Meet the Analysts

Research Reports

Gregory Aurand

Robert LeBoyer

Joe Gomes

Michael Heim

Mark Reichman

Michael Kupinski

Virtual & In-person Roadshows / Conferences

Channelchek Premium. Access more at no cost. 

The site "channelcheck" is opened on the phone

Join the Channelchek Investor Community. Your name, email, zip, and investor type is all it takes to open the door to research reports, favorites tracking, and virtual and in-person roadshows / conferences. Even exclusive investment opps.

Take it to the next level. It doesn’t cost a penny.

Click “Log In” to agree to Channelchek.com <a href="#">Terms of Use</a> and acknowledge that Channelchek.com <a href="#">Privacy Policy</a> applies to you.

Welcome to the Channelchek Investor Community

Informed investors make more money. And it’s all about timing. Get it when it happens.

Inbox Intel from Channelchek.

New Contract Impact
The new AI contract is expect to generate some $35 million of annualized revenue for Bit Digital, or about $3 million per month. We previously had projected 2024 revenue of $75 million, up from our $41.9 million 2023 estimate. The increase in 2024 over 2023 assumes the Company achieves its 3.5 EH/s deployment rate in the first quarter of 2024, current bitcoin prices stay in the $25,000 â€”&nbsp;$30,000 range (the current bitcoin price is approximately $37,700) , and the bitcoin market adjusts rationally and smoothly to the halving.
The new machines are expected to be delivered by January 2024. We are going to assume a full year revenue contribution of $30 million from the contract to be a little conservative. Management has indicated the adjusted EBITDA margin will be substantially above the current mining business. We are assuming a 70% adjusted EBITDA margin. Historically, Bit Digital assumes a 3 year useful life for mining machines. We will assume a straight 3-year depreciation of the $35 million cost of the equipment.
Running these assumptions through our model results in estimated 2024 revenue of $105 million, adjusted EBITDA of $26 million, a GAAP net loss of $5.5 million or a loss of $0.06 per share, and adjusted EPS of $0.27. Our prior 2024 estimates called for revenue of $75 million, adjusted EBITDA of $7 million, a GAAP net loss of $12.5 million, or a loss of $0.14 per share, and adjusted EPS of $0.06.

New Contract Impact
The new AI contract is expect to generate some $35 million of annualized revenue for Bit Digital, or about $3 million per month. We previously had projected 2024 revenue of $75 million, up from our $41.9 million 2023 estimate. The increase in 2024 over 2023 assumes the Company achieves its 3.5 EH/s deployment rate in the first quarter of 2024, current bitcoin prices stay in the $25,000 â€”&nbsp;$30,000 range (the current bitcoin price is approximately $37,700) , and the bitcoin market adjusts rationally and smoothly to the halving.
The new machines are expected to be delivered by January 2024. We are going to assume a full year revenue contribution of $30 million from the contract to be a little conservative. Management has indicated the adjusted EBITDA margin will be substantially above the current mining business. We are assuming a 70% adjusted EBITDA margin. Historically, Bit Digital assumes a 3 year useful life for mining machines. We will assume a straight 3-year depreciation of the $35 million cost of the equipment.
Running these assumptions through our model results in estimated 2024 revenue of $105 million, adjusted EBITDA of $26 million, a GAAP net loss of $5.5 million or a loss of $0.06 per share, and adjusted EPS of $0.27. Our prior 2024 estimates called for revenue of $75 million, adjusted EBITDA of $7 million, a GAAP net loss of $12.5 million, or a loss of $0.14 per share, and adjusted EPS of $0.06.

Finalized AI Contract

Capital Markets

Looking Ahead
 Maple Gold Mines Ltd. is a Canadian advanced exploration company in a 50/50 joint venture with Agnico Eagle Mines Limited (NYSE: AEM, TSX: AEM) to jointly advance the district-scale Douay and Joutel gold projects in Quebecâ€™s renowned Abitibi Greenstone Gold Belt. The projects represent a large and highly prospective land package encompassing 400 square kilometers, including an established gold resource at Douay that offers significant expansion potential in addition to the past-producing Eagle and Telbel mines at Joutel, and benefit from well-developed infrastructure access. Eagle is 100%-controlled by Maple Gold which has an exclusive option to acquire the mine property. The district-scale property package hosts a significant number of regional exploration targets along a 55-kilometer strike length of the Casa Berardi Deformation Zone that have yet to be tested through drilling, making the project highly prospective for new gold and polymetallic discoveries. 
Mr. Kiran Patankar has been appointed President and Chief Executive Officer and has joined the Maple Gold Board of Directors. He has served as Interim President and Chief Executive Officer since August 28. Mr. Patankar brings a unique blend of technical, financial, strategic, and administrative skill sets and experience to his role. Previously, he served as President, CEO, and a director of two TSX-V listed gold exploration and development companies. Mr. Patankar earned a degree in geological engineering from the Colorado School of Mines and an MBA from the Yale School of Management. He has worked to better align Maple Goldâ€™s technical team with that of its strategic and joint venture partner, Agnico Eagle Mines Limited, to improve exploration targeting and results using a more efficient value-oriented approach.
 
Joint Venture with Agnico Eagle Mines Limited
In February 2021, Maple Gold and Agnico Eagle Mines Limited entered into a joint venture agreement to form a 50-50 joint operation which combined the companyâ€™s Douay Gold project and Agnicoâ€™s Joutel project into a consolidated joint property package. Douay and Joutel are contiguous properties with Joutel comprised of Agnicoâ€™s past-producing Telbel mine and Maple Goldâ€™s 100%-controlled and past-producing Eagle mine.
 
The terms and conditions of the joint venture agreement provide that: 1) Agnico will fund C$16,000,000 of joint operation exploration expenses and C$2,000,000 directly to Maple Gold over a four-year period, 2) Maple Gold will fund C$2,000,000 in exploration expenses over the same four-year period and contribute property and equipment with an approximate value of C$40,000 at the Douay Gold project, 3) Agnico and Maple will jointly fund an additional C$500,000 of exploration on the western portion of Douay in Year One, 4) Agnico and Maple will each be granted a 2% net smelter returns royalty on the property they contribute to the joint operation with respective aggregate buyback provisions of C$40,000,000.
Committed funding to the joint venture operators is expected to occur as follows: 1) C$4,000,000 in each of Years One and Two, 2) C$5,000,000 in Year Three, and 3) C$5,000,000 in Year Four. Agnico and Maple will contribute expenditures proportionately thereafter. During the first nine months of 2023, Maple Gold received C$500,000 from Agnico associated with its Year Three contribution.&nbsp;As of September 30, 2023, all cash contributed by Maple Gold to the Douay-Joutel joint venture has been spent.&nbsp;Approximately $6.0 million of funding remains available through January 2025 from Agnico Eagle.
Eagle Property
In July 2021, Maple Gold entered into an option agreement with Globex Mining Enterprises to acquire a 100% interest in the Eagle Mine property. Maple Gold can earn a 100% interest in Eagle by completing payments to Globex totaling C$1,200,000 in cash and shares over five years and incurring exploration expenditures of C$1,200,000 over a four-year period. To date, Maple Gold has satisfied the cumulative exploration expenditure requirement and will make cash payments of C$75,000 on July 16, 2024, C$100,000 on July 16, 2025, and C$150,000 on July 16, 2025. Maple will make share payments equal to the amounts of the cash payments on each respective payment date. Globex will retain a 2.5% gross metal royalty (GMR) which is subject to a right of first refusal and can be reduced to a 1.5% GMR for a cash payment of C$1.5 million.
To date, drilling at Eagle has confirmed the existence of several different styles of gold mineralization over a significantly broader mineralized corridor than previously defined. Gold mineralization within the main horizon at Eagle is oriented northwest-southwest which is consistent with modeled stratigraphy. However, work suggests that gold mineralization may be controlled not only by stratigraphy, but also by cross-cutting structures hosting potential feeders, and supports the company's interpreted sub-parallel mineralized horizons concept at Eagle-Telbel which suggests a volcanogenic stacked polymetallic systems. This interpretation could be tested in the next drill phase which could begin in the Eagle West mine area.&nbsp;
Morris Project
Maple Gold acquired a 100% interest in the 34 Morris project claims in July 2021. The property package was more than doubled through staking additional claims in January 2022. Data compilation, prospecting, sampling, and geophysical survey results revealed evidence of hydrothermal alteration and associated conductors typically encountered around VMS deposits. The Morris project is approximately 30 kilometers east-northeast of Matagami and 110 kilometers north-east from the Douay camp. The property lies within the Matagami mining district which is known for volcanogenic massive sulfide deposits. Historical work indicated that the volcanic units hosting the high-grade zinc-copper deposits of the Matagami mining camp are present at Morris. In 2021, Maple Gold completed a reconnaissance- style mapping and sampling program which confirmed the presence of favorable hydrothermally altered felsic volcanic rocks. Line cutting for geological mapping and a ground IP survey were completed in the second half of 2021. Geochemical data and geophysical survey results have been compiled and interpreted with new targets identified. A surface pulse electro-magnetic (EM) survey was initiated in the winter of 2022 and completed in early 2023. We think Maple Gold could conduct follow-up work at the Morris project along with potential drilling once the alteration zone is further defined and targets prioritized.
Summary of Financial Results for the Period Ended September 30
 
