Company Overview: IGO Limited (ASX: IGO) is a leading exploration and mining company with a portfolio of high-quality operating and exploration assets. The company seeks to become a globally relevant supplier of metals that are critical to energy storage and renewable energy. The company is mainly involved in the mining and processing of nickel, copper and cobalt mining and processing at the Nova Operation (100% owned). Further, it is also involved in the non-operator gold mining from its 30% interest in the Tropicana Operation and ongoing mineral exploration in Australia and overseas.


IGO Details


Decent Top-Line Growth: IGO Limited (ASX: IGO) is a leading exploration and mining company that has a strategic aspiration to become a globally relevant supplier of metals that are critical to energy storage and renewable energy. The company’s 100% owned Nova nickel-copper-cobalt operation is central to its growth strategy which remains focused on exploration and discovery; identifying potential M&A opportunities; and exploring vertical integration and partnership opportunities, both domestically and overseas, to leverage off the nickel sulphate downstream processing technology. In order to become a globally relevant producer of materials critical to clean energy, the company is actively pursuing step-change organic growth through its portfolio of belt scale exploration projects in Australia and internationally. Over the last few years, the company has transformed its exploration project portfolio to increase its exposure to belts and projects that have the potential to deliver multiple tier-one nickel and copper discoveries. During 2015 - 2019, the company’s revenue grew at a CAGR of 12.18%.


5-Years Financial Snapshot (Source: Company Reports)

Amid Covid-19 pandemic, the company has continued to perform resiliently with decent production reported in March Quarter, positioning IGO to end FY20 excellently. The company expects to end FY20 with nickel, copper and cobalt production at, or marginally above, the top end of FY20 guidance and cash costs towards the mid-point of guidance. The company remains focussed on exploration and discovery of high-quality, longer-life, and larger-scale projects; and identifying potential M&A opportunities to drive long-term growth. 

FY19 Performance Highlights: During the financial year 2019, the company reported record revenue and other income of $793 million and an underlying EBITDA of $341 million. In FY19, the commercial production at Nova exceeded production guidance, and the performance from Tropicana comfortably met the production guidance. Tropicana’s production was also higher than the previous year, driven by higher throughput, grade and a higher realised gold price. The performance of IGO’s two core assets generated an underlying free cash flow of $278 million and record net profit after tax of $76 million.

During the period, the company sold, 22,434 tonnes of payable nickel, 12,208 tonnes of payable copper and 372 tonnes of payable cobalt. Tropicana generated cash from operating activities of $148 million following the sale of 154,402 ounces of gold refined and sold. For the full year, the company paid a total dividend of $0.10 per share and returning a record A$59 million to its shareholders.


FY19 Results Summary (Source: Company Reports)

H1FY20 Performance Highlights: In the first half of FY20, the company generated revenue and profit from ordinary activities of $474.3 million and $100.1 million, respectively, underpinned by higher production and payable metal from the Nova Operation, together with higher metal prices during the period.  For the period, the company delivered an interim unfranked dividend of A$0.06 per share, up 200% on the previous corresponding period (pcp).

Nova operations delivered higher production relative to the prior half-year with the production of 15,236t nickel, 6,779t copper and 561t cobalt at a cash cost of A$2.51/lb. The company generated revenue of $316.9 million from Nova Operation, up 47% on pcp. Tropicana operations performed better than guidance with gold production of 257,252oz at cash costs and All-in Sustaining Costs of A$719/oz and A$1,007/oz, respectively. From Tropicana Operation, the company reported a profit after tax of $54.1 million up 27% on pcp.


H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 51.82% of the total shareholding. Creasy (Mark Gareth) and T. Rowe Price Associates, Inc., hold the maximum interests in the company at 15.39% and 7.69%, respectively.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

A Quick Look at Key Metrics: For H1FY20, the company’s gross margin stood at 71.8%, higher than the industry median of 47.1%. Further, the company reported a net margin of 21.2%, higher than the industry median of 14.3%. The company’s current ratio stands at 5.27x, higher than the industry median of 1.81x, demonstrating that the company is well-equipped to pay its short-term obligations. 


