Analysts' Ideas of the Week · 2020. 8. 18. · Analysts' Ideas of the Week Larger Miners Likely to...

Analysts' Ideas of the Week Larger Miners Likely to Pursue Share-Based M&A Deals

August 17, 2020

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Click here to view FRC’s complete list of top picks

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

FRC Top Picks

The following table shows last week’s top five performers among our Top Picks,

including four junior resource companies and one mortgage investment corporation.

The top performer, Fura Gems Inc. (TSXV: FURA), was up 47.4% WoW, as it

announced plans to go private, discussed later in this report. The second-best

performer was FPX Nickel Corp. (TSXV: FPX), a company we initiated coverage on

August 11, 2020. FPX holds one of the largest undeveloped nickel deposits in the world;

our initiating report can be found here.

Top Five Performers Last Week

Overall, our portfolio (equally weighted) was up 0.7% in the past week versus the

benchmark’s (TSXV) -0.3%. Over the longer-term (six months, one-year, three-year,

and since launch), our portfolio has significantly outperformed the TSXV as shown

below.


https://www.researchfrc.com/website/top-pick-page/

https://www.researchfrc.com/fpx-nickel-corp-nickel-suitable-for-both-stainless-steel-and-ev-batteries-initiating-coverage/




Performance by Sector

Our complete list of top picks (updated weekly) can be viewed here.

Weekly Mining Commentary

Most of global equity indices reported gains in the past week.

Source: FRC / Various

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

dropped in a single week. Silver and gold were the biggest losers. This decline was not

surprising to us as we have been calling for a correction in prices for the past few weeks.



https://www.researchfrc.com/top-pick-page/




As shown below, our price forecasts for the full year (unchanged from last week) are lower than current prices.

Valuations of senior gold producers dropped two weeks in row, as shown in the chart

below. The global average EV / R of gold producers is currently 3.6x versus the four-

year average of 2.7x. The global average EV / EBITDA is currently 11.1x versus the

four-year average of 9.0x (Source: S&P Capital IQ). These valuations indicate that

the market expects further upside in gold prices. A major boost for the sector last

week was Warren Buffet’s investment in Barrick (TSX: ABX).






However, valuations of base metal producers stayed relatively flat WoW. The global

average EV / R of the Diversified Metals and Mining sector is currently 1.4x versus the

four-year average of 1.5x. The global average EV / EBITDA is currently 11.1x versus

the four-year average of 8x (Source: S&P Capital IQ). These valuations do not give

us a clear indication on the market’s take on base metal prices.






Our outlook has slightly improved since last week as the U.S. has been reporting a

decline in new cases of COVID-19. Also, for the first time, India has started showing

signs of a decline. Other countries we have been closely monitoring, such as Mexico,

Iran and Spain, have also started showing signs of decline. That said, rising cases in

South America (especially Peru and Colombia) are now our primary concern.






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

Another positive development last week was that inventory levels of copper declined on both the LME and SHFE (Shanghai Futures Exchange) for the first time in several weeks.



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




The decline in inventory was likely due to stronger manufacturing activities, as reflected by the charts of the U.S. and China below. Another sign of improving business activities is the reduction in unemployment rates in the U.S. and Canada in July, which we discussed last week.






China Caixin Manufacturing PMI

United States Manufacturing PMI

Source: Tradingeconomics.com

We are maintaining our prediction of a U-shaped recovery in business activities and demand for base metals. As for precious metals, we expect a rise in M&A transactions, mostly share deals (rather than cash) considering the rich valuations. Gold and silver juniors with high quality assets in safe jurisdictions will likely be sought after targets. In the following section, we review companies that announced key developments in the

past week.

Mining / Exploration

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Fura Gems Inc TSXV: FURA $0.14 N/A Aug 14, 2020

PR Content Last Friday, Fura’s major shareholder, Lord of Seven Hills Holdings FZE (“L7H” - a Dubai based investment company), holding 51.5% of the outstanding shares, and Fura, came into an agreement for L7H to acquire the remaining shares for $0.15 per share, and take the company private. The acquisition price reflects a 36% premium over the previous day closing price. Fura’s board has approved the transaction, which is expected to close in October 2020.

FRC Opinion Negative - The offer price is significantly lower than our fair value estimate of $164M on Fura’s assets, which is $0.60 per share based on the current number of shares outstanding. Fura’s management stated that “despite significant marketing efforts, liquidity and access to capital have been challenging, which we believe largely result from the limited number of companies listed on the TSXV that operate in the coloured gemstone sector.” As the board has approved the transaction, we are temporarily retracting our rating and fair value estimate on Fura’s shares.



https://www.researchfrc.com/company/fura/




Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Thor

Exploration

Limited

TSXV: THX $0.22 $0.50 Aug 10, 2020

PR Content Announced updates on their progress at Segilola; the company is on schedule and on budget to complete construction; first gold pour is expected in Q2-2021.