Maple Gold reported a third quarter net loss of C$1,113,372 or C$(0.00) per share compared to a net loss of C$2,310,524 or C$(0.01) per share during the prior year period. We had forecast a net loss of C$2,294,303 or C$(0.01) per share. Exploration and evaluation expenses of C$746,488 and general and administrative expenses of C$432,021 were well below prior period expenditures of C$1,486,497 and C$1,358,062, respectively. They were also below our estimates.
Compared to the prior year period, Douay and Joutel exploration expenditures increased by C$498,253 and C$17,487, respectively due to higher costs associated with drilling and assaying costs at Douay and incurred expenses associated with geophysics at Joutel. Eagle and Morris exploration expenditures decreased by C$1,673,893 and C$32,632, respectively, as drilling activities shifted to the Douay and Joutel properties.
General and administrative expenses decreased by C$965,741 largely due to lower share-based payments and reduced staffing levels at the corporate level.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 
Net cash used in operating activities amounted to C$1,716,342, while net cash used in financing activities amounted to C$58,471 which represented the repayment of lease liabilities. No net cash flows were associated with investing activities. The net change in cash and cash equivalents was C$(1,774,813).
Capital Structure and Liquidity 
As of September 30, Maple Gold Mines reported cash and cash equivalents amounting to C$4,384,972 and marketable securities amounting to C$336,430. The company has a COVID relief related CEBA loan of C$40,000 which it intends to repay shortly. The loan is interest-free until January 18, 2024, and if 75% of the loan principal is paid on or before that date, the balance will be forgiven. Shares outstanding were 339,584,027.

Looking Ahead
 Maple Gold Mines Ltd. is a Canadian advanced exploration company in a 50/50 joint venture with Agnico Eagle Mines Limited (NYSE: AEM, TSX: AEM) to jointly advance the district-scale Douay and Joutel gold projects in Quebecâ€™s renowned Abitibi Greenstone Gold Belt. The projects represent a large and highly prospective land package encompassing 400 square kilometers, including an established gold resource at Douay that offers significant expansion potential in addition to the past-producing Eagle and Telbel mines at Joutel, and benefit from well-developed infrastructure access. Eagle is 100%-controlled by Maple Gold which has an exclusive option to acquire the mine property. The district-scale property package hosts a significant number of regional exploration targets along a 55-kilometer strike length of the Casa Berardi Deformation Zone that have yet to be tested through drilling, making the project highly prospective for new gold and polymetallic discoveries. 
Mr. Kiran Patankar has been appointed President and Chief Executive Officer and has joined the Maple Gold Board of Directors. He has served as Interim President and Chief Executive Officer since August 28. Mr. Patankar brings a unique blend of technical, financial, strategic, and administrative skill sets and experience to his role. Previously, he served as President, CEO, and a director of two TSX-V listed gold exploration and development companies. Mr. Patankar earned a degree in geological engineering from the Colorado School of Mines and an MBA from the Yale School of Management. He has worked to better align Maple Goldâ€™s technical team with that of its strategic and joint venture partner, Agnico Eagle Mines Limited, to improve exploration targeting and results using a more efficient value-oriented approach.
   
Joint Venture with Agnico Eagle Mines Limited
In February 2021, Maple Gold and Agnico Eagle Mines Limited entered into a joint venture agreement to form a 50-50 joint operation which combined the companyâ€™s Douay Gold project and Agnicoâ€™s Joutel project into a consolidated joint property package. Douay and Joutel are contiguous properties with Joutel comprised of Agnicoâ€™s past-producing Telbel mine and Maple Goldâ€™s 100%-controlled and past-producing Eagle mine.
   
The terms and conditions of the joint venture agreement provide that: 1) Agnico will fund C$16,000,000 of joint operation exploration expenses and C$2,000,000 directly to Maple Gold over a four-year period, 2) Maple Gold will fund C$2,000,000 in exploration expenses over the same four-year period and contribute property and equipment with an approximate value of C$40,000 at the Douay Gold project, 3) Agnico and Maple will jointly fund an additional C$500,000 of exploration on the western portion of Douay in Year One, 4) Agnico and Maple will each be granted a 2% net smelter returns royalty on the property they contribute to the joint operation with respective aggregate buyback provisions of C$40,000,000.
Committed funding to the joint venture operators is expected to occur as follows: 1) C$4,000,000 in each of Years One and Two, 2) C$5,000,000 in Year Three, and 3) C$5,000,000 in Year Four. Agnico and Maple will contribute expenditures proportionately thereafter. During the first nine months of 2023, Maple Gold received C$500,000 from Agnico associated with its Year Three contribution.&nbsp;As of September 30, 2023, all cash contributed by Maple Gold to the Douay-Joutel joint venture has been spent.&nbsp;Approximately $6.0 million of funding remains available through January 2025 from Agnico Eagle.
Eagle Property
In July 2021, Maple Gold entered into an option agreement with Globex Mining Enterprises to acquire a 100% interest in the Eagle Mine property. Maple Gold can earn a 100% interest in Eagle by completing payments to Globex totaling C$1,200,000 in cash and shares over five years and incurring exploration expenditures of C$1,200,000 over a four-year period. To date, Maple Gold has satisfied the cumulative exploration expenditure requirement and will make cash payments of C$75,000 on July 16, 2024, C$100,000 on July 16, 2025, and C$150,000 on July 16, 2025. Maple will make share payments equal to the amounts of the cash payments on each respective payment date. Globex will retain a 2.5% gross metal royalty (GMR) which is subject to a right of first refusal and can be reduced to a 1.5% GMR for a cash payment of C$1.5 million.
To date, drilling at Eagle has confirmed the existence of several different styles of gold mineralization over a significantly broader mineralized corridor than previously defined. Gold mineralization within the main horizon at Eagle is oriented northwest-southwest which is consistent with modeled stratigraphy. However, work suggests that gold mineralization may be controlled not only by stratigraphy, but also by cross-cutting structures hosting potential feeders, and supports the company&#8217;s interpreted sub-parallel mineralized horizons concept at Eagle-Telbel which suggests a volcanogenic stacked polymetallic systems. This interpretation could be tested in the next drill phase which could begin in the Eagle West mine area.&nbsp;
Morris Project
Maple Gold acquired a 100% interest in the 34 Morris project claims in July 2021. The property package was more than doubled through staking additional claims in January 2022. Data compilation, prospecting, sampling, and geophysical survey results revealed evidence of hydrothermal alteration and associated conductors typically encountered around VMS deposits. The Morris project is approximately 30 kilometers east-northeast of Matagami and 110 kilometers north-east from the Douay camp. The property lies within the Matagami mining district which is known for volcanogenic massive sulfide deposits. Historical work indicated that the volcanic units hosting the high-grade zinc-copper deposits of the Matagami mining camp are present at Morris. In 2021, Maple Gold completed a reconnaissance- style mapping and sampling program which confirmed the presence of favorable hydrothermally altered felsic volcanic rocks. Line cutting for geological mapping and a ground IP survey were completed in the second half of 2021. Geochemical data and geophysical survey results have been compiled and interpreted with new targets identified. A surface pulse electro-magnetic (EM) survey was initiated in the winter of 2022 and completed in early 2023. We think Maple Gold could conduct follow-up work at the Morris project along with potential drilling once the alteration zone is further defined and targets prioritized.
Summary of Financial Results for the Period Ended September 30
   
