Is Turquoise Seeing Gold?

05/08/2017 2:50 am EST

Focus: COMMODITIES

Bill Mathews

Editor & Founder, The Cheap Investor

Vancouver-based Turquoise Hill Resources (MRQ) is an international mining company focused on copper, gold and coal with mines in the Asia Pacific region, explains Bill Mathews, editor The Cheap Investor.

The Vancouver, Canada-based company mines copper, gold, silver, and molybdenum. Its principal material mineral resource property is the Oyu Tolgoi copper-gold mine located in southern Mongolia.

Turquoise Hills Resources is a small, profitable mining company selling near its 52-week low.  Its has a good balance sheet with $1.4 billion ($0.70 per share) in cash, a book value of $4.34 per share and a large debt of $4.1 billion. Large debt is not unusual for a mining company, as it is a capital intensive industry.

Insiders own about 50% of the 2.1 billion shares outstanding, and 178 institutions own 31% of the float (shares in public hands). For the quarter ended December 31, 2016, institutions purchased 13.8 million more shares than they sold.

Negative factors include the large debt, lower revenues and earnings when compared to last year and the huge number of shares outstanding.

The decrease in revenues for 2016 — from $1.6 billion to $1.2 billion — is mainly attributable to reduced gold sales volumes due to lower production and copper prices, partly offset by cost reductions and adjustment to deferred tax assets.

Cost of sales for 2016 were $861.8 million compared to $975.0 million in 2015 reflecting lower sales of metals in concentrate and reduced cost of production as a result of cost savings.

Operating cash flows before interest and taxes in 2016 were $399.2 million compared with $650.5 million in 2015 mainly reflecting the impact of reduced gold production and lower copper prices.

Capital expenditure on property, plant and equipment was $326.3 million on a cash basis in 2016 compared to $116.2 million in 2015, attributed to both underground and open-pit capital activities. Cash and cash equivalents at December 31, 2016 were $1.4 billion.

The Company’s Oyu Tolgoi mine is expected to produce 130,000 to 160,000 tons of copper and 100,000 to 140,000 ounces of gold in concentrates for 2017. Sales contracts have been agreed for a significant majority of Oyu Tolgoi's expected 2017 concentrate production.

Turquoise Hill Resources is a speculative stock because of its debt, number of shares outstanding and falling revenues and earnings.

However, the company has a lot of positive factors. First of all, it is profitable and the stock is selling near its 52-week low. Institutions purchased a significant amount of shares in the last quarter, and that trend is continuing into the first quarter of 2017.

If the price of gold moves up, so should Turquoise Hill Resources’ stock. In fact, we think the stock could move at least 25 to 50% over the next year or two.

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