Company Overview: IGO Limited (ASX: IGO) is a leading exploration company involved mainly in the mining and processing of nickel, copper and cobalt. The company is strategically focused on metals that are critical to energy storage and renewable energy. IGO has a portfolio of high-quality belt scale exploration projects across Australia and overseas as it owns 100% of the Nova nickel-copper-cobalt operation and a 30% non-operator interest in the Tropicana Operation, a Joint Venture with AngloGold Ashanti Australia Limited.


IGO Details
 

 
 
Operating High-Quality Belt Scale Exploration Projects: IGO Limited (ASX: IGO) is a leading exploration and mining company with a portfolio of high-quality belt scale exploration projects across Australia and overseas. The company is strategically progressing to become a globally relevant supplier of metals that are critical to energy storage and renewable energy. The company’s growth strategy is 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. Lately, the company has been successful in producing high-quality, battery-grade nickel sulphate and saleable copper-cobalt mixed sulphide products. Over the period 2015 - 2019, the company’s top-line grew at a CAGR of 12.18%. 


Company Performance (Source: Company Reports)

The company continues to investigate opportunities for IGO to have exposure to the downstream nickel sulphate, and potential cathode precursor chemicals markets which will help it in unlocking greater value from the metals it produces whilst also unlocking value via the supply chain of materials critical for clean energy. Further, IGO has been exploring a range of areas including equipment productivity and tracking, additional automation and technology benefits and innovations to improve recoveries and efficiencies through technology that can reduce costs. For FY20, the company has increased the exploration budget to accelerate organic growth opportunities. In FY20, the company is expecting continued strong production performance at Nova and anticipates nickel, copper and cobalt production to be marginally above the top end of FY20 guidance. The company continues to assess inorganic growth opportunities that have the potential to deliver improved returns to its shareholders.

FY19 Performance Highlights: For the financial year 2019, the company reported record revenue of $793 million and an underlying EBITDA of $341 million. Throughout the year, the company saw a consistent operational performance at Nova and Tropicana. The performance of the company’s two core assets generated an underlying free cash flow of $278 million and net profit after tax of $76 million. For FY19, the company paid total dividends of 10 cents per share. 
In FY19 all nickel, copper and cobalt were derived from Nova with all gold contributed from the Tropicana JV (IGO 30% share). From Nova, the company reported production of 30,708t nickel and 13,693t copper, exceeding the top end of metal production guidance. From Tropicana, the company delivered 518,172oz of gold production on a 100% basis.


FY19 Performance (Source: Company Reports)

H1FY20 Highlights: In the first half of FY20, the company generated revenue and other income of $474.7 million, up 33% on the previous corresponding period (pcp). Further, the company recorded profit from ordinary activities of $100.1 million, up 44% on pcp, driven by the higher production and payable metal from the Nova Operation, together with higher metal prices during the period.

From Nova operations, the company generated revenue of $316.9 million, an increase of 47% over pcp, resulting in segment profit before tax of $123.8 million. During the period, the company finalized new Nova offtake contracts with materially improved nickel payability terms. The Tropicana Operation contributed $54.1 million in segment profit before tax. During the period, the company’s underlying free cash flow increased by 84% to $206 million, increasing net cash to A$396 million. For the period, the company declared an interim unfranked dividend of A$0.06 per share.


H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 51.88% of the total shareholding. Creasy (Mark Gareth) and T. Rowe Price Associates, Inc., Inc. hold the maximum interests in the company at 15.39% and 7.69%, respectively.
 

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Recent Updates:

1. Planned exploration activities at Fraser Range JV Projects: IGO Ltd has planned exploration activities on Rumble Resources Ltd’s Fraser Range JV Projects in the June 2020 Quarter. At Thunderdome JV Project (70% IGO), IGO has already completed a wide-spaced air core drilling program (1.5km by 400m pattern) over a portion of the project. The company has recently decided to undertake a systematic air-core drilling program across the tenements in order to obtain basement samples for geochemistry.

2. Substantial field program for West Kimberly Joint Venture tenure: Recently, Buxton Resources Limited updated its shareholders that IGO is going to undertake a significant drill program for West Kimberly Joint Venture tenure. Proposed field work includes deep diamond drilling at Merlin, ground EM in the adjoining Quick Shears tenements plus ground reconnaissance of recently identified EM anomalies. The company is planning to conduct additional ground EM and ground truthing to prioritise follow-up drilling.

Response to Covid-19: In response to Covid-19 pandemic, the company has implemented measures to change the way it operates its business so that it can minimise the risk of the virus reaching its sites. The company has announced a special COVID-19 leave provision of 20 days in addition to standard leave provisions. Further, it has also introduced a comprehensive employee assistance program and a mental health program. The company’s exploration activity around Nova and on the Fraser Range is continuing as planned, however, to ensure the health and wellbeing of all its community stakeholders, the company has suspended all exploration activities at Lake Mackay and in the East and West Kimberley regions. 

Q3FY20 Performance Highlights: In the third quarter of FY20, the company continued its strong performance from its core assets and generated a revenue of $188 million. The company reported revenue and other income of $188 million and underlying EBITDA of $76 million, representing an EBITDA margin of 40%. During the quarter, the company’s cash at bank increased to $464.3 million and bank debt remained unchanged at $57.1 million. 

The production at Nova increased Quarter on Quarter for all metals, at a cash cost of A$1.96 per payable pound of nickel for the Quarter. In line with the company’s expectation, the Tropicana gold production was lower, with lower Cash Costs and All-in Sustaining Costs of $877 and $1,303 per ounce respectively.


Quarterly Performance (Source: Company Reports)

A Quick Look at Key Margins: In H1FY20, IGO’s gross margin stood at 71.8%, higher than the industry median of 46.8%. For the same period, the company reported a net margin of 21.1%, up 20.9% on pcp, demonstrating the company’s improving profitability. The company has a current ratio of 5.27x, higher than the industry median of 1.76x.


Key Metrics (Source: Refinitiv, Thomson Reuters)

What to expect: Looking forward, the company intends to achieve growth through exploration, M&A and downstream processing. It continues to investigate the opportunity for IGO to have exposure to the downstream nickel sulphate, and potential cathode precursor chemicals markets which will help it in unlocking greater value from the metals it produces while also unlocking value via the supply chain of materials critical for clean energy.

Following the continued strong production performance at Nova, 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 at Tropicana is expected to be towards the lower end of its guidance range and AISC is expected to be towards the upper end of its guidance range. The total capital expenditures at Tropicana are expected to be within the full-year guidance range.


FY20 Guidance Range (Source: Company Reports) 


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative) 

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company has a strong balance sheet with a cash balance of $464.3 million and bank debt of $57.1 million and is therefore well-positioned to work through the current challenging and uncertain period. In the past six months, the stock of IGO has declined by 27.34% and is inclined towards its 52 weeks low price, offering an opportunity for accumulation. We have valued the stock using EV/EBITDA 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 strong financial and operational performance in FY19 and first nine months of FY20, IGO’s strong balance sheet, FY20 Outlook, and current trading levels, we give a “buy” recommendation on the stock at the current market price of $4.680, up by 0.645% on 6 May 2020.
 
 
IGO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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