Maple Gold reported a third quarter net loss of C$1,113,372 or C$(0.00) per share compared to a net loss of C$2,310,524 or C$(0.01) per share during the prior year period. We had forecast a net loss of C$2,294,303 or C$(0.01) per share. Exploration and evaluation expenses of C$746,488 and general and administrative expenses of C$432,021 were well below prior period expenditures of C$1,486,497 and C$1,358,062, respectively. They were also below our estimates.
Compared to the prior year period, Douay and Joutel exploration expenditures increased by C$498,253 and C$17,487, respectively due to higher costs associated with drilling and assaying costs at Douay and incurred expenses associated with geophysics at Joutel. Eagle and Morris exploration expenditures decreased by C$1,673,893 and C$32,632, respectively, as drilling activities shifted to the Douay and Joutel properties.
General and administrative expenses decreased by C$965,741 largely due to lower share-based payments and reduced staffing levels at the corporate level.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 
Net cash used in operating activities amounted to C$1,716,342, while net cash used in financing activities amounted to C$58,471 which represented the repayment of lease liabilities. No net cash flows were associated with investing activities. The net change in cash and cash equivalents was C$(1,774,813).
Capital Structure and Liquidity 
As of September 30, Maple Gold Mines reported cash and cash equivalents amounting to C$4,384,972 and marketable securities amounting to C$336,430. The company has a COVID relief related CEBA loan of C$40,000 which it intends to repay shortly. The loan is interest-free until January 18, 2024, and if 75% of the loan principal is paid on or before that date, the balance will be forgiven. Shares outstanding were 339,584,027.

Looking Ahead

Natural Resources

Favorable DLE Test Results Bode Well for Boardwalk PEA

Nat Resources

Drills Are Turning
Drilling at Labrador Goldâ€™s 100%-owned Kingsway gold project is targeting the Appleton Fault over a 12-kilometer strike length. &nbsp;Labrador Gold currently has two drill rigs operating at its Kingsway gold project. One drill is operating at the Knobby discovery target, while the other is operating in the Gap Zone between the Big Vein and Pristine targets. A third rig will likely be deployed in early December at the Golden Glove target. Drilling will test the area south of the Big Vein target to the southern boundary of the property which encompasses the Knobby discovery and Golden Glove. Knobby is a priority target since the east-west strike crosscuts the regional northeast trend like structures known to host high-grade gold in quartz veins within the district. Recall that grab samples collected from the Knobby quartz vein outcrops returned gold values up to 30.58 grams of gold per tonne and&nbsp;provided the first indication of gold mineralization along the Appleton Fault between Big Vein and Golden Glove. Three parallel veins have been traced along an east-west strike length of approximately 200 meters. The Big Vein-to-Golden Glove corridor is a three-kilometer section of the Appleton Fault Zone.&nbsp;Once drilling is completed in the Gap Zone, the number of rigs operating will be two.
Labrador Gold Discoveries Along the Appleton Fault
<img src="https://www.noblelinx.com/x/research/images/reports/NKOSFFig10122023b.JPG" style="width: 325px;height: 528px;float: none" />
Source: Labrador Gold Corp.
To date, the drilling program has exceeded our expectations. Labrador Gold has intersected significant gold mineralization in five of six targets, including high grades associated with visible gold at Pristine, Big Vein, and DropKick. The other two are Midway where drilling intersected 3.53 grams of gold per tonne over six meters and Golden Glove where drilling intersected 6.22 grams of gold per tonne over four meters. The Big Vein target has been extended to a strike length of 722 meters and remains open in both directions. The goal of drilling the Gap zone is to extend Pristine to the Southwest and Big Vein to the northeast to connect the two for a total strike length of 1.7 kilometers.
 
Hopedale Property
Labrador Gold fulfilled the requirements of the Hopedale option agreement and exercised its option to acquire 100% of the four licenses covering 695 claims comprising the Hopedale property. &nbsp;The district-scale Hopedale property covers a 43-kilometer strike length of the Florence Lake greenstone belt. The belt is typical of greenstone belts around the world but has been underexplored by comparison. 
While gold continues to be the priority target, Hopedale offers the potential for the critical metals copper, nickel, and cobalt in addition to the significant gold mineralization discovered to date. Nickel mineralization previously identified by Labrador Gold occurs over a 1.2-kilometer strike length of altered ultramafic rocks in the southern portion of the greenstone belt with rock samples assaying up to 0.34% nickel, 0.42% copper and 134 ppm cobalt. Soil samples over the same area, called Rusty Ridge, show values up to 1,529 ppm nickel and 152 ppm cobalt. The three-kilometer Thurber Dog trend includes four discrete gold occurrences and is a compelling area for future work with significant potential for further discovery. Both the Kaapak copper occurrence with its high-grade copper, and nickel anomalies associated with ultramafic rocks at Rusty Ridge, are critical metals targets that require follow up work to better gauge their potential. 
The 2023 work program at Hopedale focused on extending the known copper and nickel showings as well as to follow up on additional soil and rock anomalies elsewhere on the property. Work included mapping and prospecting and soil sampling. Regional drone magnetic surveys and more detailed ground magnetic-VLF surveys were carried out ultramafic and surrounding rocks to identify anomalies that may have potential to host nickel and/or copper mineralization. Results of assays and geophysical surveys are pending.

