canadian markets.

Source: FRC / Various




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The following chart shows the performance of some of the major stock indices. Most of

them have recouped 90% of their losses from COVID-19. On average, they are

down 10% from pre-COVID levels.

Source: FRC / Various

For the first time in several weeks, the prices of all five mainstream metals

strengthened WoW.

The rise in base metal prices was primarily due to the strong rebound in business

activities across the globe, as indicated by the following data.

1. WTI oil prices were up 10% in the past week, to over US$40 a barrel, from rising global demand.




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2. Car sales in China have surpassed 2019 levels. Unemployment in the country is declining.

Car Sales in China

3. U.S. retail sales increased 18% MoM in May. Retail traffic is up in June, as shown in

the chart below.

Source: Reuters

Small businesses’ credit card transactions are on the rise.




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4. Consumer confidence is Canada is also increasing, as indicated by the chart below and the strong rebound in home sales.




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5. The inventory levels of copper declined on the SHFE (Shanghai Futures Exchange), but increased on the LME. We feel the increase in inventory on the LME was likely due to weekly volatility, and not due to any real decline in demand, especially considering that all the other data points have been positive for demand.

Valuations – The valuations of gold producers increased, while that of base metals producers stayed flat last week.




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Despite a strong rebound in business activities, we feel the biggest market risk is the

high unemployment, and the ability of businesses to rehire and bring jobs back to the

market. A sustained period of high unemployment will be catastrophic. One of the

metrics we track to gauge economic health is delinquency rates. As shown below, credit

card delinquencies in the U.S. have been rising.




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As a result of the current high unemployment rate, and concerns of a second wave, we believe upside is limited for base metal prices in the short term. Prices of copper, zinc and nickel have increased significantly in the past few weeks, and are currently at pre-COVID levels.There is no indication that the current fundamentals are better than pre-COVID levels.

We remain bullish on gold as four out of the six factors in our model (presented below) support higher prices, before falling to our long-run average of $1,400/oz.

In the following section, we review companies that announced key developments in the

past week.




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Mining / Exploration

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Caldas Gold

Corp.

TSXV: CGC $2.40 $3.47 June-16-2020

PR Content Signed a non-binding term sheet with Wheaton Precious Metals (TSX: WPM) to receive US$110 million. As per the agreement, WPM will purchase 6.5% of gold production, and 100% of silver production from CGC, until 190 Koz of gold and 2.15 Moz silver is delivered. Thereafter, purchases will drop to 3.25% of gold production and 50% of silver production for the life of mine. WPM will pay CGC 18% of spot gold and silver prices until delivery targets are met, and 22% of spot gold and silver prices thereafter. CGC also announced a US$150 million financing through gold-linked notes and another C$50 million equity financing.

FRC Opinion Positive – CGC’s share price is up 20% since we launched coverage last week. These proposed financings are to fund the US$269 million CAPEX to expand the current 25 Koz per year gold operation to a 150 Koz per year operation. After plugging in the terms of the proposed deal with WPM in our models, we estimate that the net present value of the production offered to WPM, over a 20 year mine life, is US$96 million, based on a long-term gold price of US$1,400 per oz and a 11.5% discount rate. Since this is lower than the upfront payment of US$110 million offered to CGC, we feel the deal is attractive for CGC. WPM’s offer is probably generous because they expect upside from a higher gold price, and a longer mine life. An updated resource estimate, and a Pre-Feasibility Study on Marmato, are expected to be completed in the coming weeks, which will give us more clarity on the updated CAPEX / OPEX / mine life estimates.




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Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

GR Silver

Mining Ltd

TSXV: GRSL $0.46 $0.98 June-18-2020

PR Content Completed a previously announced bought deal financing of $9.15 million.

FRC Opinion Positive – The proceeds will be used to fund resource expansion and drilling at the Plomosas and San Marcial projects in Sinaloa, Mexico. The newly acquired Plomosas project has been consistently returning high grade drill results. The flagship high-grade San Marcial silver project has an indicated resource of 36 Moz at an average grade of 147 gpt AgEq, and an inferred resource of 11 Moz at 108 gpt AgEq.

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Latin Metals

Inc.

TSXV: LMS $0.095 $0.43 June-16-2020

PR Content Announced rock sampling results from two areas on its projects in Santa Cruz, Argentina. Eight samples from one area (Estero) returned gold values between 0.11g/t gold and 0.57 g/t gold. Three samples returned high-grade silver values between 118 g/t silver and 470 g/t silver. 14 samples were collected from the second area, of which, two returned gold values of between 0.53 g/t and 0.77 g/t gold.