FRC Opinion Positive - THX is fully funded to advance the Segilola gold project in Nigeria into production. At a grade of 4.2 gpt, Segilola is estimated to host the highest grade open pit gold deposit known in West Africa. Production is expected to be 80,000 oz per year, with an all in sustaining cost of US$662 per oz.

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Kootenay Silver

Inc.

TSXV: KTN $0.49 $0.57 Aug 13, 2020

PR Content Announced results from four more holes of its 7,000 m drill program at the Columba silver project in Chihuahua state, Mexico. Best results were: ➢ 361 gpt silver over 11 m, including

608 gpt silver over 5 m, and 1,160 gpt silver over 1 m; all within 229 gpt silver over 22 m.

FRC Opinion Positive – We are pleased to see that the project continues to return high grade values. In 2019, the company completed a 41 hole / 6,853 m drill program, which was very successful with multiple holes returning high grade silver intercepts on multiple veins. Management has no immediate plans on the flagship La Cigarra project, also in Chihuahua state. Drilling at Columba is ongoing. We expect the company to start preparing a maiden resource estimate shortly.



https://www.researchfrc.com/website/company/thor/



https://www.researchfrc.com/website/company/ktn/

https://www.researchfrc.com/website/company/ktn/




Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Fortune

Minerals

Limited

TSX: FT $0.075 $0.97 Aug 10, 2020

PR Content Announced plans for exploration (induced polarization and ground magnetometer surveys) on an anomaly located 1 km southeast of the main NICO deposit. Historic drilling north of this anomaly had intersected gold, returning 1.11 gpt gold and 0.355% cobalt over 3 m.

FRC Opinion Neutral – We were pleased to hear an update from the company as the company had been relatively inactive in the past year. We believe NICO is the largest undeveloped primary cobalt project in North America, with significant quantities of gold. An updated feasibility study is expected in the near future. A previous study (completed in 2014), based on a cobalt price of US$16/lb (vs the current price of US$15), had shown an after-tax Net Present Value @ 7% of $224 million, with an after-tax Internal Rate of Return of 15.1%. FT’s current market cap is just $27 million.

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Laurion Mineral

Exploration Inc.

TSXV: LME $0.20 $0.33 Aug 11, 2020

PR Content Completed a $1.10 million private placement.

FRC Opinion Positive – LME is now fully funded to pursue its next phase of exploration. The company recently completed an encouraging phase 1 drill program at its 100% owned Ishkoday project in Ontario. The project has a non NI 43-101 compliant preliminary target of 40-50 Mt grading 2.5 g/t gold, 0.5% copper, 3% zinc and 30 g/t silver. We will be publishing an update report shortly.



https://www.researchfrc.com/company/ftminerals/



https://www.researchfrc.com/website/company/laurion-mineral-exploration-inc/

https://www.researchfrc.com/website/company/laurion-mineral-exploration-inc/




Cannabis

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Grown Rogue

International

Inc.

CSE: GRIN $0.10 $0.24 Aug 11, 2020

PR Content

Golden Harvests, LLC (“Golden

Harvests”) has received its first Class-C

Adult Use License.

FRC Opinion

Positive – In our initiating report in July

2020, we had indicated that receipt of the

Class-C Adult Use License was imminent.

We are pleased to see Golden Harvests

receive this license on time. Prior to this

license, Golden Harvests was a pure-play

medical cannabis cultivator in

Michigan. Golden Harvests now has

access to Michigan’s emerging recreational

cannabis market.

Weekly Cannabis Commentary

Cannabis Industry Performance

Note: MCAN and XCAN were launched on November 18, 2019, and January 20, 2020, respectively.

Source: TMX Money, FRC



https://www.researchfrc.com/company/grown-rogue-international-inc/






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 -3%, -1%, and -4%, respectively. The worst performer on the list of companies that we track is the Supreme Cannabis Co., Inc. (TSX: FIRE). On August 14, 2020, FIRE terminated its consulting services agreement with Kush Enterprises Canada ULC (“KKE Canada”) to develop and launch a line-up of premium cannabis products. We are not privy to any other news related to the poor weekly performance of FIRE. The best performer on the list of companies that we track is Organigram Holdings Inc. (TSX: OGI). On August 14, 2020, OGI sent its first shipment of bulk dried cannabis flower to Canndoc Ltd. (“Canndoc”), one of the largest medical cannabis producers in Israel. Cannadoc is a subsidiary of InterCure Ltd. (TASE: INCR). We are not privy to any other news related to the strong weekly performance of OGI. Valuation of Select Canadian LPs

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

cannabis companies that we track.