Drills Are Turning
Drilling at Labrador Goldâ€™s 100%-owned Kingsway gold project is targeting the Appleton Fault over a 12-kilometer strike length. &nbsp;Labrador Gold currently has two drill rigs operating at its Kingsway gold project. One drill is operating at the Knobby discovery target, while the other is operating in the Gap Zone between the Big Vein and Pristine targets. A third rig will likely be deployed in early December at the Golden Glove target. Drilling will test the area south of the Big Vein target to the southern boundary of the property which encompasses the Knobby discovery and Golden Glove. Knobby is a priority target since the east-west strike crosscuts the regional northeast trend like structures known to host high-grade gold in quartz veins within the district. Recall that grab samples collected from the Knobby quartz vein outcrops returned gold values up to 30.58 grams of gold per tonne and&nbsp;provided the first indication of gold mineralization along the Appleton Fault between Big Vein and Golden Glove. Three parallel veins have been traced along an east-west strike length of approximately 200 meters. The Big Vein-to-Golden Glove corridor is a three-kilometer section of the Appleton Fault Zone.&nbsp;Once drilling is completed in the Gap Zone, the number of rigs operating will be two.
Labrador Gold Discoveries Along the Appleton Fault

Source: Labrador Gold Corp.
To date, the drilling program has exceeded our expectations. Labrador Gold has intersected significant gold mineralization in five of six targets, including high grades associated with visible gold at Pristine, Big Vein, and DropKick. The other two are Midway where drilling intersected 3.53 grams of gold per tonne over six meters and Golden Glove where drilling intersected 6.22 grams of gold per tonne over four meters. The Big Vein target has been extended to a strike length of 722 meters and remains open in both directions. The goal of drilling the Gap zone is to extend Pristine to the Southwest and Big Vein to the northeast to connect the two for a total strike length of 1.7 kilometers.
   
Hopedale Property
Labrador Gold fulfilled the requirements of the Hopedale option agreement and exercised its option to acquire 100% of the four licenses covering 695 claims comprising the Hopedale property. &nbsp;The district-scale Hopedale property covers a 43-kilometer strike length of the Florence Lake greenstone belt. The belt is typical of greenstone belts around the world but has been underexplored by comparison. 
While gold continues to be the priority target, Hopedale offers the potential for the critical metals copper, nickel, and cobalt in addition to the significant gold mineralization discovered to date. Nickel mineralization previously identified by Labrador Gold occurs over a 1.2-kilometer strike length of altered ultramafic rocks in the southern portion of the greenstone belt with rock samples assaying up to 0.34% nickel, 0.42% copper and 134 ppm cobalt. Soil samples over the same area, called Rusty Ridge, show values up to 1,529 ppm nickel and 152 ppm cobalt. The three-kilometer Thurber Dog trend includes four discrete gold occurrences and is a compelling area for future work with significant potential for further discovery. Both the Kaapak copper occurrence with its high-grade copper, and nickel anomalies associated with ultramafic rocks at Rusty Ridge, are critical metals targets that require follow up work to better gauge their potential. 
The 2023 work program at Hopedale focused on extending the known copper and nickel showings as well as to follow up on additional soil and rock anomalies elsewhere on the property. Work included mapping and prospecting and soil sampling. Regional drone magnetic surveys and more detailed ground magnetic-VLF surveys were carried out ultramafic and surrounding rocks to identify anomalies that may have potential to host nickel and/or copper mineralization. Results of assays and geophysical surveys are pending.

Drills Are Turning

Background
As we have noted in past reports, there has been a family schism at Lifeway.
Recall, in February 2022, Edward Smolyansky and Ludmila Smolyansky, brother and mother, respectively, to Lifeway CEO Julie Smolyansky, notified the Lifeway Board of their belief that the Company should replace Julie and commence an exploration of the Companyâ€™s strategic alternatives. Edward and Ludmila explored a potential proxy fight before coming to a settlement agreement in July 2022, which should last until the 2024 annual shareholder meeting.
 
Unlike her family members, Julie Smolyansky favors an independent public company strategy, focused on the Company's core strengths-dominant market share, a growing end market, and implementation of the&nbsp;Lifeway 2.0 strategic plan, which has reinvigorated top-line growth, and with milk prices retreating to historic norms recently, bottom-line growth also.
Ownership
 
 Ownership of Lifeway shares is highly concentrated, meaning the fate of the Company truly is in just a few hands. Danone owns nearly 24% of the Company and has for years. Julie Smolyansky holds another 14.3%, excluding the 500,000 shares (about 3.4% of the outstanding shares) held in a trust controlled equally by Mrs. Smolyansky and her brother, Edward. Edward and Ludmila Smolyansky control 27.7% (again excluding the 500,000 shares), according to their most recent 13D filing from October 31st. Institutional ownership is just 12.3% of the outstanding shares, with the top ten institutions controlling 10.4% of the outstanding common. Roughly 19% of the outstanding shares are held by non-institutional accounts.
We would note that in the October 31st 13D amended filing, Edward and Ludmila disclosed that on October 26, 2023, the pair notified the Company that they were nominating an individual to serve as a director of the Company, pursuant to the nomination rights set forth in the Settlement Agreement, dated July 27, 2022. Under the Settlement Agreement, "the Companyâ€™s Board will be required to appoint the nominee to the Board if the Board and its Audit and Corporate Governance Committee approve the nominee, in each case after considering of the nominee in good faith and exercising its fiduciary duties, which approvals may not be unreasonably withheld." Mrs. Smolyansky and Mr. Smolyansky also notified the Company of a second contingent nominee, to be considered if the Board or the Committee failed to approve the first nominee.
Share Concentration
 Given the share concentration, any potential sale of Lifeway really hinges on Danone, who, to date, has not publicly expressed a desire to see the Company sold. To illustrate, together Danone and Julie control 37.9% of the outstanding shares. If we add half of the 3.4% of the shares held in the trust, this increases to 39.6%. Doing the same exercise for Edward and Ludmila gives them 29.4%. If Edward and Ludmila convince all of the institutional shareholders to join them, (highly unlikely, in our view) this rises to 41.7%, or about 6,126,137 shares.
That leaves the 19% of shares held by non-institutional accounts, or about 2,791,287 shares. Under this exercise, to wrest control from Julie, Edward and Ludmila need 50.1% of the outstanding share to vote with them, or about 7,360,180 shares in total, or about 1,234,042 additional shares, or about 44% of all the non-institutional shares. Obviously, if Danone decided to come down on the "sale of the Company" side, the need for Edward and Ludmila to woo additional shareholders to wrest control of the Company would be moot.
 Valuation
Let's start off with the June 2022 letter sent by David Kanen of Kanen Wealth Management to Julie Smolyansky and the Lifeway Board of Directors. According to the letter, Mr. Kanen owned approximately 4.1% (620,973 shares) of the outstanding common. In his letter, Mr. Kanen noted, "Based on our due diligence of comparable transactions, a fair value for LWAY should be between 1.5x-2x Revenue. This would yield a value of between $15-$20 per share. Keep in mind the company also has Real estate worth an estimated $10 million." 
Mr. Kanen's letter had an immediate impact on trading volume, with monthly volume rising nearly ten fold, from the 200,000/mth level to the 2 million/mth level. And, increasing the sale of the company speculation. However, according to 13F filings, Kanen Wealth exited its entire Lifeway position sometime in the third quarter. LWAY shares traded in a range of $6.09-$12.96 during the third quarter.
Although Kanen Wealth exited its stake, we believe its valuation work remain valid. If we look at a group of diverse food products companies with revenue in the $100 million to $1 billion range, such shares trade at an average 1.0x revenue, 13.8x EBITDA, and 17.0x earnings. The group has an average 25% gross margin, 12% EBITDA margin and 1% net margin. Based on our 2023 estimates, Lifeway sports at 26% gross margin and 12% EBITDA margin, both in-line with the category, but a much superior 6.7% net margin. Applying the group average valuation multiples to our 2023 Lifeway estimate generates a fair value range of $11-$18 per share. If we tighten the peer comparable group to dairy companies, and use a five year average EBITDA multiple, we generate a fair value in the $18 range. If we use the five year average multiple for the "Better for You" comparable, the potential value increases to the $23 level.
Given this, we believe the Kanen $15-$20 range is supportable and while the upper end of the range still provides ample upside, we believe to achieve the upper end would require an acquisition announcement or sustained operating improvement over time. With LWAY shares having blown through our price target, we believe the shares are likely to perform more in-line with the market going forward.

