KeyStone’s Your Stock Our Take: Metalla Royalty & Streaming Ltd. (MTA:TSX-V), and DOG: Avicanna Inc. (AVCN:TSX).
This week in our Your Stock, Our Take segment we answer a listener question on Metalla Royalty & Streaming Ltd. (MTA:TSX-V), a precious metals royalty and streaming company, engages in the acquisition and management of precious metal royalties, streams, and related production-based interests in Canada and Australia. With gold prices higher on the year and Metalla essentially a pure-play gold and silver streaming and royalty company with a small dividend yield, a listener asks us our take on the stock.
Our Dog of the Week is, Avicanna Inc. (AVCN:TSX), which focuses on the research and development, cultivation, manufacture, and commercialization of plant-derived cannabinoid-based products and extracts. Avicanna shares have been in freefall since listing on the TSX in mid-July, dropping roughly 65%. In the last 2-weeks alone, the stock is down 45%. Is the drop an opportunity or a cautionary tale? We discuss.
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XPEL Inc. (XPEL:NASDAQ)
Price: $6.50
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Viemed Healthcare, Inc. (VMD:TSX)
Price: $5.90
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Gain: 53%
Questor Technology Inc. (QST:TSX-V)
Price: $2.22
Today: $4.27
Gain: 92%
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Your Stock, Our Take
Metalla Royalty & Streaming Ltd. (MTA:TSX-V)
Current Price: $1.32
Market Cap: $177 million
What does the company do?
Metalla Royalty & Streaming Ltd is a pure-play gold and silver streaming and royalty company. The company’s business is to invest in a portfolio of precious metals projects from which it generates royalty and streaming revenues. Metalla is a younger company trying to emulate the business models of other, more established, precious metals royalty stocks such as Franco-Nevada and Wheaton Precious Metals.
Key Points:
Metalla’s share price is up 68% since the start of the year. This is an impressive run, although most of the precious metal’s royalty companies have had a strong move up this year. A key driver behind this performance is undoubtably the price of gold which is up 23% over the last year from about US$1,200 per ounce to US$1,480 today. The price of silver is also up about 19% in the last 12 months sitting at just over $17 per ounce today.
Recent Annual Financials:
- Revenue for fiscal 2019 was $7.9 million, an increase of 7% over fiscal 2018.
- Adjusted EBITDA was $2.1 million in fiscal 2019, compared to $2.8 million in fiscal 2018, down 26%.
- Net loss was -$2.4 million in fiscal 2019, compared to a loss of -2.6 million in fiscal 2018.
- Operating cash flow of $2,286,671, compared to $2,819,031 last year.
Our Take:
Negative Earnings
EV/EBITDA: 83.7x
Current Ratio: 1.20
Cash Ratio: 1.04
Net Cash: $1.8 million
Our take is that Metalla does not meet our investment criteria. The company is expensive relative to EBITDA and cash flow. The financial performance over the last year was not that impressive with only 7% revenue growth, lower cash flow and negative net earnings. It appears to us that most of the company’s strong share price performance in 2019 has been the result of increasing precious metal prices. One of the issues that we have with commodity sensitive businesses like metals and oil & gas is that so much of a company’s success, or lack of success, it driven by volatility commodity prices. This is great when the price is your friend and moving higher but it gives companies few options when prices are going down.
Metalla has reported several royalty acquisitions over the past year. These may result in better growth for the company on a go forward basis. That is something investors can watch for. However, from what we see today, the fundamentals are strong enough for us to be interested in the company. We would potentially look to some of the more established precious metals streamers if we wanted to get into that space.
Weekly Dog
Avicanna Inc. (AVCN:TSX)
Current Price: $2.18
Market Cap: $48.5 billion
Dog Performance:
Avicanna shares have been in freefall since listing on the TSX in mid-July, dropping roughly 65%. In the last 2-weeks alone, the stock is down 45%.
What does the company do?
Avicanna, which is headquartered in Toronto, is focused on the development, commercialization and manufacturing of plant-derived cannabinoid products.
The bulk of Avicanna’s research and development is being conducted at the Johnson & Johnson JLABS @ Toronto science incubation centre.
The company is in the process of conducting clinical trials for its therapeutic Pura Elements brand and the manufacture of the Pura Earth cosmetics brand.
It owns a majority 60% interest in subsidiary Santa Marta Golden Hemp, one of the few fully licensed and registered cultivators in Colombia, giving it an advantage over many of its peers in the equatorial nation.
That operation, along with Avicanna’s other 70% owned subsidiary that is also located in Santa Marta, gives it 250,000 square feet of licensed cultivating area. This is expected to expand to 410,000 square feet, giving the company 2,000 kilograms of productive capacity monthly on completion of its phase one project.
Avicanna requires $550,000 and a further two months to complete the expansion of those cultivating facilities in Santa Marta.
It is anticipated that those outdoor cultivation facilities will have low production expenses because of the many advantages offered by Colombia, including steady sunlight as well as low cost energy, water and labour.
That gives Avicanna an advantage over many growers focused on indoor cultivation in Canada.
What is driving the stock?
Since it went public on the TSX roughly 3-months ago, the company has reported one quarter of financial results.
The company has had just a single release of quarterly financial results since it listed on the TSX, and this release (examined below) featured increasing losses and negative revenue growth. While the company seems optimistic in its outlook, the market does not seem to share in the optimism, and until there is a change that suggests the company can actually provide value to shareholders, the market behavior will likely continue.
Financial Results (minimal revenues)
Q2 2019 compared to Q2 2018
- Revenue was $16,571 compared to $25,156, down 34%.
- Net loss was $4.5 million compared to a loss of $1.5 million.
- On a diluted per share basis, a loss of $0.25 compared to a loss of $0.12
- Adjusted EBITDA was a loss of $4.2 million compared to a loss of $1.3 million.
- On a diluted per-share basis, a loss of $0.23 compared to a loss of $0.10.
The company has a positive outlook for the remainder of 2019. The company is currently cultivating non-psychoactive cannabis for production and extraction of CBD. This being said, the company is subject to approvals by respective authorities in Colombia, and unless regulatory approvals to sell and distribute CBD isolates are obtained, orders cannot be fulfilled.
Conclusion:
Negative Earnings
Negative EBITDA
Current Ratio: 4.31
Net Cash: $11.6 million
Avianna is a company involved in the research and eventual production of CBD and THC. With falling revenues, and significant growing losses, both at the bottom line and at the operating level, it does not meet our criteria for investment. While the company is currently approved for CBD production for research purposes in Canada, the company currently has no path to profitability, and much of its production is awaiting appropriate licensing. Until some change happens for the company that may lead to a source of growing revenue, the company’s share price is unlikely to regain lost value.
Avicanna is still a development stage company and a speculative investment. It has yet to produce a commercial cannabis crop or make any sales, underscoring the considerable risks surrounding its operations.
While Avicanna is certainly positioned to benefit from the advantages of cultivating cannabis in Colombia, there is no guarantee that the company will succeed.
Avicanna finished its last quarter with around $13 million in cash, but the company lost $4.5 million in the quarter. The company will likely require additional capital by year’s end. Not a good sign for existing shareholders.
Just 2-months ago the company had a market cap of $155 million – far too rich for its underlying financial position. The market cap is now a third of this in the range of $48.5 million. Despite the drop we see little current value.
The company’s recent loss of value have given it the title of our Dog of the Week.
