Scorpio Gold Corp. :SGN-CA: Earnings Analysis: Q3, 2016 By the Numbers : November 30, 2016

Scorpio Gold Corp. reports financial results for the quarter ended September 30, 2016.

We analyze the earnings along side the following peers of Scorpio Gold Corp. – Goldgroup Mining Inc. and Aquila Resources Inc. (GGA-CA and AQA-CA) that have also reported for this period.

Highlights

• Summary numbers: Revenues of CAD 17.38 million, Net Earnings of CAD 1.87 million.

• Gross margins widened from 18.68% to 23.63% compared to the same period last year, operating (EBITDA) margins now 25.03% from 36.57%.

• Year-on-year change in operating cash flow of 165.87% is about the same as the change in earnings, likely no significant movement in accruals or reserves.

• Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

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Market Share Versus Profits

SGN-CA‘s change in revenue this period compared to the same period last year of 42.37% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that SGN-CA is holding onto its market share. Also, for comparison purposes, revenues changed by 8.46% and earnings by 133.44% compared to the immediate last period.

Earnings Growth Analysis

The company’s earnings growth has been influenced by the year-on-year improvement in gross margins from 18.68% to 23.63%. However the company’s overhead costs have prevented it from fully capitalizing on these gross margin improvements. In fact, the company’s operating margins (EBITDA margins) showed no improvement over the same period last year.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

SGN-CA‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 63.17, compared to last year’s level of 36.36 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Cash Versus Earnings – Sustainable Performance?

SGN-CA‘s change in operating cash flow of 165.87% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 14.18% to 20.08% and (2) one-time items. The company’s pretax margins are now 18.89% compared to -170.64% for the same period last year.

Access our Ratings and Scores for Scorpio Gold Corp.

Company Profile

Scorpio Gold Corp. is a mineral exploration company. It engages in mining, exploration, and development of mineral properties in the United States. Its major projects include the Mineral Ridge, Pinon and Goldwedge projects. Scorpio Gold was founded on May 29, 2006 and is headquartered in Vancouver, Canada.

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