On today’s TSX Breakouts report, there are 70 stocks on the positive breakouts list (stocks with positive price momentum), and just one security is on the negative breakouts list (stocks with negative price momentum).
Multiple gold stocks have positive price momentum and continue to appear on the positive breakouts list as the price of gold futures holds above US$1,800 per ounce - its highest level since 2011. Discussed today is a gold stock whose share price closed at a record high on Friday – K92 Mining Inc. (KNT-X). Year-to-date, the share price is up 86 per cent and the stock has a unanimous buy recommendation from 11 analysts covering the company.
The stock’s visibility has improved. Recently, the stock’s market capitalization climbed above the $1-billion level, currently at $1.1-billion. Furthermore, month-to-date, three analysts have launched coverage on the company, Andrew Mikitchook (at BMO Capital Markets), Craig Stanley (at Raymond James), and Ovais Habib (at Scotiabank).
However, given management’s expansion plans and need for capital along with the rocketing share price, I would not be surprised to see the company announce a financing after a stage three expansion PEA (preliminary economic assessment) is released later this month.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Headquartered in Vancouver, B.C., K92 is an exploration and junior mining company, producing gold, copper, and silver from its operations in Papua New Guinea.
At the AGM (annual general meeting) held on July 8, the chief executive officer John Lewins summarized management’s near-term objectives, “We will be strongly focused this year on continuing to build on our production, to build on our exploration successes, complete that second phase of expansion, and move into the feasibility study on the third phase of expansion following the completion of the PEA this year.”
Production: On July 6, the company reported record production of 25,762 ounces of gold, as well as 531,406 pounds of copper and 10,867 ounces of silver (26,847 gold equivalent ounces) at its high-grade, underground Kainantu Mine in the second-quarter. This is up from 19,934 gold equivalent ounces in the first-quarter with AISC (all-in sustaining costs) of US$886 per ounce. The expected mine life is currently 13 years.
This production was delivered during the country’s State of Emergency declared by the government on March 20, which was subsequently lifted on June 16. To date, this country has had 16 confirmed cases of COVID-19 based on data from Johns Hopkins University.
Exploration: K92 currently has six rigs on site, which will increase to nine rigs by the end of the third-quarter, and rise to 10 rigs by the end of the year. Positive drilling results could increase the size of the resource materially.
Stage 2 expansion: The stage two expansion is nearing completion, which will double production to approximately 1,100 tonnes per day, 400,000 tonnes annualized, by the fourth quarter.
Stage 3 expansion: This is the company’s next leg of growth. By the end of July, a stage three expansion PEA is expected to be released – a potential near-term catalyst for the stock. This expansion is anticipated to increase production to a million tonnes per annum.
Given the spike in the share price, growing analyst coverage, and the need for capital to fund management’s stage 3 expansion plans, I would not be surprised to see the company raise money in the financial markets. The last time the company came to the market was a year ago. In July 2019, K92 completed a $20-million financing, issuing 10,895,100 shares at a price per share of $1.90. As at March 31, 2020, the company had $21-million of cash on its balance sheet.
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
There are 11 firms covering this small-cap stock with a market capitalization of $1.1-billion, and all 11 analysts have buy recommendations.
The firms providing research coverage on the company are as follows, in alphabetical order: BMO Capital Markets, Canaccord Genuity, Clarus Securities, Cormark Securities, Desjardins Securities, Eight Capital, Haywood Securities, PI Financial Corp., Raymond James, Scotiabank, and Stifel Canada.
Revised recommendations
Month-to-date, two analysts have revised their target prices.
- Geordie Mark, the analyst at Haywood Securities, increased his target price to $6.15 from $5.40.
- Tyron Breytenbach, the analyst at Stifel Canada, raised his target price to $6.50 from $6.
Financial forecasts
The Street is forecasting cash flow per share of 46 cents in 2020, 64 cents in 2021, jumping to 94 cents in 2022.
Valuation
Analysts typically value the company on a price-to-net asset value basis.
The average one-year target price is $6.09, suggesting there is 13 per cent upside in the share price over the next 12 months. Individual target prices are as follows in numerical order: $5.75 (the low on the Street is from Tom Gallo, the analyst at Canaccord Genuity), $5.80, five at $6, $6.15, $6.25, and two at $6.50 (the high on the Street is from David Stewart, the analyst at Desjardins Securities, as well as Tyron Breytenbach, the analyst at Stifel Canada).
Insider transactions
Since the beginning of the second quarter, only one insider has reported any trading activity in the public market.
On May 28 and May 29, Ian Stalker, who sits on the board of directors, sold a total of 155,400 shares at an average price per share of approximately $4.06, trimming this account’s holdings to 675,450 shares. Proceeds from the sales, not including trading fees, exceeded $630,000.
Chart watch
On Friday, the share price rallied over 8 per cent to a record closing high on above average volume with over 2-million shares traded. The three-month historical daily average trading volume is approximately 1.4-million shares.
Month-to-date, the stock price has increased 33 per cent, and year-to-date the share price is up 86 per cent.
In terms of key resistance and support levels, the stock’s next major ceiling of resistance is around $6. Looking at the downside, there is strong technical support between $4.90 and $5. After that, there is strong support around $4, near its 50-day moving average (at $4.02).
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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