Equinox Gold: Despite Higher AISC, Good Miner At A Discount

Thesis

Equinox Gold (NYSE:EQX) is a quality gold mine with the highest percentage of insider ownership among its peers. At the helm of the company is renowned Ross Beaty. The company has one red flag: it's higher than average AISC.

The five pillars of a profitable mine are top management, growing reserve base, growing output, low AISC, and soaring spot prices. A lack of strong leadership can turn an excellent deposit into a mediocre mine, though the greatest management team cannot transform an inferior deposit into an outstanding mine. That said, the managers can push company performance to the geological and metallurgical limits posed by the deposit.

AISC is one of those metrics. It depends on project parameters, primarily by deposit grade and cut-off grade. The lower the deposit grade, the higher the cut-off grade, thus, the higher the AISC. As mentioned earlier, even a great team cannot guarantee success. Equinox Gold has Ross Beaty for its Chair. He is one of the true legends in the mining business, along with Pierre Lassonde, Sean Boyd, and Marc Bristow. Mr. Beaty owns 8.2% of Equinox`s shares.

Equinox has a Greenstone project in its pipeline. The project has impressive metrics: AISC at $850/oz, annual production at 400k ounces, and grade at 1.27 grams per ton. The last is a remarkable number for open pit mines, with a world average below 0.5 grams per ton. Once the Greenstone project starts operation, EQX will approach the Big Boys Club with an annual production of 1 million ounces.

Using NAV with a spot at $1500/oz, EQX has a negative value due to its high AISC. However, my base calculation with a spot at $1800/oz gives an adequate margin of safety at 32%. Given all the facts, I give EQX a buy rating.

Q2 Results

With seven operating mines, one mine under construction, and three growth projects, the firm is a mid-tier gold producer with 16.922 M oz in P&P reserves. The company's mines are in Brazil, the USA, Mexico, and Canada. The image below from the last corporate presentation shows the company`s assets.

Equinox's four producing assets in Brazil contribute more than 70% of the company`s annual production. The other two mines are in the US, and one is in Mexico. The Greenstone project is expected to come into production in 1H24. It will contribute 50% of annual output and, given its AISC below $900/oz, will deliver probably 65% of the cash flow. I like Equinox's focus on the Western Hemisphere. It simplifies operations, thus reducing operational risk.

Equinox had a solid last quarter, as seen in the image below:

The revenues and operating income soared significantly compared to 1Q23 and 2Q22. Higher grades and easing inflationary pressures brought AISC down, thus improving EQX's profit margins.

2Q22 gold production is 137,700 ounces, an increase of 14% from last year. With a record 260,400 ounces produced in H1, Equinox is already at 44% of its year guidance midpoint, showing progress after a poor 2022. If there are no issues, the EQX goals are achievable. Significant production growth is expected next year, and commercial production at Greenstone is scheduled for H2 2024.

The chart below shows Equinox results QoQ by segment.

EQX Brazilian assets had a strong last quarter. Its revenues soared by at least 15%, while its expenses remained stable or declined. RDM mine had increased production by over 95% to about 13,000 ounces at a lower AISC of $1,553/oz than 2Q22 at $1,849/oz. Fazenda mine also had a more robust quarter, producing almost 15,500 ounces of gold at $1,487/oz (2Q22: $1,572/oz), thanks to improved throughput and grades. Production in Aurizona increased significantly to 28,500 ounces, with AISC at $1,390/oz from 19,900 ounces at $1,627/oz. Equinox's Mexican operation in Los Filos had higher output at 37,800 ounces than 31,700 ounces compared to 2Q22, thanks to increased throughput and underground grades. AISC at Los Filos remained at $1,701 per ounce; however, it was much lower than $2,141 per ounce for 2Q22. Equinox US assets did not perform impressively. Mesquite revenue dropped by 30% while Castle Mountain by 4%.

Equinox owns 60% of the Greenstone project. Orion Resources owns the remaining 40%. This is the company's most significant recent development. The image below shows gives project highlights.

