Event Core
On 5 March 2022, the Australian Bureau of Statistics released figures on international trade in goods and services. Key statistics highlight that the balance of goods and services surplus, on a seasonally adjusted basis, advanced by $1,877 million to $9,314 million in March 2022. The surplus advancement was primarily driven by a 5% decline in imports and an almost negligible change in exports.
Key Statistics on International Trade
Goods Export Sustaining Elevated Levels: Total goods export fell marginally by $59 million sequentially to $44,678 million in March 2022. The goods exports were primarily upheld by a $611 million increase in non-rural goods in general merchandise and were restrained mainly by a $493 million downturn in non-monetary gold exports.
Goods Import Dipping: Total goods imports fell by 5% or $1,871 million and clocked at $34,342 million in March 2022. Consumption goods import slipped by $962 million, and intermediate and other merchandise goods import squeezed by $697 million.
Materials Industry to Bolster Exports
Mineral Exports and Capex Activities: Metal ores and mineral exports stood at $14.20 billion for March 2022, relative to $14.08 billion in February 2022. Despite instability in global macros, the industry is expanding leaps and bounds – showcasing resilience. Total capex on mining rose by 2.6% to $9.44 billion in December 2021 quarter, indicating operational expansion in the industry.
Total Expenditure on Mineral Exploration Activities: The total expenditure on mineral exploration stood at $921.5 million in December 2021 quarter, relative to $743.1 million on PcP. Meters drilled advanced to 3,154.1 million relative to 2,971.1 million meters on PcP. Despite a sequential hiccup, the statistics of exploration activities are elevated amid rising global demand.
Key Risks and Challenges
Beijing’s “Zero COVID-19” policy will likely continue to affect economic activity in 2022, causing supply chain disruptions and constraining commodity demand. The Australian metallurgical coal prices are at, or close to, record-high levels as bad weather in Australia affects exploration and transportation. Mining value-added slipped by 1.0% (QoQ) in December 2021 quarter and was down 0.1% on a PcP basis. The recovery in world economic activity continues to be affected by COVID-19 outbreaks and energy shortfalls. The mining industry is significantly affected by labour shortage and immobility, causing production delays and short-term cash flow constraints.
Outlook
Favourable Capex Estimates: The Australian Bureau of Statistics estimates mining capex to clock $42.7 billion in FY22, an upward revision of 1.2% from the previous estimate. In FY23, the capex estimates for mining stand at $38.5 billion.
Favourable Export Earnings: Export earnings are estimated to lift by 33% to clock a record of $425 billion in FY22. Earnings should steady out at $263 to $293 billion after FY23.
Increase in Energy Prices: Energy prices have surged on the prospect of geopolitical stress among Russia and Ukraine, intensifying energy shortages. Commodity prices will settle back as inventories rebuild and international trade reorganises.
Increased Commodity Price Index: In Australian dollar terms, the Office of the Chief Economist’s Resources and Energy Commodity Price Index advanced by 24% in the March 2022 quarter and stood by 49% on a PcP basis.
Surging Electric Vehicle Sales Bolstering Materials Demand: It is forecasted that global EV sales will surge from 6.5 million units in CY21 to 22 million units in CY27, raising demand for steel, aluminium, lithium, and other related materials.
Considering the improvement in trade surplus, we have figured out three stocks on ASX that are set to see momentum.
(1) Capricorn Metals Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.44 billion, Annual Dividend Yield: 0.00%)
Recent Commissioning and Cash Flow Generating Project Upgrading Fundamentals: Capricorn Metals Limited (ASX: CMM) engages in gold exploration, development, and project evaluation business in Australia and Madagascar. In FY21, the cash position stood at $10.3 million as of 30 June 2021. The first gold sale clocked a sale of 1,477 ounces for $2,450/ounce, collecting $3.6 million in revenue. An investment of $1.2 million was made in gold and base metals explorer DiscovEx Resources Limited, holding 11.68% interest.
In H1FY22, gold sales stood at 52,756 ounces at an average delivery price of $2,383/ounce. The cash balance as of 31 December 2021 stood at $27.4 million, with gold bullion worth $2.6 million. Bank debt was registered at $75 million after repaying $15 million. Gold production for the March 2022 quarter stood at 31,769 ounces, and pre-royalty cash cost stood at $942/ounce with an all-in sustainable cost (ASIC) of $1,086/ounce. Cash flow from operations from KGP mine continued with $35.1 million with increasing mining volumes and third mining fleet operations.
