The Q1 earnings season for the VanEck Gold Miners ETF (GDX) has concluded, with Equinox Gold (NYSE) recently reporting its results. Unfortunately, the company’s Q1 performance fell below expectations, with all-in sustaining cost (AISC) margins plunging below 6% and production at only ~16% of its guidance midpoint.
However, this year is pivotal for Equinox as it brings a new high-margin gold mine online in Canada, fully owning the Greenstone project after acquiring OMF’s stake.
Q1 Production and Sales
Equinox Gold reported Q1 production of ~111,700 ounces of gold, a 9% decline from the previous year. This decrease was due to lower grades and throughput at multiple sites, including Los Filos, Aurizona, Fazenda, and Santa Luz. However, Mesquite and RDM showed improved performance.
Mesquite produced ~22,000 ounces, benefiting from ore contributions from three pits. This led to an AISC of $1,188/oz, significantly lower than the previous year’s $1,780/oz. Conversely, Los Filos saw a substantial decline in output, producing ~24,000 ounces with an AISC spiking to $2,424/oz due to elevated waste stripping and operational issues.
Aurizona also had a challenging quarter with production down to ~23,900 ounces from ~25,800 ounces the previous year. This decline was attributed to lower throughput and recoveries, higher sustaining capital, and increased mining costs.
Financial Results
Equinox’s revenue in Q1 was $241.3 million, slightly up from $234.1 million the previous year. Operating cash flow was $17.9 million, with net debt rising to ~$804 million. The increase in net debt was due to continued free cash outflows during the Greenstone Mine build phase and higher sustaining capital expenses.
AISC rose to $1,950/oz in Q1 2024, up from $1,658/oz the previous year, driven by fewer ounces produced, currency headwinds, and higher sustaining capital. This led to a decrease in AISC margins to $116/oz (5.6%) from $237/oz (12.5%).
Despite these challenges, Q1 was the weakest quarter, and with Greenstone now online, AISC margins are expected to improve significantly in the coming quarters.
Recent Developments
In April, Equinox Gold acquired the remaining 40% of the Greenstone Mine from Orion Mine Finance for $995 million. This acquisition included 42 million shares of Equinox and $705 million in cash. This move positions Equinox to produce upwards of 750,000 ounces this year at lower costs than previously expected.
Although the purchase price may seem high, it is in line with similar transactions for high-quality assets in Tier-1 jurisdictions. The acquisition is expected to be highly beneficial for Equinox, with Greenstone potentially generating significant free cash flow.
Future Outlook
Equinox Gold aims to ramp up production to over 1.05 million ounces by 2025, though its cash cost profile is expected to remain above $1,150/oz. Despite this, the company should generate substantial free cash flow next year, significantly improving its financial position.
Equinox also plans to develop two major growth projects: Castle Mountain Phase and the Los Filos CIL Plant.
Valuation
With ~510 million shares and a share price of $5.65, Equinox has a market cap of ~$2.88 billion and an enterprise value of nearly $4.0 billion. This valuation is reasonable for a company on the brink of becoming a million-ounce producer.
Using fair multiples of 1.0x P/NAV and 8.0x FY2025 cash flow estimates, the updated fair value for EQX is $8.10, suggesting a 42% upside from current levels. However, a low-risk buy zone closer to $4.90 is recommended for new positions.
Positivity Surrounding Equinox
Equinox Gold’s recent acquisition of the Greenstone Mine and its progress towards becoming a million-ounce producer positions the company for potential multiple expansions. Although challenges remain, such as the high AISC and significant share dilution, the long-term outlook is positive.
Equinox’s improved jurisdictional profile and potential asset divestments could further enhance its valuation. Any pullbacks below $4.95 present a buying opportunity for investors looking to capitalize on this transformative period for Equinox Gold.
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