Seeking Alpha

Leagold's Mixed Q3 Results May Present A Buying Opportunity

About: Leagold Mining Corporation (LMCNF)
by: Peter Arendas
Peter Arendas
Long only, commodities, research analyst

Leagold produced 84,229 toz gold at an AISC of $1,042/toz in Q3.

Several issues were encountered at the Los Filos, RDM and Pilar mines which resulted in a 7.73% production decline quarter-over-quarter.

The Q3 operating cash flow equaled $9.02 million and EPS equaled $-0.01.

The Los Filos mine expansion program progresses on schedule.

The share price is approaching the support level at $1.5, which could be a very attractive entry point.

Leagold Mining (OTCQX:LMCNF) released its Q3 2019 financial results. And although Q3 also contained positive things, the overall impression is pretty mixed. The most striking is the fact that the gold production declined again, which contributed to higher unit cash costs and AISC and worse than expected financial results. This negative surprise caused an almost 12% share price drop the day following the earnings release.

The Q3 gold production declined to 84,229 toz, which is 7.73% less than in Q2 and 20.5% less than in Q1. In comparison to Q3 2018, the Q3 2019 gold production was lower by 9.7%. At the Los Filos mine, production declined almost by 10% quarter-over-quarter, especially due to lower gold grades (0.72 g/t vs. 0.83 g/t) and lower recoveries (63% vs. 70%). The management reacted by adding another crusher and focusing more on the heap leach pad improvements and solution control.

At the RDM mine, gold production declined from 17,217 toz in Q2 to 15,286 toz in Q3, or by 11.2%, due to mid-September suspension of the milling operations that was caused by some regulatory issues. At the Pilar mine, gold production declined by 17% quarter-over-quarter, due to the higher ore dilution and resulting lower gold grades.

The only positive exception was the Fazenda mine in Q3. Its gold production increased by 5.9%, to 18,731 toz gold. But the company expects that in Q4, the other operations will also improve and the 2019 production guidance of 380,000-420,000 toz gold will be met. As the 9M 2019 gold production amounts 281,463 toz, 98,537 toz gold need to be produced in Q4 to meet the lower boundary of the guidance.

Source: Own processing, using data of Leagold

As the production volumes declined, the unit production costs increased. As can be seen in the chart below, the cash costs, as well as the AISC, climbed to their highest level since Q1 2018. The Q3 cash costs equaled $903/toz gold, which is 5.9% higher compared to Q2 and 10.3% higher compared to Q3 2018. The AISC increased to $1,042/toz, or by 6.5% quarter-over-quarter and by 7.9% in comparison to Q3 2018.

Source: Own processing, using data of Leagold

Leagold's Q3 operational results disappointed and the financial results were saved only by the improved gold prices. The realized gold price increased to $1,417/toz, or by 11.4% quarter-over-quarter. Although the gold sales volume declined from 94,178 toz gold to 85,451 toz gold, the revenues increased slightly to $121.7 million. Also the operating cash flow returned back to green numbers, reaching the $9.02 million level. The net income was a negative $3.1 million and EPS equaled $-0.01, which is almost in line with Q4 2018 and Q1 2019 and much better compared to Q2 2019 when the earnings were severely impacted by tax-related non-cash items worth $63.5 million.

Source: Own processing, using data of Seeking Alpha and Leagold

During the third quarter, Leagold was able to improve its cash position slightly to $55.9 million. However, its total debt increased as well. It grew to $289.7 million, pushing the net debt up to $233.8 million. But although the net debt increased, the increase is not big. Moreover, the growing indebtedness is related to Leagold's expansion plan that is underway.

Source: Own processing, using data of Seeking Alpha and Leagold

During Q3, Leagold started the expansion of the Los Filos mine. The aim is to double its production by the end of 2021. Leagold has completed the access road to the Guadalupe deposit and also the stripping operations have been initiated. The Bermejal underground development is underway, as well as the CIL plant engineering works.

The operational issues resulted in worse Q3 financial results than originally expected. The market reaction was pretty negative and the share price declined to $1.61, only to end the trading day at $1.65, or approximately 12% below the pre-announcement closing price. The stock chart doesn't look good. The RSI is approaching the oversold levels but it's not quite there yet. The share price is well below the 10-day as well as the 50-day moving averages and it seems to be headed to test the support level at $1.5. Although the Q3 results were disappointing, they provide an attractive buying opportunity, given Leagold's growth plans and its current market capitalization of only $528 million and an enterprise value of $762 million. Adding some more shares around $1.5 should be a good decision in the long term.

What I like about Leagold's Q3:

  • The expansion of the Los Filos mine is progressing well.
  • The 2019 production guidance was reiterated.
  • The operating cash flow and EPS improved quarter-over-quarter.

What I don't like about Leagold's Q3:

  • The gold production experienced its second consecutive quarterly decline.
  • The production costs grew to their highest level in 2 years.
  • The net debt increased slightly.
  • The chart looks like the share price decline should continue at least to the $1.5 level (which is not good, on the other hand, it may lead to some very attractive buying opportunities).

Disclosure: I am/we are long LMCNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.