Invest1 publisher2 min readPublished
Rising costs keep one analyst from buying Torex Gold at US$49.50 as Media Luna ramps up
Torex Gold reported about 93,700 payable gold-equivalent ounces while costs rose sharply, Seeking Alpha analyst Taylor Dart wrote. He calls the stock reasonably valued yet sees too little margin of safety at US$49.50 to start a position.
The Investor · Invest desk
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What happened
- Dart attributes most of the sharp rise in Torex's costs to factors outside the company's control.
- Precious-metal prices fell again from the prior quarter, and a strong peso added to the pressure on Torex.
- Copper prices, which outperformed most commodities in the third quarter, give Torex only a minor offset.
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Why it matters
- exposure Torex's margin now depends on metal prices and the peso, which Dart says it does not control, so management has few levers to restore it before those markets move.
- decision New buyers have to choose between paying US$49.50 now for a stock Dart calls reasonably valued and waiting for the second-half cash to be reported.
- capability With the tax payments already made, second-half cash from rising grades can show up as free cash flow without being diverted to those bills.
Torex reported roughly 93,700 payable gold-equivalent ounces as Media Luna ramps up [1][9], and the costs against those ounces went the wrong way [2]. The offset comes later. Torex cleared its PTU and mining tax bills in the first half [5], so the cash it generates later in the year does not have to cover them, and Dart expects that cash to be strong as grades increase [6].
Dart's answer for a buyer today is to wait. "I don't see enough margin of safety at US$49.50 to justify starting a new position, and while Torex remains reasonably valued, I see more attractive bets elsewhere," he wrote [7]. He calls the stock fairly priced and still declines to buy, because he wants a wider gap between price and his own estimate of value before committing money. He holds no position and has no plans to open one within 72 hours [8]. The note does not tell holders to sell.
The summary does not include an all-in sustaining cost figure or a net asset value, so the size of the discount Dart wants cannot be checked from it.
Precious-metal prices could recover, or the peso could weaken, and margins would widen with no action from Torex, since those are the pressures Dart names [3]. The second-half cash could arrive as strong as he expects [6], and a buyer who waited would then pay more for a company that had already shown the cash. Or the costs he treats as external could turn out to be partly Torex's own, and the stock would have a harder second half than the grade story implies [2].
I think Dart's position is the sensible one for new money, for a narrow reason. The cost rise is a reported number and the cash offset is a forecast, and a buyer at US$49.50 is paying for the forecast before it has been tested. The view is wrong if Torex reports strong second-half free cash flow while precious-metal prices stop falling, because then the margin of safety was there all along and waiting cost the entry. Copper will not decide it, since Dart describes its contribution as a minor offset [4].
What to watch
- Torex's second-half results, which will show whether rising grades produce the strong free cash flow Dart expects.
- Precious-metal prices and the peso after another quarter-over-quarter decline in metal prices.
- Whether Torex's costs ease as the outside factors Dart cites reverse, or stay high and point to costs inside the company.