FRC Opinion Positive – We are encouraged by results from Estero. The company is planning additional work, including detailed structural mapping, and soil geochemical sampling over outcrops. LMS is following a prospect generator / joint venture model to advance its projects. Flagship assets are the Esperanza copper-gold project in San Juan province, the Organullo gold project in Salta province (optioned out to Yamana / TSX: YRI). YRI is fully funding a 3,300 m / 16 hole drill program. LMS is also actively evaluating projects in Peru.




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Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Nexus Gold

Corp.

TSXV: NXS $0.06 N/A June-19-2020

PR Content Commenced a 1,000 m drill program at its 100% owned McKenzie gold project in Red Lake, Ontario.

FRC Opinion Neutral – NXS is using the proceeds from a recently completed $0.71 million financing to fund this program. Results of this program are highly anticipated as historic drilling from the project has returned high grade values such as 7.49 gpt over 8.2 meters, 15.54 gpt Au over 0.8 m, 4.47 gpt gold over 1.4 m, and 2.15 gpt Au over 5.5 m. The company’s portfolio includes 11 exploration projects in West Africa and Canada.

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Bayhorse Silver TSXV: BHS $0.08 $0.68 June-17-2020

PR Content Commencing a drill program (10 holes / 1,500 m) at its Brandywine gold-silver project in B.C.

FRC Opinion Neutral – Historic drilling has returned high grade values such as 36.9 g/t over 1.52 m and 14.4 g/t over 3.4 m, including 1.52 m of 20 g/t. BHS is pursuing a $625k financing to fund the program. The company had recently announced encouraging assay results from ore-sorting at the Bayhorse silver mine in Oregon. We are expecting updates from this project.




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Special Situations

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Siyata Mobile

Inc.

TSXV: SIM $0.12 $1.14 June 18, 2020

June 16, 2020

PR Content

Received a $0.30 million purchase order

(“PO”) for its UV350 device from an

undisclosed purchaser in Australia.

Launched its portfolio of 4G cellular signal

boosters on Amazon.com (NASDAQ:

AMZN).

FRC Opinion

Positive – This marks the company’s first

major PO in Australia. The ability for Siyata

to sell its UV350 internationally speaks to

the demand for its product.

Positive – We have verified that Siyata’s

portfolio of 4G cellular signal boosters are

available for purchase on Amazon.com.

Although the company’s portfolio of 4G

cellular signal boosters are not the main

driver of revenue, we are pleased to see

Siyata expand the sales channel for its

products.




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Cannabis

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Namaste

Technologies

Inc.

TSXV: N $0.38 $0.70 June 22, 2020

June 17, 2020

PR Content

Announced that it has been granted an

exclusive license by IGNITE International

Brands, Ltd. (CSE: BILZ) to utilize certain

brand trademarks on cannabis products

for sale in Canada in exchange for certain

royalty payments (details undisclosed).

Furthermore, CannMart has received

approval to begin listing Cannabis 2.0

products in the provinces of Alberta and

Ontario.

The CEO of Namaste Technologies (Mr.

Meni Morim) has resigned as a director of

Choklat (Namaste’s interest-owned

company), due to disagreements (details

undisclosed). CannMart has terminated

its existing purchase order with Choklat.

FRC Opinion

Positive – We are pleased to see Namaste

continually expand its roster of brands. The

ability to begin listing Cannabis 2.0 products

in the provinces of Alberta and Ontario are

expected to provide a material boost to

revenue. We have already accounted for

this in our valuation of the company.

Negative – In our initiating report, we had

modeled Choklat to provide nominal income

for Namaste. In a worst-case scenario

where the income potential from Choklat is

nil, the exclusion of Choklat would not have

a material impact on our valuation of

Namaste.




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Weekly Cannabis Commentary Cannabis Industry 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 Horizons Marijuana Life Sciences ETF (TSX: HMMJ / “HMMJ”), the Standard & Poor’s/MX International Cannabis Index (“MCAN”), and the Standard & Poor’s/TSX Cannabis Index (“XCAN”) generated a return of -2%, -1%, and -3%, respectively. The worst performer on the list of companies that we track is HEXO Corp. (NYSE: HEXO). On June 17, 2020, HEXO closed the sale of its Niagara, Ontario facility for proceeds of $10.25 million. According to The Deep Dive, the property was acquired as part of the Newstrike Brands acquisition one year ago. The value of the acquisition was $262 million, with property, plant and equipment (“PPE”) valued at $46 million (the value attributed specifically to the Niagara facility was undisclosed). Furthermore, HEXO lost its spot on the S&P/TSX Composite Index today due to not having a minimum average price of $1 over the previous three months.




