Media Luna Project Completion Will Expand Production Starting In 2025

Key Takeaways

• Completion of the Media Luna project and exploration activities boost production capacity, supporting future revenue and long-term growth.
  
• Enhanced cost efficiency and positive free cash flow expected from operational improvements and higher gold prices, strengthening net margins and earnings.
  
• Delays and rising costs, alongside reliance on gold prices and high taxation, challenge Torex Gold's earnings and liquidity amid upcoming project completions.

Catalysts

Operates as an intermediate gold producer in Mexico.

• The completion of the Media Luna project, which is 87% finished, is anticipated to enhance production capabilities starting in 2025, impacting future revenue positively as new capacity comes online.
  
• The internal pre-feasibility study on EPO has shown potential for maintaining production levels of at least 450,000 ounces annually through 2030, with possible resource conversion extending this to 2033, thus influencing long-term revenue stability and growth.
  
• Improvements in cost efficiency, such as reduced cash costs and all-in sustaining costs, despite higher royalties due to strong gold prices, are expected to support stronger net margins as cost pressures are mitigated.
  
• The company is on track to return to positive free cash flow by mid-2025, primarily supported by improved operational efficiencies and higher sustained gold prices, which will positively impact earnings.
  
• Continued exploration and drilling activities are expected to increase reserves and resources, supporting long-term growth by sustaining production levels and potentially increasing future revenues.

Torex Gold Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Torex Gold Resources's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.3% today to 25.5% in 3 years time.
• Analysts expect earnings to reach $338.6 million (and earnings per share of $3.95) by about January 2028, up from $124.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.1x on those 2028 earnings, down from 14.1x today. This future PE is lower than the current PE for the CA Metals and Mining industry at 14.1x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Torex Gold Resources Future Earnings Per Share Growth

Risks

• The deferment of the tie-in period for the Media Luna project to February 2025, due to delays in vendor deliveries and switchgear, could extend the timeline and impact the cash flow and production schedule. This might lead to increased costs and deferred revenue, impacting earnings.
  
• Elevated all-in sustaining costs (AISC), already expected to be at the higher end of the guidance range due to increased profit sharing and royalties linked to high gold prices, could further squeeze margins if gold prices fluctuate or operational costs rise unexpectedly.
  
• The reliance on strong gold prices to achieve cost management and free cash flow projections, a dependency that could be risky if gold price declines, impacting revenue and profitability.
  
• The high rate of taxation and Mexican profit sharing obligations could pressure net margins, especially if profitability increases as anticipated, potentially affecting liquidity in early 2025.
  
• Although the completion of the Media Luna project is near, future costs associated with the ramp-up, such as temporary elevated costs in 2025 and potential unforeseen operational challenges, could hamper the anticipated improvements in free cash flow and earnings.

Valuation

• The analysts have a consensus price target of CA$38.25 for Torex Gold Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$43.0, and the most bearish reporting a price target of just CA$34.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $338.6 million, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 6.8%.
• Given the current share price of CA$29.33, the analyst's price target of CA$38.25 is 23.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.