The project was 90% complete, 4 million hours had been worked LTI-free, and according to a third independent quantitative risk assessment that was finished last quarter, the project is still on track to start production in H1 2024. At quarter's end, Equinox and Orion Mine Finance had spent $940 million, with Equinox's share at just $170 million. The project is on time despite the difficulties with logistics, labor shortages, and inflation pressures. The image below shows the progress on August 25, 2023.

Company Financials

Compared to other mid and significant producers, EQX has an adequate balance sheet. It still holds sufficient liquidity to finance its operations and debt, though the higher-than-average AISC squeezes the company`s profits. The table below shows some metrics I use to measure a company`s solvency and liquidity. The data is taken from the last financial report.

Equinox deserves credit for its continuous capital investments, regardless of the difficulties. Using capital expenditures (CapEx) and operational cash flow ratio (OCF) EQX is second to IAMGOLD with 201.4%. A similar picture paints CPX/Depreciation, Depletion, Amortization, and CPX/Market Capitalization. Given the potential of the Greenstone project and its targeted start date, such a high CAPEX should generously pay off. The table below compares similar-sized miners and their CPX multiples.

The higher the AISC, the lower the profit margins and the poorer the profitability, as seen in the table below. It shows some metrics I use to assess the company`s efficiency.

Despite the mediocre profitability, we must consider the difficulties in 2022. In the last two quarters, I had seen declining inflation and higher average gold prices, thus pushing up EQX performance. Once Greenstone comes online, I expect profitability metrics to improve significantly. The annual production will eventually grow to 1 million ounces at lower AISC, though EQX costs will remain higher than the industry average.

Equinox Gold does not distribute dividends. Among similar-sized miners, Centerra pays dividends with a respectable yield of 4.24%.

Valuation

Equinox Gold is a gold miner, and as such, I use three valuation methods:

• Net asset value based on the company`s plausible reserves, current assets, and total liabilities.
• Conventional comparison based on EV/Sales and Price/Cash Flow
• Miners special assessment weighting up EV to Annual production, EV to Plausible reserves, Plausible reserves to Fully diluted shares

I calculate net assets as follows:

NAV = PR*(SP-AISC) + cash + inventories + total receivables - total liabilities

PR (plausible reserves) = 100% * P&P Reserves + 50%*M&I Resources + 30%*Inferred Resources

I examined two scenarios. One conservative with spot gold $1500/oz. The other is the base scenario using the $1800/oz price.

Conservative NAV per share = $ (21.43)

Base NAV per share = $ 6.26

Current Market Price = $ 4.23

Due to the high AISC calculating conservative NAV, I obtained a negative outcome. However, using base case figures, EQX's margin of safety moves to 32%.

The image below compares Equinox with the following companies:

Equinox Gold is the most expensive stock of the group based on EV/Sales multiple. Using Price/Cash Flow is second to Ramelius. Despite declining gold prices and gold stocks, higher AISC squeezed profit margins, thus expanding the company`s multiples.

The EV/Annual Production figures are similar; EQX is the second most expensive among its peers. However, measured with EV/Plausible Reserves, we pay $55/oz, the second cheapest to IAMGOLD. Besides that, buying EQX shares, we receive 0.09 ounces of gold, much higher than its competitors.

Risk

Equinox Gold is a well-diversified producer with operations in a few countries. Thus, it benefits from distributing the political risk while not sacrificing operational efficiency. EQX's balance sheet is adequate, given the problematic 2022 and Greenstone development costs. Greenstone project had made impressive progress given the circumstances, such as pressing inflation in the last two years, broken supply lines, and a shortage of qualified personnel. The project is 90% complete, significantly reducing EQX's overall risk.

Conclusion

Equinox is a solid gold miner with quality assets in a few low-risk countries, run by an experienced team with skin in the game, and has a Tier 1 project in its pipeline. Using conservative NAV with a gold price at $1500/oz EQX is overvalued, though utilizing a spot at $1800/oz, the current market price offers a 32% margin of safety. The only red flag is higher than the industry average AISC. It is too high for a strong buy rating. However, given EQX's strengths, Ross Beaty at the helm, and growth potential, I give a buy rating.