Key Metrics (Source: Refinitiv, Thomson Reuters)
 
March 2020 Quarter Highlights: During the March 2020 quarter, the company delivered decent results, with production performance and disciplined cost control positioning IGO for a strong finish to FY20.Total revenue for the quarter stood at $188 million, benefitting from its strong delivery at Nova and offset by lower nickel prices and lower gold production. Further, the company reported an underlying EBITDA of $76 million, representing a strong EBITDA margin of 40%. Net cash improved during the quarter to $407.2 million.

At Tropicana operations, the production was lower due to lower grades, resulting in expected higher costs as a result of the lower produced ounces. At Nova, nickel, copper and cobalt production all exceeded pro-rata FY20 production guidance at 8,019t, 3,784t and 303t, respectively.


March Quarter Production Results (Source: Company Reports)   

Recent Updates: 

1. Confirmation of Gold/Silver Mineralisation At Burracoppin: Moho Resources Ltd (ASX: MOH), an Australian mining company which is in a farm-in joint venture agreement with IGO Limited for Burracoppin Project Tenements, recently announced assay results of individual 1.0 metre samples from maiden aircore drill program at Burracoppin Crossroads prospect, confirming that the Crossroads prospect hosts bedrock gold and silver mineralisation.

2. $7 million Agreement with IGO: IGO Newsearch Pty Ltd, a wholly-owned subsidiary of IGO Limited recently executed $7 million agreement with Matsa to earn a 70% interest in the Symons Hill nickel project which is highly prospective for nickel and copper and is located within the Fraser Range. IGO Newsearch Pty Ltd can elect to spend a minimum of $3.5 million to earn a 70% interest in the project.

3. Joint Venture with Metals X Limited: On 11 June 2020, Metals X Limited announced that it has executed a binding $32 million Farm-in and Joint Venture Term Sheet with IGO Limited in relation to the Paterson Exploration Project (PEP). This Joint Venture further consolidates IGO’s presence in this highly endowed, yet under-explored province.

Key Risks: Despite the challenging operating conditions, the company has continued to perform resiliently during the last few months. However, there is no certainty that operations will not be impacted in the coming months. The company is exposed to the risks of deviations in the commodity prices as its revenues are sourced from the sale of base metals and precious metals that are priced by external markets. The company is exposed to exchange rate risk on sales denominated in United States dollars (USD) whilst its Australian dollar (AUD) functional currency is the currency of payment to the majority of its suppliers and employees. The Company has material exposure to economic, environmental, and social sustainability risks, including changes in community expectations, and environmental, social, and governance legislation. 

What to expect: Amid Covid-19 pandemic, the company has continued to perform resiliently with decent production performance reported in March Quarter, positioning IGO for a strong finish to FY20. The company remains focussed on exploration and discovery of high-quality, longer-life and larger-scale projects; and identifying potential M&A opportunities to drive long-term growth.

The company expects to end FY20 with nickel, copper and cobalt production at, or marginally above, the top end of guidance and cash costs towards the mid-point of guidance. The gold production from Tropicana is expected to be towards the lower end of the FY20 guidance range and AISC is expected to be towards the upper end of the guidance range. The FY20 exploration expenditure is expected to be approximately $6 million, lower than the mid-point of guidance.
 

FY20 Guidance Range (Source: Company Reports)            


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: With net cash amounting $407.2 million as at 31 March 2020, the company is well-positioned to work through the current challenging and uncertain period. Over the last three months, the stock of IGO has increased by 41.95% on ASX and is currently trading close to its average 52-week trading range. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price with lower double-digit upside (in % terms). For the purpose, we have taken peers OZ Minerals Ltd (ASX: OZL), Iluka Resources Ltd (ASX: ILU) and Mineral Resources Ltd (ASX: MIN). Considering the company’s decent financial and operational performance, its robust balance sheet, FY20 guidance, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $5.030, up by 1.822% on 24 June 2020. 
 

IGO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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