The economy gained steam, with the exports showing healthy growth, and a positive trade surplus continues. In the recent data by the Australian Bureau of Statistics, the export price index, which represents export prices of merchandise goods, rose 11.2% QoQ in the March 2021 and +8.6% over the prior year. Import price index edged up 0.2% in this quarter and fell 6.2% through the year. This was the second-largest record growth achieved in the last five years, as shown in the below chart.
Figure 1. Upward Trending Export Price Index:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
A broad spectrum of merchandise goods evidenced a surge in export prices. An increase in the crude materials category was led by metalliferous ores and metal scrap, which posted an increase of 18.2% in March 2021 over the preceding quarter. Strong demand from China for iron ore and shortage of supply in the global market contributed to the rise. The revival in industrial production supported manufactured goods, with iron and steel exports showing strong growth in the index. Mineral fuels category rebounded with export prices of natural gas on the rise as recovery in oil prices in late 2020 saw manifold increase in oil-linked contracts. Petroleum prices improved owing to the strong demand for oil and reduced global supply. Export prices of gold (non-monetary) declined by 9.7% QoQ in March 2021 was due to improved sentiments and recovering markets following the easing of global uncertainty. Food prices were affected by record harvest activity for cereals which had put pressure on prices.
Figure 2. Surge in Metalliferous Ores Drove Export Prices:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
A surge in the export price index translated to healthy export values in Australia. According to The Australian Bureau of Statistics, Australia posted a strong trade surplus in March 2021 since the beginning of the year. Both exports and imports of goods soared 15%, with the trade surplus reaching ~$8.5 billion. Australia exported record-breaking iron ore totalling ~$14 billion in March 2021. Iron ore accounted for 39% of overall exports. Copper ore posted the third-highest exports to record $745 million. The ongoing revolution in green technologies has taken the demand over the top for copper intensive goods.
In a separate report by the Department of Industry, Science, Energy and Resources, a handful of base metals and bulk commodities posted an increasing price trend at a global level. As copper played an essential role in the nation’s electrification needs, the price of copper firmed up and is expected to reach US $8,260 a tonne in 2021. Strong industrial and construction activity may drive consumption in China, India, the US, and Italy. The rollout of vaccination is expected to ease gold prices from US $1,700 in 2021 to US $1,210 an ounce in 2026. Worldwide consumption of gold is expected to decline. Central Banks in various jurisdictions felt the need for more liquid assets and started selling off gold. However, gold export in Australia is expected to peak at ~$29 billion in 2020-21 as the price is expected to hold steady gains in the current year. Zinc prices may get negatively affected by increasing production levels. Zinc usage in battery technologies for renewables is rapidly catching up in Australia.
Figure 3. Copper Prices Holds Steady Growth:
Data Source: The Department of Industry, Science, Energy and Resources, Chart Created by Kalkine Group
Australia is the largest exporter of iron ore, with a global share of 53% in 2020. The prices reached the highest level since 2011 to US $152.33/ tonne in January 2021. Supply disruptions in Brazil and increased demand from China is leading the price gains. The iron ore price is projected to remain over US $100/ tonne until late 2021. Brazil iron ore output is expected to rebound in the next 12-18 months, which may ease iron ore prices. Supply pressure owing to production cuts in Canada and Kazakhstan is weighing on uranium which had shown steady price gains.
Figure 4. Iron Ore Prices Reached Highest Level Since 2011:
Data Source: The Department of Industry, Science, Energy and Resources, Chart Created by Kalkine Group
Key Risks: Much of the increase in the export price index was driven by an appreciation of the Australian dollar against the US dollar. Export earnings may worsen if the Australian dollar turns volatile and depreciates. The Brazilian economy is expected to recover in the next 12-18 months, and this may gradually ease the demand from China for Australia’s iron ore exports. Delay in vaccine rollout in the global economies may affect industrialization progress and stall the infrastructure activity bringing down the exports of copper, steel, etc.