Background
As we have noted in past reports, there has been a family schism at Lifeway.
Recall, in February 2022, Edward Smolyansky and Ludmila Smolyansky, brother and mother, respectively, to Lifeway CEO Julie Smolyansky, notified the Lifeway Board of their belief that the Company should replace Julie and commence an exploration of the Companyâ€™s strategic alternatives. Edward and Ludmila explored a potential proxy fight before coming to a settlement agreement in July 2022, which should last until the 2024 annual shareholder meeting.
   
Unlike her family members, Julie Smolyansky favors an independent public company strategy, focused on the Company&#8217;s core strengths-dominant market share, a growing end market, and implementation of the&nbsp;Lifeway 2.0 strategic plan, which has reinvigorated top-line growth, and with milk prices retreating to historic norms recently, bottom-line growth also.
Ownership
   
 Ownership of Lifeway shares is highly concentrated, meaning the fate of the Company truly is in just a few hands. Danone owns nearly 24% of the Company and has for years. Julie Smolyansky holds another 14.3%, excluding the 500,000 shares (about 3.4% of the outstanding shares) held in a trust controlled equally by Mrs. Smolyansky and her brother, Edward. Edward and Ludmila Smolyansky control 27.7% (again excluding the 500,000 shares), according to their most recent 13D filing from October 31st. Institutional ownership is just 12.3% of the outstanding shares, with the top ten institutions controlling 10.4% of the outstanding common. Roughly 19% of the outstanding shares are held by non-institutional accounts.
We would note that in the October 31st 13D amended filing, Edward and Ludmila disclosed that on October 26, 2023, the pair notified the Company that they were nominating an individual to serve as a director of the Company, pursuant to the nomination rights set forth in the Settlement Agreement, dated July 27, 2022. Under the Settlement Agreement, &#8220;the Companyâ€™s Board will be required to appoint the nominee to the Board if the Board and its Audit and Corporate Governance Committee approve the nominee, in each case after considering of the nominee in good faith and exercising its fiduciary duties, which approvals may not be unreasonably withheld.&#8221; Mrs. Smolyansky and Mr. Smolyansky also notified the Company of a second contingent nominee, to be considered if the Board or the Committee failed to approve the first nominee.
Share Concentration
 Given the share concentration, any potential sale of Lifeway really hinges on Danone, who, to date, has not publicly expressed a desire to see the Company sold. To illustrate, together Danone and Julie control 37.9% of the outstanding shares. If we add half of the 3.4% of the shares held in the trust, this increases to 39.6%. Doing the same exercise for Edward and Ludmila gives them 29.4%. If Edward and Ludmila convince all of the institutional shareholders to join them, (highly unlikely, in our view) this rises to 41.7%, or about 6,126,137 shares.
That leaves the 19% of shares held by non-institutional accounts, or about 2,791,287 shares. Under this exercise, to wrest control from Julie, Edward and Ludmila need 50.1% of the outstanding share to vote with them, or about 7,360,180 shares in total, or about 1,234,042 additional shares, or about 44% of all the non-institutional shares. Obviously, if Danone decided to come down on the &#8220;sale of the Company&#8221; side, the need for Edward and Ludmila to woo additional shareholders to wrest control of the Company would be moot.
 Valuation
Let&#8217;s start off with the June 2022 letter sent by David Kanen of Kanen Wealth Management to Julie Smolyansky and the Lifeway Board of Directors. According to the letter, Mr. Kanen owned approximately 4.1% (620,973 shares) of the outstanding common. In his letter, Mr. Kanen noted, &#8220;Based on our due diligence of comparable transactions, a fair value for LWAY should be between 1.5x-2x Revenue. This would yield a value of between $15-$20 per share. Keep in mind the company also has Real estate worth an estimated $10 million.&#8221; 
Mr. Kanen&#8217;s letter had an immediate impact on trading volume, with monthly volume rising nearly ten fold, from the 200,000/mth level to the 2 million/mth level. And, increasing the sale of the company speculation. However, according to 13F filings, Kanen Wealth exited its entire Lifeway position sometime in the third quarter. LWAY shares traded in a range of $6.09-$12.96 during the third quarter.
Although Kanen Wealth exited its stake, we believe its valuation work remain valid. If we look at a group of diverse food products companies with revenue in the $100 million to $1 billion range, such shares trade at an average 1.0x revenue, 13.8x EBITDA, and 17.0x earnings. The group has an average 25% gross margin, 12% EBITDA margin and 1% net margin. Based on our 2023 estimates, Lifeway sports at 26% gross margin and 12% EBITDA margin, both in-line with the category, but a much superior 6.7% net margin. Applying the group average valuation multiples to our 2023 Lifeway estimate generates a fair value range of $11-$18 per share. If we tighten the peer comparable group to dairy companies, and use a five year average EBITDA multiple, we generate a fair value in the $18 range. If we use the five year average multiple for the &#8220;Better for You&#8221; comparable, the potential value increases to the $23 level.
Given this, we believe the Kanen $15-$20 range is supportable and while the upper end of the range still provides ample upside, we believe to achieve the upper end would require an acquisition announcement or sustained operating improvement over time. With LWAY shares having blown through our price target, we believe the shares are likely to perform more in-line with the market going forward.

Moving Rating to Market Perform after Sharp Rise in Stock Price

Consumer

New Awards; Raising PT to $22

Defense

Operations
Daily production rates in the 2023-3Q rose 6% quarter over quarter with the recent addition of seven new wells. This was anticipated following the company's second quarter comments and September 28th press release providing an update on operations. Notably, production has averaged 3,350 boe/d since the end of the quarter which could imply good results in upcoming quarters. The company has completed its 2023 drilling program so further growth is unlikely. However, current flow rates are above that assumed in our models for the next two quarters and has led us to bump up our production estimates modestly.
 
 
<table border="1" style="border-collapse: collapse;width: 736px;height: 72px">
 <tbody>
 <tr style="height: 18px">
 <td style="width: 191px;height: 18px">
 </td>
 <td style="width: 66px;height: 18px">2023-3Q</td>
 <td style="width: 70px;height: 18px">2022-3Q</td>
 <td style="width: 72px;height: 18px">2023-2Q</td>
 <td style="width: 73px;height: 18px">Noble Est.&nbsp;</td>
 <td style="width: 264px;height: 18px">Comments</td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 191px;height: 18px">Gas production (mmcf/d)</td>
 <td style="width: 66px;height: 18px">145</td>
 <td style="width: 70px;height: 18px">189</td>
 <td style="width: 72px;height: 18px">141</td>
 <td style="width: 73px;height: 18px">145</td>
 <td style="width: 264px;height: 18px">
 </td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 191px;height: 18px">Oil production (bbls/d)</td>
 <td style="width: 66px;height: 18px">3,032</td>
 <td style="width: 70px;height: 18px">2,838</td>
 <td style="width: 72px;height: 18px">2,859</td>
 <td style="width: 73px;height: 18px">3,050</td>
 <td style="width: 264px;height: 18px">7 new wells came on line</td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 191px;height: 18px">Total production (boe/d)</td>
 <td style="width: 66px;height: 18px">3,056</td>
 <td style="width: 70px;height: 18px">2,870</td>
 <td style="width: 72px;height: 18px">2,883</td>
 <td style="width: 73px;height: 18px">3,074</td>
 <td style="width: 264px;height: 18px">
 </td>
 </tr>
 </tbody>
</table>
 
