I. Sector Landscape
In December 2022 quarter, the surged commodity prices have driven mining profits with a 3.4% increase in gross profit surplus plus gross mixed income (GOSMI). The mining operating surplus advanced by 14.7%, reflecting robust growth in commodity prices. Moreover, Australia’s energy segment seeks substantial opportunities amid surged domestic demand for electricity generation and subsequent escalation of urbanisation.
Prospects for Lithium Mining
Favourable Pricing Uptrend: The demand for lithium continues to be driven by increased battery usage for electric vehicles (EVs) and several portable electrical appliances. Spodumene prices are forecasted to grow from an average of US$660/tonne in 2021 to US$1,325/tonne in 2022. Lithium hydroxide prices are forecast to increase to US$27,620/tonne in 2022 from US$17,970/tonne in 2021 before easing to US$13,140 in 2027.
World Demand for Lithium: The global lithium demand is estimated to rise to 636,000 tonnes of lithium carbonate equivalent (LCE) in 2022 from 526,000 tonnes in 2021. Global light electric vehicle (EV) sales expanded in 2021, with an estimated 2 million EV sales in December 2021 quarter. Global EV sales are estimated to rise by 3 million units in 2022.
Oil & Gas Exploration Witnessing Favourable Price and Volume Metrics
Total Petroleum Exploration: In March 2022 quarter, the offshore petroleum exploration expenditure increased to $163.7 million, up by 35.4% sequentially and a substantial 71.6% PcP. Total petroleum exploration expenditure stood at $340 million, up by 7.6% sequentially and 26.3% PcP. On the contrary, production lease areas slipped by 11.2% to $95.2 million.
Petroleum Demand: Demand for transportation fuels has sought recovery, with solid growth projected for 2022 and early 2023. Global airline travel continues to resurge, with jet fuel consumption projected to rise in 2022 and 2023. Global oil consumption is projected to clock 104 million barrels/day by 2025.
Index Performance:
The ASX 300 Metals and Mining (GIC) and ASX 200 Energy (GIC) Indices have posted 2-year returns of ~+34.33% compared to ~+32.89%, respectively. Increasing emphasis on emission-reducing technologies, favorable commodity pricing factors, considerable green energy investments, and economic recovery prospects.
The ASX 300 Metals and Mining (GIC) and ASX 200 Energy (GIC) have outperformed the ASX 200 Index in the past five years by ~11.35% and ~9.91%, respectively:
Source: REFINITIV as of 02 June 2022
Key Risks and Challenges
Total lithium supply from mine and brine operations currently stands incapable of meeting demand. While project development is underway, bridging the supply gap will take considerable time. A potential downside for EV growth expectations is the 30% cut to China’s EV subsidy program in January 2022, with program termination by 2023. Significant uncertainty surrounds global oil price forecasts, with geopolitical distress amid Russia and Ukraine driving global supply concerns. Data from February 2022 showcase that OPEC+ members pumped an additional 120,000 barrels/day, way less than the mooted 400,000 barrels/day increase. LNG prices remain elevated in the June 2022 quarter but is expected to recede as oil prices settle.
Outlook
Increased Capex in Mining: The total private new capital expenditure for FY22 is estimated to clock $42.1 billion and $41.9 billion in FY23. The rising exploration expenditure in mining may sustain the current trend.
Improved Lithium Production Prospects in Australia: Australia’s lithium production is estimated to cross triple the units over the outlook period, clocking to 692,000 tonnes of LCE in FY27 from 224,000 tonnes in FY21.
Favourable Lithium Export Earnings: Australia’s lithium export earnings are estimated to increase from $1.0 billion in FY21 to $6.7 billion in FY27 as lithium hydroxide production rises. Moreover, five lithium hydroxide refining operations are expected to commence operations by FY27.
Crude Oil and Feedstock Exports: Australia’s crude oil and feedstock exports in FY22 are estimated to increase by 1.7% to 281,000 barrels/day. Exports are projected to rise later as several new oil projects come online.
Favourable Export Earnings: Australia’s crude and condensate export earnings are revised upwards by almost $1.2 billion in FY22 and $2.7 billion in FY23, amid significant higher oil price forecasts.
II. Investment theme and stocks under discussion (IGO, LTR, BPT)
After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Book Value’ multiple method.
1. ASX: IGO (IGO Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$8.45 billion)
IGO is engaged in the mining and developing operating assets focused on metals to enable clean energy in Australia.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 18.38% on 02 June 2022. Moreover, the stock might trade at a slight premium compared to its peers, given its achievement in the first and consistent production of battery-grade lithium hydroxide. For valuation, peers such as Iluka Resources Ltd (ASX: ILU), Jervois Global Ltd (ASX: JRV), Mineral Resources Ltd (ASX: MIN), and others are considered. Given the financial inflows from TLEA, successful production of battery-grade lithium hydroxide, well-diversified business portfolio, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $11.600, up by ~3.942% on 02 June 2022. In addition, the stock has delivered an annualised dividend yield of 1.34%.
IGO Daily Technical Chart (Source: REFINITIV)
2. ASX: LTR (Liontown Resources Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$2.51 billion)
LTR is a battery metals exploration and development company focused on developing its Kathleen Valley project to a standalone mine in Australia.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 18.94% on 02 June 2022. However, given no revenue generation and potential exploration risks, the stock might trade at some premium compared to its peers. For valuation, peers such as Mincor Resources NL (ASX: MCR), Iluka Resources Ltd (ASX: ILU), Sunrise Energy Metals Ltd (ASX: SRL), and others are considered. Given the active exploration activities in place, offtake binding term sheets signed with creditworthy players, positive results from Buldania Project, current trading levels, and upside indicated by valuation, we give a “Speculative Buy” recommendation on the stock at the closing market price of $1.190, up by ~3.930% on 02 June 2022.
LTR Daily Technical Chart (Source: REFINITIV)
3. ASX: BPT (Beach Energy Limited)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$3.98 billion)
BPT is an oil & gas exploration and production company headquartered in Adelaide, South Australia.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 9.75% on 02 June 2022. However, the stock might trade at a slight discount compared to its peers, given challenges from high oil price volatility and potential funding risk. For valuation, peers such as Santos Ltd (ASX: STO), Cooper Energy Ltd (ASX: COE), Karoon Energy Ltd (ASX: KAR), and others are considered. Given the decent financial performance, sufficient liquidity, prompt investment activities, current trading levels, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing market price of $1.775, up by ~1.719% on 02 June 2022. In addition, the stock has delivered an annualised dividend yield of 1.14%.
BPT Daily Technical Chart (Source: REFINITIV)
Competitive Price Chart:
Source: REFINITIV
Markets are trading in a highly volatile zone currently due to certain macroeconomic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
Note: All the recommendations and the calculations are based on the closing price of 02 June 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the factors discussed above.
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