Figure 5: Key Risks Affecting Export Earnings:
Source: Analysis by Kalkine Group
Outlook: Export earnings from the resources sector is set to reach $296 billion in 2020-21, according to The Department of Industry, Science, Energy and Resources. Steady price is expected to peak iron ore exports reaching $136 billion in 2020-21. Commercialization of South Flank project by BHP, resumption of mining operation in the Northern Territory by The Roper Bar Mine, NT Bullion’s new Frances Creek mine is expected to boost iron ore production. In a report by IHS Markit, manufacturing firms expressed optimism for an increased output over the coming twelve months. The PMI Manufacturing Index rose to the highest level since 2016 to reach a reading of 59.6. Considering the development in exports of the resources sector, we have figured out 4 stocks on ASX that are set to see the momentum.
(1) Newcrest Mining Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 21.67 Billion, Annual Dividend Yield: 1.66%)
Riding on long reserve life: Newcrest Mining Limited (ASX: NCM) is one of the largest gold producer and gold mining company in Australia. In FY20, revenue increased by ~5% YoY to US$3,922 million, led by 11% YoY growth from Cadia location to US$1,802 million, where production of gold stood at 843koz and achieved record mined tonnes at 31.8mtpa. This strong operating performance facilitated Cadia to generate a free cash flow of US$991 million. However, overall gold production fell by 13% YoY to 2,171koz, while copper jumped by 30% YoY to 138 thousand tonnes primarily led by production from the acquired Red Chris, and higher production from Cadia and Telfe. Meanwhile, NCM successfully raised A$1.2 billion of equity through A$1.0 billion of institutional placement and A$200 million Share Purchase Plan that was used for the acquisition of finance facilities for the Fruta del Norte mine and towards organic growth options.
NCM reported H1FY21 revenue growth of ~21% YoY to US$2,172 million led by a rise in gold revenue by 18% YoY to US$1,768 million, followed by copper revenue by 34% YoY to US$469 million, and silver revenue by 50% YoY to US$12 million. However, overall gold production fell by 2% YoY to 1,038koz, while copper jumped by 11% YoY to 69 thousand tonnes. Further, EBITDA jumped by 52% YoY to US$1,146 million, partially due to fall in operating cost by 8% YoY to US$1,029 million. Meanwhile, during Q3FY21, gold production stood at 512koz and copper production at 35kt and improved All-In Sustaining Cost (AISC) of $891/oz, as well as delivered an AISC margin of 49%. In Q3FY21, Cadia recorded the lowest ever quarterly AISC of negative $160/oz.
Outlook: Phenomenal advancement seen at the Havieron Project where initial inferred mineral resource projected at 3.4Moz of gold & 160kt of copper. Further, the Red Chris box is commenced, and funding has been approved. Importantly, the dividend policy is aimed at 30-60% payout for FY21 free cash flow, a minimum annual dividend of no less than US$15 cents per share, an interim dividend of US$15 cents per share, an increase of 100%. These developments indicate strong operational performance and increased revenue visibility for future periods.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs NCM (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month returns of ~+2.42% and ~-11.19%, respectively. It is currently trading below the average of a 52-week high price of $38.150 and a 52-week low price of $23.085, indicating an accumulation opportunity. The stock outperformed the market volatility index driven by the strong progress by the resources sector despite the pandemic. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a premium as compared to its peer average EV/Sales (NTM Trading multiple), citing its leadership position in gold production, notable progress in its Havieron Project and ability in raising equity funds from institutional investors. For this purpose, we have taken peers such as Alkane Resources Ltd. (ASX: ALK), OZ Minerals Ltd. (ASX: OZL), Strandline Resources Ltd. (ASX: STA), to name a few. Considering the notable acquisitions, strong H1 FY21 performance, ongoing projects and dividend policy for FY21, we give a “Buy” recommendation on the stock at the current market price of $26.270, down by 0.943% on 3rd May 2021.