Pricing
 
 Realized oil prices improved versus the June quarter due to an 11% increase in West Texas Intermediate (WTI) prices. More importantly, the discount between Western Canadian Select (WCS) prices and WTI prices as expressed in Canadian dollars decreased 25% versus the June quarter. Such an improvement, coming in a low-demand, summer quarter, may reflect an improvement in field pressure issues that have plagued western Canadian producers in recent quarters. Prices do not include a $0.81/boe loss from a modest hedge position. Management took advantage of a rise in oil prices in September before prices declined in October and November. Management added swaps to protect against declines protecting 600 bbl/d at a WTI price of roughly $90/bbl. In total, Hemisphere has protected 1,100 boe/day or roughly 1/3 of current production levels although most of the hedges were put in place prior to the oil price runup in the September quarter at much lower prices.

 
<table border="1" style="border-collapse: collapse;width: 734px;height: 90px">
 <tbody>
 <tr style="height: 18px">
 <td style="width: 182px;height: 18px">
 </td>
 <td style="width: 66px;height: 18px">2023-3Q</td>
 <td style="width: 69px;height: 18px">2022-3Q</td>
 <td style="width: 68px;height: 18px">2023-2Q</td>
 <td style="width: 94px;height: 18px">Noble Est.</td>
 <td style="width: 255px;height: 18px">Comments</td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 182px;height: 18px">WTI Prices (US$)</td>
 <td style="width: 66px;height: 18px">81.90</td>
 <td style="width: 69px;height: 18px">91.56</td>
 <td style="width: 68px;height: 18px">73.65</td>
 <td style="width: 94px;height: 18px">80.00</td>
 <td style="width: 255px;height: 18px">
 </td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 182px;height: 18px">WTI (C$)</td>
 <td style="width: 66px;height: 18px">108.45</td>
 <td style="width: 69px;height: 18px">11.55</td>
 <td style="width: 68px;height: 18px">99.53</td>
 <td style="width: 94px;height: 18px">104.00</td>
 <td style="width: 255px;height: 18px">
 </td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 182px;height: 18px">Basin Discount</td>
 <td style="width: 66px;height: 18px">(15.55)</td>
 <td style="width: 69px;height: 18px">(26.02)</td>
 <td style="width: 68px;height: 18px">(20.83)</td>
 <td style="width: 94px;height: 18px">(25.00)</td>
 <td style="width: 255px;height: 18px">40% y-t-y decline in basin differential</td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 182px;height: 18px">Realized Prices</td>
 <td style="width: 66px;height: 18px">92.90</td>
 <td style="width: 69px;height: 18px">93.53</td>
 <td style="width: 68px;height: 18px">78.70</td>
 <td style="width: 94px;height: 18px">79.00</td>
 <td style="width: 255px;height: 18px">
 </td>
 </tr>
 </tbody>
</table>
 ---------- page break ----------
 
Operating costs and netbacks
 
Production costs per unit declined 30% year over year and 22% quarter over quarter. Management attributes the decline to reduced costs for power, repairs and maintenance, and workovers. Spreading costs over a higher production levels also helped reduce costs per unit. Royalty costs per unit decreased versus the same period last year but rose relative to the June 2023 quarter. The change in royalty costs reflects changes in realized energy prices. Royalty costs remain near 20% of revenues. Transportation cost per unit were largely unchanged. The result of higher realized energy prices and lower operating costs led to a nice increase in operating field netback. Netback rose 11% year over year and 33% quarter over quarter. Results surpassed our expectations and demonstrate the reason why cash flow generation is so strong.
<table border="1" style="border-collapse: collapse;width: 738px;height: 108px">
 <tbody>
 <tr style="height: 18px">
 <td style="width: 185px;height: 18px">(C$/bbl)</td>
 <td style="width: 67px;height: 18px">2023-3Q</td>
 <td style="width: 66px;height: 18px">2022-3Q</td>
 <td style="width: 65px;height: 18px">2023-2Q</td>
 <td style="width: 76px;height: 18px">Noble Est.</td>
 <td style="width: 279px;height: 18px">Comments</td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 185px;height: 18px">Royalty costs&nbsp;</td>
 <td style="width: 67px;height: 18px"> (18.03)</td>
 <td style="width: 66px;height: 18px"> (24.19)</td>
 <td style="width: 65px;height: 18px">(15.42)</td>
 <td style="width: 76px;height: 18px">(17.00)</td>
 <td style="width: 279px;height: 18px"> Higher royalties reflect higher prices</td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 185px;height: 18px">Operating costs</td>
 <td style="width: 67px;height: 18px"> (9.19)</td>
 <td style="width: 66px;height: 18px"> (13.12)</td>
 <td style="width: 65px;height: 18px">(11.72)</td>
 <td style="width: 76px;height: 18px">(12.00)</td>
 <td style="width: 279px;height: 18px"> Cost declined with higher production</td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 185px;height: 18px">Transportation costs</td>
 <td style="width: 67px;height: 18px"> (2.95)</td>
 <td style="width: 66px;height: 18px"> (2.40)</td>
 <td style="width: 65px;height: 18px">(2.93)</td>
 <td style="width: 76px;height: 18px">(3.00)</td>
 <td style="width: 279px;height: 18px">
 </td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 185px;height: 18px">Operating field netback</td>
 <td style="width: 67px;height: 18px">56.40</td>
 <td style="width: 66px;height: 18px"> 49.95</td>
 <td style="width: 65px;height: 18px">42.41</td>
 <td style="width: 76px;height: 18px">47.00</td>
 <td style="width: 279px;height: 18px">
 </td>
 </tr>
 </tbody>
</table>
 

 
Financial results
With a decrease in Hemisphere's basin discount and a reduction in production costs, bottom-line results improved at a rate higher than expected. This can be seen in the revenues, operating income, adjusted fund flow and net income line. Earnings per share numbers were also helped by a share repurchase program that reduced share count by half a million shares costing $639,000. In a heavy investment quarter for the company, Hemisphere spent approximately $8 million in capital investments, still well below operating cash flow. of $11 million. Looking at the upcoming fourth quarter, we expect operating cash flow to rise to $13 million due to higher production and for capital investments to decline to $4 million with Hemisphere's 2023 drilling program completed. This will create an interesting situation where the company has significant excess cash. It has already eliminated its debt and paid a special dividend in the third quarter. Absent a major acquisition, we believe the company could consider a dividend raise or a second special dividend payment in addition to opportunistically repurchasing share at a level near or above that done in the third quarter.
 
