Equinox Gold Q2 Earnings: We Have Seen Better Days (NYSE:EQX)

Introduction

Vancouver-based Equinox Gold (NYSE:EQX) reported its second quarter 2022 results on August 3, 2022.

Important note: This article is an update of my article published on May 6, 2022. I have been following EQX on Seeking Alpha since February 2021.

1 – 2Q22 highlights

Equinox Gold produced 120,813 Au oz during 2Q22, a 1.5% decrease over 2Q21 (122,656 Au oz) and up 2.9% sequentially.

The revenues came in at $224.6 million, down 0.7% from the last year’s quarter. The company posted a loss of $78.72 million compared to an income of $325.74 million last year.

The adjusted EBITDA for 2Q22 was $24.1 million.

The Santa Luz project is ramping up and delivered 5,551 Au ounces this quarter (first gold pour end of March). Below is an update on the ramping up from the Presentation.

2 – Investment thesis

Equinox Gold is struggling with temporary technical issues related to its RDM mine, which forced the company to revise its 2022 guidance.

However, the company enjoys a solid balance sheet and solid future growth that deserve a long-term investment status. The Santa Luz is about to produce commercially, and the company is developing its Greenstone Project advancing on schedule with pre-production activities commencing in 4Q22.

Equinox Gold is an Americas gold producer with nearly seven producing mines and four projects. Excellent mineral reserves with an estimated 580K Au ounces in 2022.

Thus, despite this weak period and extra CapEx, I still consider Equinox Gold a long-term investment.

3 – Stock performance

Equinox Gold has significantly underperformed the VanEck Vectors Gold Miners ETF (GDX) and plunged over 30% after announcing weak 1Q22 results followed by weak 2Q22 results. EQX is now down 42% on a one-year basis.

CFO Peter Hardie said in the conference call:

With a tough quarter, we have reduced guidance, RDM. We suspended the guidance early in the year. So, no surprise there and also Santa Luz has been on slightly slower ramp up as we have a refurbished plant that’s starting to hit its stride a bit more these days. And so that will be about 580,000 average production for the year, slightly down on the expectations, beginning of the year and that clear path to 1 million ounces is well funded and it’s well on its way to being achieved over the next few years.

Equinox Gold – Financial Snapshot 2Q22 – The Raw Numbers

Click to enlarge

Data Source: Financial statement

Gold Production And Balance Sheet Details

1 – Revenues were $224.6 million in 2Q22

Operating expense in 2Q22 was $170.7 million (2Q21 – $139.9 million).

The decrease in revenue compared to the comparative period of 2021 was primarily due to a 5% decrease in gold ounces sold, offset partially by a 4% increase in the realized gold price.

2 – Free cash flow was a loss estimated at $169.08 million in 2Q22

Trailing 12-month free cash flow was an estimated loss of $268.07 million with a loss in 2Q22 of $169.08 million. The loss in free cash flow is due mainly to the CapEx attached to Santa Luz and Greenstone. Therefore, it should not be considered a negative but an excellent investment for future growth.

3 – Net debt is $374.45 million, and cash of $257.41 million in 2Q22

As of June 30, 2022, the total cash was down to $257.41 million, and the total liquidity is ~$505 million. However, the company indicates a Net debt of $385.1 million on March 31, 2022 (which includes $278.9 million of in-the-money convertible notes).

Total liquidity decreased to $390 million as of July 31, 2022.

The current market value of equity investment held by Equinox Gold in 2Q22 was approximately $260 million.

4 – Gold production consolidated details – 2Q22 gold production was 120,813 Au Oz (120,393 Au Oz sold)

5 – Updated 2022 Guidance. 2022 Gold production is expected to be 582.5K Oz (mid-point), down 12.7%.

Production guidance has been updated. Production is expected to be 550K to 615K oz of gold and AISC of $1,330 to $1,415 per gold sold.

6 – Production details per mine

Also, Equinox began full-scale construction at the Greenstone project in Canada. The project is 20% complete on schedule and budget at the end of 1Q22.

7 – Proven and Probable Mineral Reserves

Mineral reserves are now 16.077 Moz.

Technical Analysis (Short Term)

EQX forms a descending triangle pattern with resistance at $4.75 and support at $3.85.

The dominant trading strategy that I usually promote in my marketplace, “The gold and oil corner,” is to maintain a core long-term position and use about 40%-50% to trade LIFO while waiting for a higher final price target for your core position between $9 and $10.

I believe it is safe to accumulate for the long-term, and I recommend buying EQX between $4 and $3.85 with potential lower support at $3.25.

Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States to generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stocks, one for the long term and one for short-term trading.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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