Americas gold and silver: price target lowered due to continued stock dilution (NYSE: USA)

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It was a disappointing start to the year for the Gold Juniors Index (GDXJ), but Americas Gold & Silver (USAS) was one of the worst performers, down 19% from the (-)7% return of the GDXJ. While many investors might have assumed that Americas Gold & Silver [Americas G&S] would have had an incredible January with the late announcement of commercial production, this was overshadowed by the third major capital raise in less than 12 months, which further reduced the company’s expected annual earnings per share [EPS]. Based on continued stock dilution and increase in share count from 118~million shares to 127~million shares, I am lowering my conservative fair value from $3.84 to $3.36 . Therefore, I would view any rally above $3.40 as a selling opportunity.

(Source: Company presentation)

The key to generating strong stock price returns in the gold producer space is to increase production and ultimately increase profits, while balancing expenses to maintain a long life. mining life. Typically, if a company can accomplish these three things, its stock price will rise over the long term, creating immense shareholder value. However, many investors overlook the most important piece of the puzzle: the shares outstanding and the degree of dilution needed to accomplish these feats. The best companies dilute as little as possible when going into production or increasing production and use their free cash flow to strengthen their mine life, seek new deposits and increase production. Others with bold management teams acquire businesses to grow, and it’s a model that has helped Kirkland Lake Gold (KL) soar nearly 2,000% in less than five years from 2015 to 2020. Unfortunately , Americas G&S failed miserably in the old strategy, and the dilution did not stop, even at near-record gold prices. Let’s take a closer look below:

(Source: company press release)

As Americas Gold & Silver was poised for a strong first quarter, with discouragement expected to turn into optimism with commercial production of Relief Canyon about to be announced, the company immediately halted that momentum with a new capital raise. . As noted above, the company raised approximately $24 million at an average price of $2.61 per share, with approximately 9.1 million shares sold in the deal. A single capital raise in a 12 month period would not be reason to delist a stock for a potential investment, but this is now the third capital raise in less than 12 months, with a summary of these fundings below – below:

As noted above, this translated to 29.6 million shares sold at an average price, and this does not include an additional 9.0 million shares sold for $1.66 per share in the first quarter. as part of an At-The-Market [ATM] Offer agreement. In total, this brings the dilution to 38.6 million shares in less than 12 months, with 118~million shares outstanding as of November 13, 2020 and an additional 9.1 million shares recently sold as part of the January agreement. I currently cover over 400 miners in space, and it’s hard to find junior gold explorers who are in pre-revenue due to their model being diluted at this rate. Therefore, while I think it was fair to give the company a pass for Q1 ATM and the second capital raise in May due to hiccups with commercial production given the radial stacker problem, it’s more than forgivable at this point.

(Source: YCharts.com, author’s chart)

Going back to the previous point about stock dilution, there is no doubt that Americas G&S will be a more valuable company with Relief Canyon at full capacity this summer, but continued stock dilution has taken the meat out of shareholders. Indeed, while we might have expected a 70% increase in the stock price with ~$120 million a year in incremental revenue from Relief Canyon, the stock was diluted by over 45% over the same period, from 86 million shares in Q4 2019 to 127~million shares currently. So while investors should see a higher market cap once we see the first two quarters of production meet Relief Canyon’s targets, that won’t translate to what should have been a stock price of 5. $.25 had we not seen a stock dilution monsoon. since the fourth quarter of 2019. This revenue projection is based on production of ~75,000 gold equivalent ounces per year at a conservative gold price of $1,725/oz.

(Source: Pershing Gold Feasibility Study, Relief Canyon Mine)

During my most recent article, I noted that Americas G&S was finally rounding the corner, but was a high-risk, high-reward name due to the team’s complete lack of execution. I assigned a conservative fair value to the stock of $3.84, based on projected annual EPS of $0.48 for fiscal 2021 and a reasonable earnings multiple of 8 (8x 0 $.48 = $3.84). However, with the further stock dilution we have seen, which will likely see Americas G&S end the year with over 130 million shares, these annual EPS estimates will be further compressed unless we see a dramatic price increase. gold and silver (SLV). Therefore, with lower projected earnings based on equity dilution of nearly 8%, the conservative fair value has dropped significantly.

(Source: YCharts.com, author’s chart)

If we look at the updated earnings trend below, we can see that Americas G&S is expected to post more net losses per share in fiscal 2020 due to the delayed ramp-up of Relief Canyon and Cosala in care and maintenance due to an ongoing strike. However, full-year EPS estimates for fiscal 2021 are $0.42, suggesting a massive improvement in earnings trend and a new high. Unfortunately, the problem is that annual EPS estimates were previously at $0.60 before any stock dilution, so the potential fair value has gone from a pre-dilution case of $4.80 to just $3.36. $. Even after the recent selloff and terrible 2020 performance against its benchmark, that leaves less than 30% upside from current levels.

(Source: YCharts.com, author’s chart)

Some investors will say that the Galena complex should have a strong 2021 financial year with the continuation of the recapitalization plan and decent results in the fourth quarter, and this will be reinforced by the addition of 60,000 ounces of gold equivalent. [GEOs] produced from Relief Canyon. While that’s certainly true, and there’s no need to continually beat the company to a very disappointing 2020 with a strike at one mine and massive delays at another, the point is that the short term of 2020 has led to long-term compression. in annual EPS.

(Source: Company presentation)

Whether the company had managed to get through fiscal 2020 with minimal or even moderate dilution would be a different story, but the increase in the free float of more than 45% in less than 12 months has seriously undermined the upside targets here. It also raised question marks as to whether it is a trusted name regarding future dilution. Personally, I only want to bet on the best management teams that dilute as little as possible, and that alone makes Americas G&S a huge To avoid. That doesn’t stop the stock from rising if the precious metals rebound, but I would use rallies to $3.40 as an opportunity to move into a better managed miner.

Americas G&S is expected to have a strong year in fiscal 2021 with production up to ~60,000 GEOs at Relief Canyon, resulting in ~$100 million in incremental revenue or revenue growth. triple digit income. Unfortunately, continued stock dilution capped the upside of this story and rendered the stock uninvestable, in my view. Indeed, my conservative fair value went from $3.84 to $3.40, which has plateaued on the upside, and the risk remains high given management’s failure to meet its targets and the dilution stock constant. Therefore, I consider the stock to be high risk, medium reward, and I would view any bounce to $3.40 as an opportunity to exit positions. In a market where names with near flawless execution offer more upside and a third of the industry is sitting at rock bottom prices, I find it very hard to justify investing money here.


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