<table border="1" style="border-collapse: collapse;width: 729px;height: 108px">
 <tbody>
 <tr style="height: 18px">
 <td style="width: 188px;height: 18px">(C$1000 Except EPS)</td>
 <td style="width: 62px;height: 18px">2023-3Q</td>
 <td style="width: 68px;height: 18px">2022-3Q</td>
 <td style="width: 67px;height: 18px">2023-2Q</td>
 <td style="width: 77px;height: 18px">Noble Est.</td>
 <td style="width: 267px;height: 18px">Comments</td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 188px;height: 18px">Revenues</td>
 <td style="width: 62px;height: 18px"> 24,342</td>
 <td style="width: 68px;height: 18px"> 23,672</td>
 <td style="width: 67px;height: 18px">19,013</td>
 <td style="width: 77px;height: 18px">20,517</td>
 <td style="width: 267px;height: 18px">
 </td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 188px;height: 18px">Operating income</td>
 <td style="width: 62px;height: 18px"> 11,239</td>
 <td style="width: 68px;height: 18px"> 11,966
 </td>
 <td style="width: 67px;height: 18px">7,909</td>
 <td style="width: 77px;height: 18px">8,826</td>
 <td style="width: 267px;height: 18px">
 </td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 188px;height: 18px">Adjusted fund flow</td>
 <td style="width: 62px;height: 18px"> 11,713</td>
 <td style="width: 68px;height: 18px"> 10,604</td>
 <td style="width: 67px;height: 18px">8,123</td>
 <td style="width: 77px;height: 18px">8,937</td>
 <td style="width: 267px;height: 18px">
 </td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 188px;height: 18px">Net income</td>
 <td style="width: 62px;height: 18px"> 8,465</td>
 <td style="width: 68px;height: 18px"> 9,315</td>
 <td style="width: 67px;height: 18px">5,790</td>
 <td style="width: 77px;height: 18px">6,652</td>
 <td style="width: 267px;height: 18px">
 </td>
 </tr>
 <tr style="height: 18px">
 <td style="width: 188px;height: 18px">Earnings per share</td>
 <td style="width: 62px;height: 18px"> $0.08</td>
 <td style="width: 68px;height: 18px"> $0.09</td>
 <td style="width: 67px;height: 18px">$0.06</td>
 <td style="width: 77px;height: 18px">$0.06</td>
 <td style="width: 267px;height: 18px">
 </td>
 </tr>
 </tbody>
</table>
 
What we learned
Hemisphere was active repurchasing shares. During the quarter, the company purchase and cancelled 519,400 shares at an average price of $1.23 per share. We believe repurchase activity could increase in the upcoming quarter due to increased free cash flow.
Production rose sharply with the completion of wells. Production in the 2023-3Q of 3,074 boe/d rose 6% year over year. This was largely expected. However, the quarter's current flow rate of 3,350 boe/d is even better than expected and positions the company well for solid results in upcoming quarters.
Hemisphere will test pilot on newly acquired land in 2024. The biggest knock against Hemisphere is that its drilling opportunities in the Atlee Buffalo field is limited and may be drilled out in the next five years or so. The ability to use excess cash flow to acquire new acreage similar to the Atlee Buffalo field is paramount to the company's long-term growth. Management has been tight lipped about the recent acquisition as it seeks to add new properties. The upcoming test pilot could be an important indicator of the company's long-term success.
Results reflect a $642,000 impairment of exploratory assets. As part of a regular, quarterly assessment, management determined that the carrying amount for non-core Alberta exploration properties should be reduced due, in part, to an unsuccessful well (0.75 net) drilled in 2023. We do not view the impairment as material or a reflection on current core assets.

Operations
Daily production rates in the 2023-3Q rose 6% quarter over quarter with the recent addition of seven new wells. This was anticipated following the company&#8217;s second quarter comments and September 28th press release providing an update on operations. Notably, production has averaged 3,350 boe/d since the end of the quarter which could imply good results in upcoming quarters. The company has completed its 2023 drilling program so further growth is unlikely. However, current flow rates are above that assumed in our models for the next two quarters and has led us to bump up our production estimates modestly.
   





         
2023-3Q
2022-3Q
2023-2Q
Noble Est.&nbsp;
Comments


Gas production (mmcf/d)
145
189
141
145

         


Oil production (bbls/d)
3,032
2,838
2,859
3,050
7 new wells came on line


Total production (boe/d)
3,056
2,870
2,883
3,074

         




Pricing
   
 Realized oil prices improved versus the June quarter due to an 11% increase in West Texas Intermediate (WTI) prices. More importantly, the discount between Western Canadian Select (WCS) prices and WTI prices as expressed in Canadian dollars decreased 25% versus the June quarter. Such an improvement, coming in a low-demand, summer quarter, may reflect an improvement in field pressure issues that have plagued western Canadian producers in recent quarters. Prices do not include a $0.81/boe loss from a modest hedge position. Management took advantage of a rise in oil prices in September before prices declined in October and November. Management added swaps to protect against declines protecting 600 bbl/d at a WTI price of roughly $90/bbl. In total, Hemisphere has protected 1,100 boe/day or roughly 1/3 of current production levels although most of the hedges were put in place prior to the oil price runup in the September quarter at much lower prices.

   




         
2023-3Q
2022-3Q
2023-2Q
Noble Est.
Comments


WTI Prices (US$)
81.90
91.56
73.65
80.00

         


WTI (C$)
108.45
11.55
99.53
104.00

         


Basin Discount
(15.55)
(26.02)
(20.83)
(25.00)
40% y-t-y decline in basin differential


Realized Prices
92.90
93.53
78.70
79.00

         



 &#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
   
Operating costs and netbacks
   
Production costs per unit declined 30% year over year and 22% quarter over quarter. Management attributes the decline to reduced costs for power, repairs and maintenance, and workovers. Spreading costs over a higher production levels also helped reduce costs per unit. Royalty costs per unit decreased versus the same period last year but rose relative to the June 2023 quarter. The change in royalty costs reflects changes in realized energy prices. Royalty costs remain near 20% of revenues. Transportation cost per unit were largely unchanged. The result of higher realized energy prices and lower operating costs led to a nice increase in operating field netback. Netback rose 11% year over year and 33% quarter over quarter. Results surpassed our expectations and demonstrate the reason why cash flow generation is so strong.



(C$/bbl)
2023-3Q
2022-3Q
2023-2Q
Noble Est.
Comments


Royalty costs&nbsp;
 (18.03)
 (24.19)
(15.42)
(17.00)
 Higher royalties reflect higher prices


Operating costs
 (9.19)
 (13.12)
(11.72)
(12.00)
 Cost declined with higher production


Transportation costs
 (2.95)
 (2.40)
(2.93)
(3.00)

         


Operating field netback
56.40
 49.95
42.41
47.00

         





   
Financial results
With a decrease in Hemisphere&#8217;s basin discount and a reduction in production costs, bottom-line results improved at a rate higher than expected. This can be seen in the revenues, operating income, adjusted fund flow and net income line. Earnings per share numbers were also helped by a share repurchase program that reduced share count by half a million shares costing $639,000. In a heavy investment quarter for the company, Hemisphere spent approximately $8 million in capital investments, still well below operating cash flow. of $11 million. Looking at the upcoming fourth quarter, we expect operating cash flow to rise to $13 million due to higher production and for capital investments to decline to $4 million with Hemisphere&#8217;s 2023 drilling program completed. This will create an interesting situation where the company has significant excess cash. It has already eliminated its debt and paid a special dividend in the third quarter. Absent a major acquisition, we believe the company could consider a dividend raise or a second special dividend payment in addition to opportunistically repurchasing share at a level near or above that done in the third quarter.
   