(2) Aurelia Metals Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 518.41 Million, Annual Dividend Yield: 2.40%)
High-grade gold and federation discoveries to drive future growth: Aurelia Metals Limited (ASX: AMI) is involved in mining and exploration with a strategic landholding and three operating gold mines in New South Wales. In FY20, the company reported ~12% YoY rise in revenue to ~$332 million led by an increase in gold revenue by 10% YoY to $217 million, followed by copper revenue by 40% YoY to $42 million, silver revenue by 88% YoY to $9 million, and zinc revenue by 14% YoY to $26 million. Further, gold production reported at 91,672 ounces and All-In-Sustaining-Cost (AISC) at $1,526/oz. Meanwhile, EBITDA and Net Operating Cash-flow exceeded $100 million for the third consecutive year at $103.4 million and at $124.6 million, respectively. AMI balance sheet continued to be strong at a cash balance of $79 million with zero debt. Importantly, the upgrade of the lead-zinc circuit at the Peak mining facility was completed, commissioned, and ramped up in FY20.
In H1FY21, AMI reported a rise in revenue and EBITDA by ~26% YoY to ~$208 million and 44% YoY to $50 million, respectively, as higher prices achieved on all metals, with gold delivering the highest benefits and majority of sales volume gained from Peak zinc output. Further, it had posted a jump in operating mine cash flow and group cash flow by 57% YoY to $95.3 million and by 165% to $26.7 million, respectively. In Q3FY21, gold production stood at 34.9koz, AISC at $1,429/oz driven by higher gold grades at Peak and Hera and a full-year quarter of Dargues ownership.
Outlook: For FY21, the management expects to mine 100-113 koz gold at ASIC of $1,425-1,575/oz. Mining at Kairos is on track, with a high-grade Peak ore source set to commence in June 2021 quarter. Updated federation resource, supported by ~55,000m of drilling. These developments are expected to cement the company’s fundamental for future growth prospects.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs AMI (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month returns of ~+1.22% and ~-5.06%, respectively. It is currently trading below the average of a 52-week high price of $0.636 and a 52-week low price of $0.271, indicating an accumulation opportunity. The stock performed well over the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at some discount as compared to its peer mean EV/Sales (NTM Trading multiple), citing gold prices may soften due to mass vaccination rollout, and increasing yields may alter the investment climate affecting gold prices and realization to the company. For this purpose, we have taken peers such as Perenti Global Ltd. (ASX: PRN), Red 5 Ltd. (ASX: RED), Sandfire Resources Ltd. (ASX: SFR), to name a few. Considering the strong production from high-grade gold mines, healthy realization, ongoing mining investments, valuation, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.415, down by 1.191% on 3rd May 2021.
(3) BlueScope Steel Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 10.89 Billion, Annual Dividend Yield: 0.65%)
Softened Demand Impacted by the Pandemic: BlueScope Steel Limited (ASX: BSL) is engaged in the manufacturing of steel slabs, plates, hot and cold rolled coils, and coated and painted strip products for building and construction, automotive, whitegoods, and manufacturing industry. The company faced headwinds during the first half of 2020 due to the pandemic impacting overall revenues, which had declined by 10% to $11.3 billion in FY20 over pcp. Its North Star segment was affected by the closure of automotive businesses. The North America market was impacted due to lower volumes on the back of project delays and softer end markets. Its underlying EBT dropped from ~$784 million in FY19 to ~$564 million in FY20. All segments underperformed except for Building Products Asia and North America. BSL is evaluating New Zealand business by exiting non-profitable products. It is expecting cash costs of $30-$50 million.
In H1 FY21 results, BSL posted revenue growth across all segments. Its Australian business was favourably impacted by the government stimulus in the residential dwelling market. Dispatches surged in the North Star segment to 1,025 kt in H1 FY21 (vs. 1,015 in H2 FY20) as auto volumes returned to pre-COVID levels. BSL experienced robust demand from the North American construction market. Demand from China and South East Asia benefited from seasonality. Overall revenues were up by ~7% in H1 FY21 (on a QoQ basis). Its underlying EBIT improved from $228 million in H1 FY20 to $531 million in H1 FY21. The company’s North Star (in North America) expansion project is on track, and commissioning is expected in June 2022. It had closed the period with net cash of $305 million as of December 2020. BSL has adequate liquidity to the tune of $3.14 billion, including undrawn credit facilities. The debt maturity profile seems manageable, with ~$485 million is coming for due in H2 FY22. BSL announced interim dividends of 6.0 cps while buy-back plans were on hold.