Outlook: Mining volumes are expected to surge to around 1.2 million BCM/month, optimising current mining fleets. The strip ratio is expected to expand beyond the life of mine average of 3.6.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs CMM (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of CMM went down by ~13.40%. The stock made a 52-weeks low and high of $1.735 and $4.850, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at some discount compared to its peer’s EV/Sales multiple average, considering supply chain constraints and labour shortage. For valuation purpose, peers like Alkane Resources Ltd (ASX: ALK), Evolution Mining Ltd (ASX: EVN), Newcrest Mining Ltd (ASX: NCM), and others have been considered. Given the decent fundamental support from recent commissioning, steady cash flows, investment in mining activities, current trading levels, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $3.620, down by ~6.70%, as of 9 May 2022.
(2) Sandfire Resources Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.21 billion, Annual Dividend Yield: 5.36%)
Tag Line: Sandfire Resources Limited (ASX: SFR) engages in the exploration and production of copper concentrate, comprising gold and silver by-products from its 100% owned DeGrussa operations in Western Australia. In FY21, SFR registered A$813.0 million in sales relative to A$656.8 million in FY20, and payable metal sales stood at 65,689t Cu and 37,394 ounces Au. Cash flow from operations stood at A$471.1 million relative to A$273.6 million, and the cash balance as of 30 June 2021 stood at A$573.7 million despite significant capital expenditures.
In Q3FY22, the acquisition of MATSA Mining Operation in Spain was executed, and the operational integration program was rolled out. Quarterly sales stood at a revenue of US$343.1 million, and group EBITDA stood at US$186.9 million, illustrating significant leverage to string metal pricing amid a growing production profile. The cash balance as of 31 March 2022 stood at US$390.5 million, and the net stood at US$409.5 million.
Outlook: SFR remains on track to clock production of 92-95kt Cu, nearly 38kt Zn, almost 3kt Pb, 30-34koz Au, and approximately 1,400koz Ag. The resource drill-out of the Lawry Deposit at the Black Butte was completed.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs SFR (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of SFR went down by ~7.92%. The stock made a 52-weeks low and high of $4.900 and $7.495, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Considering the high volatility in commodity prices, the company can trade at a slight discount compared to its peer’s EV/Sales multiple median. For valuation purpose, peers like Aeris Resources Ltd (ASX: AIS), Perenti Global Ltd (ASX: PRN), Equus Mining Ltd (ASX: EQE), and others have been considered. Given the diversified metal production, acquisition of MATSA, progress with Lawry Deposit, decent cash position at optimised leverage levels, current trading levels, upside indicated by valuation, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $5.230, down by ~3.33%, as of 9 May 2022.
(3) Regis Resources Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 1.47 billion, Annual Dividend Yield: 3.58%)
Improving Gold Prospects Encouraging Fundamental Growth: Regis Resources Limited (ASX: RRL) is a gold production company with projects in Western Australia and New South Wales. RRL operates Duketon North, Duketon South, and Tropicana (30% stake) segments. In FY21, RRL clocked a revenue of $819 million by selling 367,285 ounces of gold at an average price of $2,229/ounce. EBITDA stood at $403 million at a margin of 49%, and NPAT stood at $146 million at a margin of 18%, reflecting business strength. Cash and bulling as of 30 June 2021 stood at $269 million after a fully franked dividend payment of $61 million.
In H1FY22, RRL delivered revenue of $489 million from the sale of 216,651 ounces of gold at an average price of $2,256/ounce. EBITDA for the period stood at $196 million at a 40% margin amid the inclusion of a 30% interest in Tropicana. Underlying NPAT stood at $44 million with a statutory NPAT of $26 million. Cash flow from operating activities clocked at $136 million. Gold production for the period stood at 210,270 ounces for H1FY22 at an AISC of $1,527/ounce. Cash and bullion as of 31 December 2021 stood at $180 million after consideration of a $22 million dividend payment (fully franked), $31 million in taxes, $33 million in exploration expenditure and $152 million capex.
Outlook: RRL is looking forward to the growth ahead of Tropicana as the operations transition back to its historical run rate of 450 to 500koz annually. Production guidance for FY22 stood at 420 to 475 koz at an AUSC of $1,425 to $1,500/ounce.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs RRL (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of RRL went down by ~8.82%. The stock made a 52-weeks low and high of $1.665 and $2.740, respectively. The stock underperformed the market volatility index. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a high single-digit (in percentage terms). The company can trade at a slight discount compared to its peer’s EV/Sales multiple median, considering increased regulatory delays and rising financial leverage. For valuation purpose, peers like St Barbara Ltd (ASX: SBM), Perseus Mining Ltd (ASX: PRU), Wiluna Mining Corporation Ltd (ASX: WMC), and others have been considered. Given the favourable god prospects, improved production guidance, decent fundamentals, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $1.860, down by ~4.86%, as of 9 May 2022.
Markets are currently trading in a highly volatile zone due to specific macroeconomic issues and geopolitical issues prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should be made depending on investors’ appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock at the Target Price mentioned as the Valuation has been achieved and subject to the factors discussed above.
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