(C$1000 Except EPS)
2023-3Q
2022-3Q
2023-2Q
Noble Est.
Comments


Revenues
 24,342
 23,672
19,013
20,517

         


Operating income
 11,239
 11,966
         
7,909
8,826

         


Adjusted fund flow
 11,713
 10,604
8,123
8,937

         


Net income
 8,465
 9,315
5,790
6,652

         


Earnings per share
 $0.08
 $0.09
$0.06
$0.06

         




What we learned
Hemisphere was active repurchasing shares. During the quarter, the company purchase and cancelled 519,400 shares at an average price of $1.23 per share. We believe repurchase activity could increase in the upcoming quarter due to increased free cash flow.
Production rose sharply with the completion of wells. Production in the 2023-3Q of 3,074 boe/d rose 6% year over year. This was largely expected. However, the quarter&#8217;s current flow rate of 3,350 boe/d is even better than expected and positions the company well for solid results in upcoming quarters.
Hemisphere will test pilot on newly acquired land in 2024. The biggest knock against Hemisphere is that its drilling opportunities in the Atlee Buffalo field is limited and may be drilled out in the next five years or so. The ability to use excess cash flow to acquire new acreage similar to the Atlee Buffalo field is paramount to the company&#8217;s long-term growth. Management has been tight lipped about the recent acquisition as it seeks to add new properties. The upcoming test pilot could be an important indicator of the company&#8217;s long-term success.
Results reflect a $642,000 impairment of exploratory assets. As part of a regular, quarterly assessment, management determined that the carrying amount for non-core Alberta exploration properties should be reduced due, in part, to an unsuccessful well (0.75 net) drilled in 2023. We do not view the impairment as material or a reflection on current core assets.

Results beat expectations on higher pricing and lower costs

Energy

Investment Appraisal 

The company reported $2.9 million in revenue, which was in-line with our estimate of $2.6 million. Adj. EBITDA loss of $1.4 million was modestly lower than our estimate of a loss of $0.8 million. Notably, Q3 operating results were affected by less QVC programming due to talent scheduling conflicts related to a return to an in-studio production policy and non-recurring restructuring expenses. Apparel. Importantly, QVC scheduling conflicts are expected to improve in Q4 and be resolved by the start of Q1 2024.

In November, the company completed its transition to a licensing model and should report the last portion of its restructuring costs in Q4. As a result, we anticipate Q4 licensing revenue will experience sequential growth from Q3. Notably, the favorable transition to a licensing model will significantly reduce operating costs. We anticipate direct operating expenses will be approximately $4 million per quarter in 2024, which is a sizeable reduction from 2022 levels of  roughly $7.5 million per quarter. Additionally, the company has completed the development of several tools for its social commerce platform, which it plans to unveil in the coming months.

We are flowing through the company's Q3 operating results to our full year 2023 revenue and adj. EBITDA forecasts, and maintaining our Q4 forecasts. The modest affects of Q3 results on our full year 2023 forecast is illustrated in Figure #2 2023 Forecast. Additionally, we are reiterating our full year 2024 and 2025 revenue and adj. EBITDA forecasts.

As of September 30, 2023, the company had $2.2 million in cash and no long-term debt. Additionally, the company entered into a $5 million term loan agreement in October. With the company's transition toward a licensing model complete, we do not expect capex requirements. Moreover, the company is waiting to see the cashflow generating potential of its social commerce platform before it considers pursuing stock repurchases. We believe the company's cash position and term loan should support the company's capital needs until it turns cash flow positive.

Near current levels, the XELB shares trade at an enterprise value of 1.0 times our 2024 revenue forecast and 1.9 times our 2025 adj. EBITDA forecast, well below peers. The average multiple of the peers is 2.4 times EV/2024 revenue and 9.3 times EV/2024 EBITDA, as illustrated in Figure #3 Industry Comparables. We believe the XELB shares warrant a valuation based on the company's cash flow potential, in light of the completed transition to a licensing model and strategic emphasis on returning to positive cash flow generation. In our view, the XELB shares offer a favorable risk/reward relationship. We believe a swing toward positive adj. EBITDA will be a key catalyst toward higher stock valuations. The shares are rated Outperform.

---------- page break ----------

 Figure #1 Q3 Results 

 

<img style="width: 399px; height: 648px;" src="https://www.noblelinx.com/x/research/images/reports/xcel-q3-results-11-20-23.png" />

Source: Noble estimates &amp; Company filings

---------- page break ----------

Figure #2 2023 Forecast

<img class="alignnone size-full wp-image-72301" src="https://dashboard.channelchek.com/wp-content/uploads/2023/11/XELB_20231122_26295-02.jpg" alt="" width="707" height="1108" />

Source: Company filings &amp; Nobel estimates

---------- page break ----------


 

Figure #3 Industry Comparables 

<img style="width: 626px; height: 319px;" src="https://www.noblelinx.com/x/research/images/reports/xcel-comps-11-21.png" />

Source: Noble estimates &amp; Eikon

Investment Appraisal 
The company reported $2.9 million in revenue, which was in-line with our estimate of $2.6 million. Adj. EBITDA loss of $1.4 million was modestly lower than our estimate of a loss of $0.8 million. Notably, Q3 operating results were affected by less QVC programming due to talent scheduling conflicts related to a return to an in-studio production policy and non-recurring restructuring expenses. Apparel. Importantly, QVC scheduling conflicts are expected to improve in Q4 and be resolved by the start of Q1 2024.
In November, the company completed its transition to a licensing model and should report the last portion of its restructuring costs in Q4. As a result, we anticipate Q4 licensing revenue will experience sequential growth from Q3. Notably, the favorable transition to a licensing model will significantly reduce operating costs. We anticipate direct operating expenses will be approximately $4 million per quarter in 2024, which is a sizeable reduction from 2022 levels of  roughly $7.5 million per quarter. Additionally, the company has completed the development of several tools for its social commerce platform, which it plans to unveil in the coming months.
We are flowing through the company&#8217;s Q3 operating results to our full year 2023 revenue and adj. EBITDA forecasts, and maintaining our Q4 forecasts. The modest affects of Q3 results on our full year 2023 forecast is illustrated in Figure #2 2023 Forecast. Additionally, we are reiterating our full year 2024 and 2025 revenue and adj. EBITDA forecasts.
As of September 30, 2023, the company had $2.2 million in cash and no long-term debt. Additionally, the company entered into a $5 million term loan agreement in October. With the company&#8217;s transition toward a licensing model complete, we do not expect capex requirements. Moreover, the company is waiting to see the cashflow generating potential of its social commerce platform before it considers pursuing stock repurchases. We believe the company&#8217;s cash position and term loan should support the company&#8217;s capital needs until it turns cash flow positive.
Near current levels, the XELB shares trade at an enterprise value of 1.0 times our 2024 revenue forecast and 1.9 times our 2025 adj. EBITDA forecast, well below peers. The average multiple of the peers is 2.4 times EV/2024 revenue and 9.3 times EV/2024 EBITDA, as illustrated in Figure #3 Industry Comparables. We believe the XELB shares warrant a valuation based on the company&#8217;s cash flow potential, in light of the completed transition to a licensing model and strategic emphasis on returning to positive cash flow generation. In our view, the XELB shares offer a favorable risk/reward relationship. We believe a swing toward positive adj. EBITDA will be a key catalyst toward higher stock valuations. The shares are rated Outperform.
&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
 Figure #1 Q3 Results 
 

Source: Noble estimates &amp; Company filings
&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
Figure #2 2023 Forecast

Source: Company filings &amp; Nobel estimates
&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-

 
Figure #3 Industry Comparables 

Source: Noble estimates &amp; Eikon

All According To Plan

Discontinuing Research Coverage

Figure #1 Q3 Results
<img src="https://www.noblelinx.com/x/research/images/reports/xcel-q3-results-11-20-23.png" style="width: 430px;height: 700px" />
Source: Noble estimates &amp; Company filings