Equinox Gold's Q2: Eventful But Not So Successful

Summary

• Equinox produced 122,656 toz gold, at an AISC of $1,382/toz in Q2.
• The operating cash flow declined rapidly, to $20.2 million.
• Equinox acquired 60% of the construction-ready Greenstone Project.
• Santa Luz mine development remains on track for production start-up in Q1 2022.
• Another blockade disrupted operations at the Los Filos mine, with negative impact on Equinox's 2021 production and cost guidance.

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Equinox Gold (NYSE:EQX) released its Q2 2021 financial results. Unfortunately, the numbers look disappointing. Not only revenues but especially operating cash flow declined significantly, moreover, Equinox had to revise its 2021 production and cost guidance, due to the negative impacts of another illegal blockade at the Los Filos mine. The blockade started in June and lasted until late July, which means that also the Q3 results will be impacted (probably even more). Despite it, the management expects that in comparison to H1, the production should be notably higher and costs lower in H2.

In Q2, Equinox produced 122,656 toz gold. It is 5% less than in Q1 and 3.4% less than in Q2 2020. The decline is partially attributable to the Los Filos mine blockade. However, as mentioned above, Equinox expects the numbers to improve in H2. The revised guidance envisions the total 2021 production in the 560,000-625,000 toz range. In H1, 251,889 toz gold were produced. It means that at least 308,111 toz gold needs to be produced in H2, in order to meet the lower boundary of the revised production guidance. It equals 154,056 toz gold per quarter on average. It would mean two record-breaking quarters for Equinox. We will see whether this target is reachable.

Source: Own processing, using data of Equinox Gold

What is positive, the production costs declined in Q2. The cash costs declined from $1,141/toz in Q1 to $1,089/toz in Q2, or by 4.6%. The AISC declined from $1,482/toz to $1,382/toz, or by 6.7%. But although the decline is positive news, the costs remain high. Compared to the same period of last year, cash costs are 40% and AISC even 45% higher. The current costs level would present a major problem in the case of a substantial gold price decline.

Source: Own processing, using data of Equinox Gold

Equinox sold 124,712 toz gold in Q2, which is 3% less than in Q1. But the average realized gold price increased from $1,786/toz to $1,804/toz, therefore, the revenues declined only by 1.5%, to $226.2 million. Compared to Q2 2020, the revenues grew by 5%. More disappointing is the steep decline in operating cash flow. The amount of $20.2 million was the lowest level since Q1 2020. On the other hand, the net income skyrocketed. It grew to $326 million and the EPS to $1.1, but only due to the impacts of one-time items such as the $186.1 million gain on reclassification of investment in Solaris or $45.4 million gain on disposal of subsidiary. The adjusted net income equaled only $3.1 million, which is slightly better than the adjusted net loss of $3.6 million recorded in Q1.

Source: Own processing, using data of Seeking Alpha and Equinox Gold

The volume of cash held by Equinox improved slightly. While the company ended Q1 with $317.5 million on hand, it held $333.9 million as of the end of Q2. Also the volume of total debt grew slightly over the same time period, from $590.3 million to $599 million. As a result, the net debt declined from $272.8 million to $265.1 million. Equinox keeps on investing in numerous development projects and also in exploration (more than 51,000 meters were drilled on Equinox's properties in Q2), therefore, the net debt should be growing over the coming quarters.

Source: Own processing, using data of Seeking Alpha and Equinox Gold

Equinox's valuation metrics worsened slightly compared to the end of Q1. While the price-to-revenues ratio remained in line with the end of Q1, due to the weak operating cash flows, the price-to-operating cash flow ratio grew from 6.31 to 8.51, and the net debt-to-operating cash flow increased from 0.89 to 1.09. However, when compared to the previous years, the values remain low. Equinox is relatively cheap also in regard to its growth prospects, as it aims at becoming a 1 million toz gold per year producer over the next 2-3 years.

Source: Own processing

For Equinox Gold, Q2 was really eventful. On April 7, the company announced the completion of the Premier Gold acquisition. As a result, Equinox gained 50% of the construction-ready Hardrock Project (later renamed to Greenstone Project) and a 30% equity interest in newly created i-80 Gold (IAUCF). On April 16, Equinox paid Orion Mine Finance $51 million to acquire a further 10% interest in Greenstone.

But Equinox was not only the acquirer. On April 19, it announced the sale of the Pilar Gold Mine to Pilar Gold for $38 million, 9.9% equity interest in Pilar Gold, and 1% NSR royalty on the Pilar Gold Mine. And on April 28, Equinox completed the sale of 10 million Solaris shares for C$82.5 million ($65.8 million).

On April 12, Equinox started the Bemejal underground mine development at the Los Filos mining complex. And on June 29, Equinox announced that mining activities have started at the Brazilian Santa Luz Gold Mine. The mine construction progresses on schedule and on budget, with the first gold production expected in Q1 2022. The Santa Luz gold production should average 110,000 toz gold per year over the first 5 years of operations.

Unfortunately, not every news was positive. On June 22, Equinox announced another illegal blockade at its flagship Los Filos mine. The operations were disrupted and they have been restarted only in late July, which had a slightly negative impact on Q2 financial results. However, the impact on the Q3 financial results should be more visible. Only on August 3, Equinox announced that the blockade was eliminated completely, and normal operations resumed in all areas of the mining complex. My article focused on the Los Filos blockade can be found here.

Due to the production disruptions, Equinox had to revise its 2021 production and cost guidance. The production guidance was modified from 600,000-665,000 toz gold to 560,000-625,000 toz gold, and the AISC guidance was modified from $1,190-1,275/toz to $1,300-1,375/toz.

Equinox's share price has been moving in a downwards channel since late August 2020, when it peaked slightly below $14. Right now, it stands approximately 50% lower. The main reason is not only the weaker gold price but also the problems at the Los Filos mine, where two blockades took place over this time period. Over the recent weeks, Equinox's shares bounced up of the bottom at $6, crossed the 10-day moving average to the upside, and are approaching the 50-day moving average. The RSI increased from oversold values around 25 to the current level of around 50. However, it is hard to say what to expect in the near term. The Q2 financial results didn't impress and the gold price has been hovering around $1,800/toz since early July. Although the second blockade has ended, some major positive catalyst is needed to restore investors' confidence.

What I like about Equinox's Q2:

• The production costs declined slightly (although they remain high).
• The Santa Luz construction progresses well.
• The Greenstone Project acquisition was completed and Equinox's interest was subsequently further increased, to 60%.

What I don't like about Equinox's Q2:

• The 2021 production guidance was revised down, while the cost guidance was revised up.
• The operating cash flow declined significantly.
• Another blockade at the Los Filos mine raised more questions and damaged investors' confidence.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of EQX either through stock ownership, options, or other derivatives. 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.