In a Nov. 17 research note, Haywood analyst Kerry Smith reported that Elemental Royalties Corp.'s (ELE:TSX.V; ELEMF:OTCMKTS) Q3/20 financials were "a slight miss" from expectations due to a "lag in deliveries of gold equivalent ounces" but the company remains on track to meet full-year 2020 revenue guidance.
Smith reviewed Elemental's Q3/20 results. The gold-focused royalty company generated US$1.15 million in revenue versus Haywood's US$1.45 million estimate. Cash flow per share before working capital changes was CA$0.016, below Haywood's expected CA$0.02. Project evaluation and listing expenses were higher than expected but were partly offset by a lower general and administrative expense. Adjusted EBITDA for Q3/20 was US$818,997, lower than Haywood's projected US$850,000.
Elemental earned but did not receive US$850,000 in accrued royalty income in Q3/20. Had it realized the money during the quarter, its financial results would have exceeded expectations. The total number of gold equivalent ounces delivered in Q3/20 was 658, lower than Haywood's expected 850. However, the amount would have been about 950 if accrued royalty income had been included in Q3/20's financials.
Smith pointed out that Elemental recognized US$3.7 million in revenue in 2020's first three quarters, nicely positioning it to achieve its full-year 2020 revenue guidance of US$5.3 million.
As for the balance sheet, at Q3/20's end the company had US$8.76 million in cash, up significantly from US$1.24 million at the end of Q2/20, Smith noted. The jump up is due to Elemental receiving US$17.9 million in initial public offering funds, less the US$11 million it spent on acquiring royalties, in Q3/20. The company has no debt.
Haywood forecasts Elemental's cash flow per share to be US$0.06 in 2020 and to rise to US$0.09 per share in 2021, driven by a higher gold price of US$1,850 per ounce.
Of Elemental's five royalties, its 1% net smelter returns (NSR) royalty on Teranga's Wahgnion project in Burkina Faso was the quarter's outperformer, relayed Smith. The operation produced 42,000 ounces, exceeding design capacity in doing so.
Along with Wahgnion, production from Astral Gold's Amancaya project in Chile, on which Elemental holds a 2.25% NSR royalty, accounted for 92% of its Q3/20 revenue. Despite a month of production being lost during Q3/20 when a miner's strike shut down the operation, Amancaya produced 15,169 ounces of gold. Sales, in contrast, lagged, amounting to 7,700 ounces, but should be made up in Q4/20, the analyst noted.
Elemental is one of the newest players in the precious metals royalty space with royalties on five producing assets, along with one development asset. Elemental offers a production focussed portfolio of royalty assets that are currently generating positive cash flow," Smith stated.
The analyst highlighted that Elemental is trading below its peers, "likely due to the fact that it is the newest player in the space and not many investors are familiar with the story." It is trading at about CA$1.60 per share whereas Haywood's target price on the company, which it rates Buy, is CA$2.50 per share.
"This presents a good entry point for investors looking for an undervalued name in the precious metals royalty space with plenty of upside," added Smith.
Upcoming catalysts for Elemental include a resource update and potential mine life extensions for Amancaya and Mercedes in Q1/21 and an exploration update on Wahgnion in H1/21.
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Disclosures from Haywood Securities, Nomad Royalty Company Ltd., November 17, 2020
Analyst Certification: I, Kerry Smith, hereby certify that the views expressed in this report (which includes the rating assigned to the issuer’s shares as well as the analytical substance and tone of the report) accurately reflect my/our personal views about the subject securities and the issuer. No part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations.
Important Disclosures
Of the companies included in the report the following Important Disclosures apply:
▪ Haywood Securities Inc. or one of its subsidiaries has managed or co-managed or participated as selling group in a public offering of securities for Nomad Royalty Company Ltd. in the past 12 months.
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