Event Core
On 10 March 2022, the Australian Bureau of Statistics released data and estimates on Payroll jobs and wages, primarily sourced from Single Touch Payroll data. As per the release, the payroll jobs spiked by 0.8%, and total wages surged by 2.7% between the week ending 29 January 2022 and 12 February 2022.
Key Takeaways from Weekly Payroll Release
Seasonality Impact on Payroll Jobs and Wages: Annual payroll jobs grew 1.8% to 12 February 2022, just over half of the previous year’s comparable growth of 3.2% to 13 February 2021, reflecting a slower start in 2022. In contrast, total wages stood 7.0% higher relative to 2021 than 5.5% annual growth.
Figure 1: Payroll Jobs Index in the Upward Trajectory:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Industry Impact: Payroll jobs surged in 11 out of 19 industries in the fortnight to 12 February 2022. Payroll jobs in the education & training industry advanced by 7.4% across the fortnight as students re-engaged in studies. The rental hiring & real estate services industry witnessed the most significant fall in payroll jobs, down by 1.4%. On a PcP basis, annual growth in payroll jobs was highest in Mining, up by 6.7%, and lowest in Accommodation and food services, down by 10.8%.
Data Supporting Selective Industries: The electricity, gas, water, & water services industry witnessed a 1.4% surge in payroll jobs in the year since 13 February 2021. The mining industry clocked the highest uptick of 6.7% in the same period. Since 15 January 2022, the construction industry has advanced by 4.1% in payroll jobs.
Updates on Metals & Mining and Construction Industry
Key Updates on Mining Activities: In December 2021, total expenditure on mineral exploration stood at $921.5 million, substantially over $743.1 million expenditure in December 2020. Meters drilled advanced from 2,971.1 meters in December 2020 to 3,154.1 meters on a seasonally adjusted basis.
Figure 2: Total Mineral Exploration Expenditure Demonstrating an Uptrend:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Improved Prospects for Gold Consumption: The global gold consumption is forecasted to advance by 4.0% to 3,880 tonnes in 2021, as recovery in ongoing economic activities supports the jewellery demand. In September 2021 quarter, several gold mines recorded a surge in output. Production at the Newcrest’s Telfer gold mine in Western Australia advanced by 17% YoY to 3.1 tonnes.
Advanced Copper Prospects: Copper prices increased in 2021, averaging to US$9,200/tonne. High prices will be supported in 2022 by expanding copper usage in low-emission technology and economic recovery. Australia’s copper export volumes are estimated to increase from 898,000 tonnes in FY21 to around 934,000 tonnes in FY23.
Construction Activities Recovering: The total construction value for December 2021 quarter stood at $53.46 billion, up by 2.9% PcP. In September 2021 quarter, total dwelling unit commencements advanced by 30.8% PcP and clocked $56.62 billion. The Residential Property Price Index increased by 5.0% sequentially and 21.7% over the past 12 months in September 2021.
Key Risks and Challenges
The post-lockdown recovery has forced workers to cash in on country-wide labour shortages by seeking higher wages, increasing industries’ operating costs. The significant impact of global supply chain disruption remains a fundamental cost to particular industries. On a sequential basis, total construction work done slipped by 0.4% in December 2021 quarter. Gold prices are estimated to fall by an average of 2.7% a year, to US$1,700/ounce in 2023, as global economic recovery witnesses a higher interest rate environment. Scheduled maintenance and lower processing rates at several sites have highly affected copper mining.
Figure 3: Key Drivers v/s Key Constraints
Source: Analysis by Kalkine Group
Outlook
Contracting Labor Supply Gap: In January 2022, the unemployment rate remained at 4.2% and the participation rate advanced by 66.2%. The employment to population ratio increased by 0.1 ppts to 63.4%.
Improved Production: In December 2021 quarter, the gross domestic product increased by 3.4% quarterly and 4.2% PcP and gross operating surplus plus gross mixed income advanced by 0.9%.
Improved Estimates for Capital Expenditure: The Australian Bureau of Statistics estimates capex in buildings and structures to clock $79.4 billion in FY22, a 1.0% upward revision relative to the previous estimate.
Favourable Gold Export Earnings: Australia’s gold export earnings are estimated to surge from $28.3 billion in FY22 to $28.4 billion in FY23, primarily driven by higher export volumes to 377 tonnes in FY23.
Improved Copper Consumption: The refined copper consumption is estimated to increase by 3.7% and clock 25 million tonnes in 2021. The global consumption is estimated to clock 27 million tonnes in 2023 as manufacturers fulfil a demand backlog.
Considering the positive movement in payroll jobs and wage growth, we have figured out three stocks on ASX that are set to see the momentum.
(1) Washington H Soul Pattinson and Company Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 8.95 billion, Annual Dividend Yield: 2.49%)
Surged Construction Activities Raising Growth Prospects: Washington H Soul Pattinson and Company Limited (ASX: SOL) is an Australian-based investment company, driving revenue through stakes in coal mining, gold, and copper mining, refining operations, and consulting services. In FY21, SOL registered $273 million in statutory NPAT, an uptick of 71% PcP. Profitability was primarily attributed to growth in building products and favourable land revaluations, which increased Brickworks’ contribution by almost 95%. Substantial improvements in Round Oak, supported by $103 million, and robust recovery in the coal process bolstered New Hope’s profit contribution by almost 45% PcP.
