True North Gems
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True North Gems |
Major industry player signs three-year off-take |
First off-take signed |
Metals & mining |
1 February 2016 |
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True North Gems is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
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