Average EV/R (October 2019 – August 2020)

Source: S&P Capital IQ, FRC






Source: S&P Capital IQ, FRC

The average EV/R, as of August 17, 2020, is 8.9x – a deterioration from 10.5x a week

ago. The average EV/R, from October 7, 2019, to date, is 11.9x. As a number of

companies are not EBITDA positive, we have refrained from tracking the average

Enterprise Value to EBITDA (“EV/EBITDA”).

Below, we outline the level of dried cannabis inventory in Canada.

Increasing Dried Cannabis Inventory

Dried cannabis sales represent an integral part of Canada’s cannabis market. Although

there is no official data to testify to the proportion of dried cannabis sales to other

cannabis products, our research has indicated that dried cannabis sales represent

up to 70% of Canada’s cannabis market. With that in mind, it is integral to look into

the level of dried cannabis inventory and identify the level of pricing pressure that these

products may face. The following shows dried cannabis inventory by month of federal

license holders.






Dried Cannabis Inventory

Source: Statistics Canada

As indicated above, inventory of dried cannabis has been steadily increasing –

unpackaged inventory was 669,787 kg in May 2020 – a month-over-month

increase of 8%. Given the large amount of dried cannabis inventory in the market, we

believe it is indicative of high forward pricing pressure. To illustrate this, Delta 9

Cannabis Inc. (TSX: DN) reported Q2-2020 financials today, with an average wholesale

cannabis price per gram decreasing 16% quarter-over-quarter (“QoQ”) to reach $3.77.

With the pile-up of dried cannabis inventory, it is likely that licensed producers (“LPs”)

will sell their product at a discount to clear inventory. We believe this is already being

seen in the marketplace, with the flood of “value brand” cannabis products by LPs such

as Canopy (TSX: WEED), Tilray (NASDAQ: TLRY), and Aurora (NYSE: ACB).

As indicated by our Canadian dried cannabis pricing chart, the price of dried cannabis

has shown a historical downturn. We fully expect this downtrend to continue into the

foreseeable future.






Canadian Retail Cannabis Pricing

Province (As of 2020/8/17) Average Price per Gram Average Price per Gram THC Average Price per Gram CBD # of Products Min. Price Max. Price

Alberta 11.52$ 11.53$ 11.37$ 294 3.93$ 22.00$

B.C. 10.18$ 10.28$ 8.22$ 226 4.48$ 80.29$

Manitoba 11.73$ 11.75$ 11.57$ 263 5.66$ 20.43$

N.B. 10.07$ 10.20$ 8.90$ 153 3.57$ 16.28$

N.S. 10.51$ 10.58$ 9.82$ 163 5.36$ 42.85$

Newfoundland 10.17$ 10.17$ 10.19$ 133 5.64$ 15.40$

Northwest Territories 11.54$ 11.54$ 3 12.08$ 13.00$

Nunavut 11.73$ 11.84$ 12.41$ 36 9.43$ 17.91$

Ontario 9.77$ 9.95$ 8.41$ 247 4.20$ 23.98$

P.E.I. 10.34$ 10.40$ 9.50$ 134 2.20$ 23.30$

Quebec 9.20$ 9.12$ 9.83$ 187 4.85$ 14.55$

Saskatchewan 12.81$ 12.83$ 12.46$ 121 5.66 38.50

Yukon 14.61$ 14.78$ 13.35$ 8 12.69$ 16.15$

CANADA 11.09$ 11.15$ 10.50$

Source: Online Provincial Cannabis Stores, FRC

The average retail price per gram decreased 0.24% week-over-week to reach

$11.09. 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

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

Canadian Retail Cannabis Stores

As of August 17, 2020, there are 1,062 retail cannabis stores across Canada – a

nominal increase from a week ago. The following shows the week-over-week growth

rates:






Week-over-Week Store Count Change

July 20, 2020 July 27, 2020 Aug 4, 2020 Aug 10, 2020 Aug 17, 2020

0.7% 0.4% 1.9% 2.4% 0.0%

Source: Provincial Websites, FRC

Number of Retail Cannabis Stores in Canada


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







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

cannabis, with a population / store (“P/S”) of 105k and 204k, respectively.

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






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 pages 2 and 9-12 are covered by FRC under an issuer paid model. FRC or companies with related management, and Analysts, may hold shares in some companies mentioned in this report including Aphria, Barrick, Supreme. 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 · 2020. 8. 18. · Analysts' Ideas of the Week Larger Miners Likely to...

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