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Valuation of Select Canadian LPs

The following shows the average Enterprise Value to Revenue (“EV/R”) of the cannabis

companies that we track.

Average EV/R (October 2019 – June 2020)

Source: S&P Capital IQ, FRC

Source: S&P Capital IQ, FRC

The average EV/R, as of June 22, 2020, is 10.7x – a slight deterioration from an

average EV/R of 10.9x as of June 15, 2020. The average EV/R, from October 7, 2019

to date, is 12.4x. As a number of companies are not EBITDA positive, we have refrained

from tracking the average Enterprise Value to EBITDA (“EV/EBITDA”).

Below, we discuss the highly anticipated retail sales numbers in Canada.




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April 2020 Retail Sales in Canada

Retail sales in Canada for the month of April 2020 were $34.7 billion – a 26% month-

over-month (“MoM”) decrease and a 33% year-over-year (“YoY”) decrease.

Source: Statistics Canada

The least impacted, on a percentage basis, were food and beverage stores

(unsurprisingly). Consistent with our thesis that cannabis sales are highly resilient




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to an economic downturn, cannabis stores only declined 1% MoM. Given that

March 2020 and April 2020 has 31 days and 30 days, respectively, retail cannabis

sales actually increased 3% MoM when comparing average sales per day.

March 2020 April 2020

$181 million / 31 days = $5.84 million /

day $180 million / 30 days = $6 million / day

We believe April 2020 retail cannabis sales figures are impressive, considering the

following headwinds:

• Ontario cannabis stores were forced to close in early April 2020 after removal

from the “essential” list (this decision was reversed later in the month) – Ontario

houses 39% of Canada’s population,

• The unemployment rate in April 2020 was 13% – indicating lower household

discretionary spending; CERB payments are unlikely to offset the total lost

income of those affected, and

• The lack of international tourism to Canada due to border shutdowns, and

provincial travel restrictions – in the state of Nevada (a tourism heavy state),

cannabis sales dropped 30% from March 2020 to April 2020 (Source: Marijuana

Business Daily).

Given that Canada has been continually increasing the number of retail cannabis stores

throughout the country (discussed later), and the additional day in May 2020 (31 days

versus 30 days in April 2020), we believe that retail cannabis sales in May 2020 will be

higher than April 2020. May 2020 retail sales are expected to be published on July 21,

2020, to which we will provide an update.

If we assume zero seasonality flat-line growth from April 2020 onwards, Canada’s

retail cannabis market is expected to reach $2.1 billion in 2020 – a 76% YoY

increase from 2019.




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Retail Cannabis Sales in Canada

Source: Statistics Canada, FRC

Our outlook on Canada’s recreational cannabis market remains positive.

Canadian Retail Cannabis Pricing

Source: Online Provincial Cannabis Stores, FRC

The average retail price per gram decreased 0.46% week-over-week to $11.43.

Over the long-term, we continue to reiterate our view that the retail price per gram of

cannabis will decrease to combat the black market for cannabis. According to




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Statistics Canada, the average per gram price of illegal cannabis in Q4-2019 was

$5.73. The following shows the trend in pricing for illegal cannabis:

Illegal Cannabis Pricing

Source: Statistics Canada, FRC

Retail Cannabis Stores

As of June 22, 2020, there are 955 retail cannabis stores across Canada. This is a 1%

increase from a week ago.

Number of Retail Cannabis Stores in Canada

Source: Provincial Websites, FRC

The following shows the number of retail cannabis stores by province/territory:




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Source: Provincial Websites, FRC

As shown above, Ontario and Quebec are the two largest underserved provinces for

cannabis, with a population / store of 157k and 202k, respectively. Growth in Canada’s

cannabis market hinges on more retail cannabis store openings in the two

aforementioned provinces.

The below chart shows Canadian retail dried cannabis flower pricing since we began

price coverage.

Canadian Retail Dried Cannabis Flower Pricing

Source: Online Provincial Cannabis Stores, FRC




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Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst(s) about any companies and industries mentioned. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. Companies mentioned in this report may be covered by FRC under an issuer paid model or be candidates for coverage. FRC or companies with related management, may hold shares in some companies mentioned in this report. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. To subscribe for real-time access to research, visit https://www.researchfrc.com/website/subscribe for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company, industry, and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward-looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.



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Analysts' Ideas of the Week · 2 days ago · Analysts' Ideas of the Week Shares of Gold Producer...

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