Equinox Gold Corp – A Deep Dive

by JDH on January 11, 2020

My largest gold holding is EQX.TO – Equinox Gold Corp.

The two year chart looks great.  From a base building period in 2018 around the $5.00 level, to the “crash” at the end of 2018 down to just over $4.00, to a much better 2020, where Equinox closed at $10.40 on Friday.

Of course charts can be deceiving.

First, the share price is “adjusted”, because on August 20, 2019 Equinox did a 5 for 1 consolidation, so what is today a $10 stock would be a $2 stock were it not for the consolidation.  That’s fine.  In fact, that’s good, because major stock exchanges don’t like penny stocks, and by consolidating Equinox was able to list on the NYSE American Stock Exchange on September 16, 2019, and on November 25, 2019 Equinox graduated from the TSX Venture Exchange to the “Big Board” in Toronto, the Toronto Stock Exchange.

Many institutional investors (mutual funds, hedge funds, ETFs) only invest in stocks traded on the big exchanges, so by moving up to the major stock exchanges Equinox opened up to more potential investors, and if there is more demand, the price, theoretically, goes higher.

But that’s not what caused the big spike in price.  It was the announcement on December 16, 2019 that Equinox was merging with Leagold Mining.  Most mergers are “take overs”, where one company takes over the other, fires all of the old management team, and carries on as the same company with a new asset.  That’s not the case with this merger.  While the companies are not exactly the same size, it is a “merger of equals”.  The new board of directors will have eight members, four from each predecessor company, and the existing senior management will continue to run the combined entities (with some shifting of roles, since you can’t have two CEOs, CFOs, etc.).

Why is this merger important?

I’ll get to that shortly, but back to my point that charts can be deceiving.  I showed you the 2 year chart, which looks great.

Here’s a four and a half year chart:

Doesn’t look quite so pretty, does it?

Equinox Gold is the result of many previous mergers.  I originally bought JDL Gold, which combined with Luna Gold to  became Trek Mining, back in March, 2017.

It was then in December, 2017 that Trek Mining combined with NewCastle Gold and Anfield Gold to form Equinox and begin trading as EQX on the TSX Venture Exchange.

As you can see from the circled area on the chart, what was a $10 stock ($2 at the time, before the 5 for 1 consolidation) was a $4.50 stock at the time of the merger and formation of Equinox, and it traded in the $4.50 to $6.50 range for the next two years.

Needless to say, I was not thrilled with my investment that had lost half of its value.

However, I stuck with it, because the underlying fundamentals made sense. Ross Beaty, Chairman of Equinox Gold, started Pan American Silver, and numerous other companies, and he has a forty year track record of success.  He is also a major shareholder, so I’m happy to ride on the coattails of someone with a track record of success who has skin in the game.  So while the stock price is notionally only back to where it was three years ago, I’m happy, and looking forward to good results going forward.

Specifically, the combined entity estimates gold production of 700,000 ounces in 2020, increasing to 1 million ounces annualized production during 2021 and beyond, and that increased production, when combined with $10 million annually in projected operating and administrative synergies, the company should be very profitable.  And of course if the gold price continues to increase, that’s more money straight to the bottom line, because unlike other gold producers Equinox is completely un-hedged; they get the benefit of future price increases.

As part of this merger Ross Beaty kicked in another $40 million in cash (to maintain his proportionate equity ownership), they have refinanced their existing debt (at better terms) with a $500 million commitment from a lending syndicate (big banks), and a they have a new $130 million convertible debenture issued to Mubadala Investment Company (a sovereign wealth fund from Abu Dhabi).  Equinox is well capitalized, and will not need to go to raise additional dilutive equity to complete scheduled mine expansion.

That’s all good, but it gets better.

As I already mentioned, size matters.  The investment from Mubadala was only possible because Equinox is now big enough to deal with an investor who only writes cheques of $100 million and higher.

The same is true of the indexes.

The new Equinox is likely large enough, post merger, to be included in the gold indexes.

Specifically: the MVIS Global Junior Gold Miners Index has the following size and liquidity requirements:

  • Market capitalization of at least $150 million USD
  • Three month average-daily-trading volume of at least 1 million USD in the current quarter, and the previous two quarters, and
  • At least 250,000 shares traded per month over the last six months, and the previous two quarters.

As of today, Equinox has a market cap of around $1 billion Canadian dollars and an average trading volume of around 400,000 shares per day, so post merger Equinox is easily large enough to be included in the MVIS Global Junior Miners Index, which is the basis for GDXJ – VanEck Vectors Junior Gold Miners ETF, which trades on the big board.

So if Equinox gets added to the MVIS Global Junior Miners Index, GDXJ will buy it.  Currently GDXJ has 122,337,446 shares outstanding, and closed Friday at $40.90, for a total market cap of $5 billion.  The maximum GDXJ invests in any one company is 6% of their net assets.  Let’s assume the invest 1% of their net assets in Equinox.

That’s $50 million USD, or say $65 million Canadian.

Post merger, Equinox will have around 214 million shares outstanding, or at $10 per share, a market cap of $2.14 billion.  $65 million at $10 per share is 6.5 million shares, or 3% of the existing market cap.

What would a purchase of 3% of the outstanding shares do to the share price?

I’m guessing it will make it go up, particularly since management, including Ross Beaty, and other institutions and high net worth individuals own more than half of the company.  The float is around 45% of the shares, so a purchase of that size will have a significant impact on the company.

But that’s just the GDXJ, the junior mining index.

There is also the GDX – VanEck Vectors Gold Miners ETF, which tracks the performance of the NYSE Arca Gold Miners Index, which tracks gold mining shares, including the big companies, not just the juniors.  What are the requirements for inclusion in the NYSE Arca Gold Miners Index?

  • Globally-listed
  • Market capitalization greater than $750 million
  • Average daily volume of at least 50,000 shares
  • Average daily value traded of at least $1 million

Bingo on all counts, post merger.

GDX is larger, with $12 billion in net assets, so a 1% investment is $120 million US, or $150 million Canadian, which is almost 7% of the outstanding shares of Equinox.

But wait, there’s more!

The S&P/TSX Composite Index is open to companies traded on the Toronto Stock Exchange.  Inclusion generally happens six months after trading starts on the TSX, (which was November 25, 2019 for Equinox), so Equinox is likely to be included sometime after May 25, 2020.  The smallest TSX Composite company today as a market cap of $394 million, so Equinox is certainly large enough to qualify.

There are lots of index funds that mirror the TSX Composite, so again, once Equinox is included in the Index, investors are compelled to buy.

To summarize: Equinox is a well-capitalized company, with production increasing, in a favorable gold market, and it will be included in a number of indexes in the first half of 2020 which will provide buying pressure.

Sounds like a strong buy to me.

Equinox has bounced from $7.50 pre-merger to $10.40 today, an increase of over 38%.  If gold continues to increase, and it is included in many indices, is another third possible by the summer?


Target price $15, with $20 possible by the end of the year.

I’ve got buy orders in at $10, with stink bids at $8.50 in the event of a market collapse.

That’s the plan.

Thanks for reading.  More next week.