True North Gems — Update 31 January 2016

True North Gems — Update 31 January 2016

True North Gems

Analyst avatar placeholder

Written by

True North Gems

Major industry player signs three-year off-take

First off-take signed

Metals & mining

1 February 2016

Price

C$0.16

Market cap

C$49m

C$1.41/US$

Net cash (C$m) at 30 Sept 2015

3.3

Shares in issue

307.5m

Free float

88%

Code

TGX

Primary exchange

TSX-V

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.0

9.7

9.7

Rel (local)

8.9

20.8

27.2

52-week high/low

C$0.19

C$0.10

Business description

True North Gems is developing its 85.4%-owned (65% on completion of the mine by its JV partner LNSG) and exploitation (mining) permitted Aappaluttoq ruby and pink sapphire mine in Greenland.

Next event

Further sales agreements

H116

Analysts

Tom Hayes

+44 (0)20 3077 5725

Charles Gibson

+44 (0)20 3077 5724

True North Gems is a research client of Edison Investment Research Limited

True North’s binding agreement with major Asian gemstone polisher Chinastone, details a three-year commitment for the latter to purchase US$7m (C$9.9m) of Aappaluttoq stones per year for an initial three-year term. Stones will be sold at market prices, paid for solely in cash. This is a major step forwards for the company, and brings on-board a major player in the gemstone market. True North intends to develop this partnership to engage further buyers for its highly marketable and conflict-free pink sapphires and rubies. Consistency of supply is a unique selling point for the company and is underpinned by Aappaluttoq’s mine plan being based on an NI43-101 compliant resource.

Year end

Revenue (C$m)

PBT*
(C$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/13

0.0

(1.7)

(0.7)

0.0

N/A

N/A

12/14

0.0

(1.4)

(0.5)

0.0

N/A

N/A

12/15e

0.0

(5.2)

(1.1)

0.0

N/A

N/A

12/16e

48.8

35.0

7.3

0.0

2.2

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Deal satisfies 41% of 2016 break-even revenue

Production costs to extract and process gemstones are inherently low at Aappaluttoq due to its gemstones cropping-out at surface and the relatively simple nature of mining and processing gemstone material. Therefore, while this initial C$9.9m per year deal constitutes 20% of our FY16 revenue forecast, it would also cover approximately 41% of True North’s total production and corporate costs for 2016. One further deal of this magnitude would practically eliminate a need for additional funding in 2016. Note that if production and corporate G&A costs are maintained as per our forecasts and the C$48.8m revenue target is achieved, True North’s EBITDA margin would be 77%. If only C$24m of revenue is achieved (the amount required for it to break even for the year), EBITDA margin reduces to 42%.

Chinastone aligned with True North’s strategy

True North’s new partner states on its website that it only deals in natural gemstones and does not buy treated material. This is sympathetic to True North’s marketing of an Arctic natural source of pink sapphires and rubies, and in our opinion supports the cachet of selling stones from this unique Greenlandic source.

Valuation: Forecasts revised for forex

Our base case valuation uses True North’s 18 March 2015 PFS on the Aappaluttoq deposit and we move our C$/US$ forex rate from 1.33 to 1.41. Considering this deal was announced to market on 28 January 2016, and Chinastone's size and pedigree, we consider True North is still capable of satisfying our C$48.8m revenue target. Therefore, we revise our previous C$0.37 per share base valuation to C$0.41 per share. This section should be read in conjunction with our December 2015 update, which details the company’s complex financing structure.

Exhibit 1: Financial summary

C$000s

2013

2014

2015e

2016e

Year-end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0

0

0

48,801

Cost of Sales

0

0

(1,749)

(7,825)

Gross Profit

0

0

(1,749)

40,975

EBITDA

 

 

(1,593)

(1,222)

(5,239)

37,496

Operating Profit (before amort. and except.)

(1,593)

(1,222)

(5,239)

34,980

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

(1,593)

(1,222)

(5,239)

34,980

Net Interest

(57)

(149)

10

15

Profit Before Tax (norm)

 

 

(1,650)

(1,371)

(5,229)

34,995

Profit Before Tax (FRS 3)

 

 

(1,650)

(1,371)

(5,229)

34,995

Tax

0

0

0

(841)

Profit After Tax (norm)

(1,650)

(1,371)

(5,229)

34,154

Profit After Tax (FRS 3)

(1,650)

(1,371)

(5,229)

34,154

Average Number of Shares Outstanding (m)

233.7

295.8

306.1

306.1

EPS - normalised (c)

 

 

(0.7)

(0.5)

(1.1)

7.3

EPS - normalised and fully diluted (c)

 

(0.7)

(0.5)

(1.1)

7.3

EPS - (IFRS) (c)

 

 

(0.7)

(0.5)

(1.1)

7.3

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

84.0

EBITDA Margin (%)

76.8

Operating Margin (before GW and except.) (%)

71.7

BALANCE SHEET

Fixed Assets

 

 

24,467

27,988

55,637

66,460

Intangible Assets

0

0

0

0

Tangible Assets

24,467

27,988

55,637

66,460

Investments

0

0

0

0

Current Assets

 

 

729

2,343

8,357

27,990

Stocks

0

0

671

643

Debtors

18

35

0

4,011

Cash

271

1,989

7,367

23,017

Other

440

319

319

319

Current Liabilities

 

 

(1,390)

(1,346)

(939)

(1,520)

Creditors

(1,390)

(715)

(307)

(889)

Short term borrowings

0

(631)

(631)

(631)

Long Term Liabilities

 

 

(1,113)

(1,160)

(6,278)

(4,980)

Long term borrowings

(894)

(877)

(5,995)

(4,697)

Other long term liabilities

(219)

(283)

(283)

(283)

Net Assets

 

 

22,694

27,825

56,777

87,949

CASH FLOW

Operating Cash Flow

 

 

(1,423)

(1,800)

(5,806)

34,094

Net Interest

(57)

(149)

10

15

Tax

0

0

0

(841)

Capex

(2,091)

(2,913)

(4,270)

(16,321)

Acquisitions/disposals

50

0

0

0

Financing

3,786

5,945

10,326

0

Dividends

0

0

0

0

Net Cash Flow

265

1,083

260

16,947

Opening net debt/(cash)

 

 

9

623

(481)

(741)

HP finance leases initiated

0

0

0

0

Other

(879)

21

0

0

Closing net debt/(cash)

 

 

623

(481)

(741)

(17,688)

Source: Company accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by True North Gems and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

LifeWatch — Update 28 January 2016

LifeWatch

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free