Outlook: The management has upwardly revised the earnings estimates of BSL. Its underlying EBIT for H2 FY21 is expected to be in the range of $1.0-$1.08 billion. Increase in HRC steel price to favourably impact North Star profitability. Improved domestic realization from Australia to benefit the company.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs BSL (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~29.12% and ~46.78%, respectively. It is currently trading above the average of a 52-week high price of $23.990 and a 52-week low price of $9.350. The stock outperformed the market volatility index as the recovery of the construction and engineering sector is weighted on the company performance. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at some discount as compared to its peer median EV/Sales (NTM Trading multiple), citing the company’s businesses are highly concentrated in the construction market, which carries seasonal risks, and the engineering activity is dependent on government public infrastructure spending. For this purpose, we have taken peers such as Perenti Global Ltd. (ASX: PRN), Mount Gibson Iron Ltd. (ASX: MGX), St Barbara Ltd. (ASX: SBM), to name a few. Considering the robust performance in H1 FY21, ongoing expansion in North Star, solid liquidity, an upward revision of earnings estimates, we give a “Hold” recommendation on the stock at the current market price of $21.460, down by 0.741% on 3rd May 2021.
(4) IGO Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 5.67 Billion, Annual Dividend Yield: 1.49%)
A Strong Growth in Nickel and Copper Production: IGO Limited (ASX: IGO) operates as an exploration and mining company. The company’s Nova Operation produces nickel and copper concentrates. Its Tropicana Operation represents the joint venture interest in the Tropicana Gold Mine. IGO experienced higher production in FY20, exceeding guidance covering all metals. Its Boston Shaker Underground gold project is on track and is nearing completion. Overall revenues improved by 13.3% to reach $888.9 million in FY20. The company maintained lower cash costs for three quarters that helped to post underlying EBITDA of $351 million in FY20 (vs. $256 million in pcp). Its JV operation for the gold project commands a strong EBITDA margin of ~60%.
The company produced low-milled grade nickel during H1 FY21 resulting in a drop in revenues by 2.5% in H1 FY21 over pcp. Higher copper prices and lower cash costs partly offset for revenue loss resulting in underlying EBITDA of $194.6 million in H1 FY21, down by 6% over pcp. However, the EBITDA margin of the gold exploration project improved from 54% to 56%. IGO has five exploration projects targeting nickel and copper deposits in Australia. It plans to acquire 25% interest in the Lithium project for US $1.4 billion, and the transaction is expected to close by June 2021 quarter. It had reported a cash balance of ~$1.19 billion as of December 2020 with nil debt. It had secured $766 million in new equity and $1.1 billion through debt issuance towards the Lithium JV project.
Outlook: The company is projecting an FY21 nickel concentrates production target of 27,000-29,000 and copper concentrates of 11,000 to 12,500. It had downwardly revised cash cost estimates of $1.80-$2.10/lb Ni for FY21. The gold production from JV is targeted at 380-430 koz in FY21 and cash costs at $1,040 – 1,120/ oz.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs IGO (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~13.93% and ~67.10%, respectively. It is currently trading above the average of a 52-week high price of $7.760 and a 52-week low price of $4.028. The stock performed well over the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). We believe that the stock might trade at a premium as compared to its peer median EV/Sales Value (NTM Trading multiple) considering steady performance of its gold exploration JV and investment in a Lithium mining project that is expected to drive the profitability going forward considering the revolution in low-emission technologies and the regulatory push. For this purpose, we have taken peers such as Strandline Resources Ltd. (ASX: STA), Syrah Resources Ltd. (ASX: SYR), Pilbara Minerals Ltd. (ASX: PLS), to name a few. Considering the solid cash balance, low production costs achieved in both Nickle and gold operations, successful fundraising for Lithium investment, we give a “Hold” recommendation on the stock at the current market price of $7.360, down by 1.736% on 3rd May 2021.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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