A 21.5% uptick primarily drove SOL’s net asset value in New Hope Corporation and a 48.5% surge in Brickwork’s portfolio, partially offset by a 22.5% downshift in the telecommunication portfolio. SOL’s portfolio value amplified by 12% PcP to $5.8 billion. On the other hand, net cash from investments slipped 29% PcP to $180 million. Despite the shortfall in TPG value, net asset value achieved 12% growth. Robust FY21 portfolio cash generation allowed a higher return to investors, primarily attributed to a 6% uptick in cash generation on a PcP basis.
Outlook: The merger with Milton Corporation is projected to amplify the large-cap portfolio by over $3.5 billion. SOL targets higher long-term shareholders’ returns via building capital growth and steady improvements in dividend payout.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
SOL Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last year, the stock of SOL went down by ~17.504%. The stock made a 52-weeks low and high of $24.760 and $40.800, respectively. 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 stock might trade at a slight discount compared to its peers’ average EV/Sales (NTM trading multiple), given considering fluctuations in coal supply and changes in macroeconomic factors. For valuation purposes, peers like Santos Ltd (ASX: STO), Senex Energy Ltd (ASX: SXY), Woodside Petroleum Ltd (ASX: WPL), and others have been considered. Given the diversification benefits, potential merger synergies, improved net asset value, current trading levels and upside indicated by valuation, we give a “Buy” recommendation rating on the stock at the current market price of $25.180, as of 14 March 2022, at 11:28 AM (GMT+10), Sydney, Eastern Australia. Markets are currently trading in a highly volatile zone due to specific macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.
(2) Copper Mountain Mining Corporation (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 826.46 million, Annual Dividend Yield: 0.00%)
Improved Production and Price Support Improving Future Prospects: Copper Mountain Mining Corporation (ASX: C6C) undertakes exploration and development of the Copper Mountain mine project in British Columbia. In FY21, production stood at 90.1 million pounds of copper, 523,821 ounces of silver, and 28,736 ounces of gold. The full-year C1 cash cost/copper pound production stood at US$1.49, and AISC/copper pound stood at US$1.84. FY21 stood significantly higher at CDN$ 578.20 million relative to 341.75 million in FY20. For FY21, the copper recovery stood at 79.8% relative to 78.0% in FY20.
In FY21, the EBITDA and cash flow from operations were stretched to CAD 306.22 million relative to CAD 117.84 million in FY20 and CAD 315.46 million relative to CAD 121.61 million. The hiked top-line and bottom-line were driven by the increased copper price and higher copper and silver sales, partially offset by forex movements. The lower deferred stripping costs were attributed to decreased deferred stripping activity in response to C6C adjusting its operating plans to curtail expenses.
Outlook: Copper production in FY22 is estimated to range between 80 and 90 million pounds, as C6C focuses on promoting Phase 4 of the Copper Mountain Main Pit and North Pit development. The company expects an AIC to range between US$2.00 and US$2.50/pound of copper.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
C6C Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last year, the stock of C6C went up by ~17.910%. The stock made a 52-weeks low and high of $2.900 and $5.420, respectively. 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 a slight discount compared to its peers, considering high copper price volatility and potential exploration risks. For valuation purposes, peers like BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), Fortescue Metals Group Ltd (ASX: FMG), and others have been considered. Given the decent surge in top-line, cost reduction strategies, surging copper prices, 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 $3.950, down by ~0.754%, as of 14 March 2022. Markets are currently trading in a highly volatile zone due to specific macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.
(3) Newcrest Mining Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 23.90 billion, Annual Dividend Yield: 2.44%)
The Completed Acquisition and Expansion in Production Profile may Deliver Fundamental Support: Newcrest Mining Limited (ASX: NCM) is mainly involved in the exploration, mine development, mine operations, and the sale of gold and gold/copper concentrate. On 9 March 2022, NCM announced the completion of the Pretium Resources acquisition, which will immediately increase NCM’s gold production and cash flows. In FY21, NCM recorded an AISC margin of US$876 per ounce, substantially up by 31% YoY. Free cash flow inclined substantially to US$4,295 million with receipt of US$92 million from Fruta del Norte finance facility.
In H1FY22, NCM clocked revenue of US$1,715 million, down by 21% PcP and EBITDA slopped by 35% and was struck at US$740 million. Free cash flows turned adverse to an outflow of US$303 million relative to an inflow of US$439 million. Statutory and underlying profits were clocked at US$298 million, and AISC stood at US$1,194/ounce, delivering an AUSC margin of US$502/ounce. NCM approved the Cadia PC1-2, Havieron Stage 1, Red Chris Block Cave, and Lihir Phase 14A pre-feasibility studies.
Outlook: NCM expects the produced commodities to stay strong with additional opportunities to enhance gold and copper production profiles. The acquisition of Pretium Resources is expected to deliver synergy benefits of ~C$15 to C$20 million annually.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
NCM Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last year, the stock of NCM went up by ~10.616%. The stock made a 52-weeks low and high of $20.910 and $29.270, respectively. 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 shrinking fundamentals, the company can trade at a slight discount compared to its peers. For valuation purposes, peers like Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: ALK), OZ Minerals Ltd (ASX: OZL), and others have been considered. Given the synergies sought with Pretium Resources, potential expansion of gold & copper profile, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the current market price of $26.570, down by ~1.043% as of 14 March 2022.
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 on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.
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