On today’s TSX Breakouts report, there are 26 stocks on the positive breakouts list (stocks with positive price momentum) and 13 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock on the positive breakouts list with its share price closing at a record high on Friday - Sigma Lithium Corp. (SGML-X).
On Monday morning, management announced initial production of lithium has begun, transitioning the company from a developer to a producer. Short-term investors may sell shares on the news to lock-in their gains. Year-to-date, the share price has rallied 40 per cent, which is on top of the astounding 193 per cent move higher in 2022.
A brief outline on Sigma Lithium is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Sigma Lithium produces lithium at its wholly-owned Grota do Cirilo Project located in Brazil.
The stock is dual-listed trading on the TSX Venture Exchange as well as the Nasdaq under the same ticker, SGML.
Investment thesis
- Proliferation of electric vehicles that require lithium for the batteries.
- A growing high quality, battery grade lithium producer. This morning, management announced that Phase 1 initial production has begun with production ramping up to full capacity by July. Phase 1 production is anticipated to be 270,000 tons per year. Phases 2 and 3 of the project are expected to increase production to 766,000 tons per year and expand the mine life to 13 years. Phase 2 and 3 productions are targeted for 2024. Management anticipates capital spending for Phase 2 and 3 to total U.S. $155-million, fully funded internally with cash flow generated from its Phase 1 production. According to Refinitiv, the consensus free cash flow estimates are $364-million in 2023, soaring to $1.05-billion in 2024 as the additional production comes online.
- Large lithium project with infrastructure in place (e.g. power, roads, port access).
- Low cost producer. All-in sustaining costs expected to be US$523 per ton.
- Later this year, management plans to release a Phase 4 resource update.
- Potential key risks to consider: 1) lithium prices have been under significant pressure in recent months with softening EV car sales, notably in China, and rising lithium supply; and 2) share price volatility.
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
According to Bloomberg, this mid-cap stock with a market capitalization of $5.7-billion is covered by seven analysts, of which five analysts have buy recommendations, one analyst (Canaccord’s Katie Lachapelle) has a “speculative buy” recommendation, and one analyst has a “hold” recommendation (Baptista’s Ishan Majumdar).
In March, PI Financial’s Justin Stevens initiated coverage on the company with a $65 target price and “buy” recommendation.
In Jan. BMO’s Joel Jackson initiated coverage with a US$40 target price and an “outperform” recommendation.
The firms that provide research coverage on the company are: Baptista Research, BMO Nesbitt Burns, Canaccord Genuity, Cormark Securities, National Bank Financial, PI Financial, and Red Cloud Securities.
Revised recommendations
Year-to-date, one analyst has revised her expectations.
In February, National Bank’s Lola Aganga raised her target price to $68 from $60.
Financial forecasts
According to Bloomberg, the consensus cash flow per share estimates are $4.04 in 2023 and $8.42 in 2024. The consensus earnings per share estimates are $5.10 in 2023 and $6.46 the following year.
Valuation
The stock is commonly valued by analysts on a price-to-net asset value basis.
According to Bloomberg, the average 12-month target price is just over $60, implying the share price has 13 per cent upside potential.
Insider transaction activity
Year-to-date, one insider has reported trading activity in the public markets.
On Jan. 11 and 12, Calvyn Gardner, who sits on the board of directors and is the former co-CEO, sold a total of 500,000 shares at an average price per share of roughly US$26.57 for an account in which he has control or direction over (Blue Summer Ltd.), trimming this specific account’s holdings to 2-million shares. Proceeds from the sales exceeded US$13-million, excluding trading fees.
Chart watch
On April 14, the share price closed at $53.23 - a record high.
Year-to-date, the share price has rallied 40 per cent. In 2022, the stock price climbed an astounding 193 per cent.
Looking at key technical resistance and support levels, the stock recently broke above a major ceiling of resistance around $50. The next major resistance level is around $60. On a pullback, there is initial technical support around $45. Failing that, the share price may retreat to around $40.
ESG Risk Rating
Looking at three risk providers Sustainalytics, MSCI and Bloomberg, Sigma Lithium currently does not have an environmental, social and governance (ESG) risk rating.
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, financial forecasts, 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 indexes 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.
This report should not be considered an investment recommendation.
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Jennifer Dowty