Event Core
To set the pace with the global transition to Electric Vehicles (EVs), the Australian Renewable Agency (ARENA) announced the first funding round of the ‘Future Fuels Fund,’ which aims to rollout 400 public fast-charging stations for EVs nationwide. Comprehending the merits of applicants, ARENA widened the funding envelope by circa $25 million to get the ball rolling. On 30 July 2021, ARENA announced $24.55 million of funding facility to five applicants across 19 projects. Cumulatively, the five applicants are expected to deliver 403 EV fast-charging stations, catalyzing an aggregate investment value of $79.9 million.
Figure 1: The Grid of Successful Applicants:
Source: Based on Australian Renewable Agency (ARENA), Analysis by Kalkine Group
Revved Up Mineral Exploration Activities
Total expenditure in mineral resources has surged by 13.7% on a sequential basis and stood at $843.9 million for the March 2021 quarter. The country witnessed 3.262 million meters of drilling in the same period relative to 2.949 million, up by 10.6% QoQ.
Figure 2: Uptrend in Mineral Exploration Activities:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
An Overview of Global Electric Vehicle Demand
Global sales forecast for EV sales stands at 4.4 million in 2021 relative to 3 million in 2020. Recently, automotive manufacturers have devised a roadmap for capacity increases in 2025, exceeding the requirements of government policies.
Automakers have experienced a significant transition to EVs from internal combustion engines (ICE). Globally, EV sales increased by 126% PcP in the quarter of March 2021. Long-term demand for EVs is estimated to surge annually to 26 million units’ sales by 2030, and the estimate stands likely to be exceeded.
Recent Regulatory Support to Priorities Low Emission Technologies
In October 2020, the Australian Government announced a $2.47 billion investment roadmap for measures targeting low energy prices and reducing emissions. The regulatory support from Government was aimed to build ARENA’s funding capacity and ensure delivery of multiple programs.
Figure 3: ARENA’s Key Programs:
Source: Based on Australian Renewable Agency (ARENA), Analysis by Kalkine Group
Trending Potential of Lithium Exploration and Industrial Developments
Lithium International Trade Draws Breath: With rising demand for battery-driven products, especially EVs, global demand for lithium is estimated to increase to 452,000 tonnes in 2021. China’s exports in lithium hydroxide rose by 20% MoM in April 2021, reflecting standard trading, and lithium carbonate imports surged by 20% relative to 38% MoM.
Australia’s Spodumene Concentrate Market Manifests Resilience: For the March 2021 quarter, Australia’s spodumene concentrate production inclined to 54,000 tonnes Lithium Carbonate Equivalent (LCE), up by 11% QoQ and 24% YoY. As a result, spodumene concentrate market price, appreciated by 36% and stood at US$550/tonne. By the end of May 2021, prices stood at US$640/tonne.
Global Demand for Nickel Rides on a High Tide
Rising Global Demand for Nickel: In March 2021 quarter, global consumption of nickel jumped 19% YoY, buoyed by solid demand from the EV battery market and stainless-steel consumption. Demand for global finished nickel is estimated to grow by 7.3% in 2021, reaching 2.5 million tonnes.
Battery and EV Markets to Devise International Roadmap for Nickel Consumption: Currently, batteries account for 5% of primary nickel consumption. However, increased EV penetration rates in the automobile sector, coupled with surged usage of nickel in batteries, projects 14% consumption within the next five years.
Australia’s Key Statistics in Nickel: In FY21, nickel export earnings are forecasted to stand at $3.6 billion, 4.5% down YoY. Despite the decline, Australian nickel production will be supported by capacity investments and surge in global prices. As a result, export volumes for FY22 are estimated to clock 248,000 tonnes, up 26% YoY.
Key Risks and Challenges
Global competition to cater EV sector has driven up high, which may translate into price pressures on lithium, graphite, and nickel. Despite intensive government support, EVs face high affordability issues. Lithium iron phosphate (LFP) battery usage assumes a potential threat from cell to pack (CTP) layout improvements due to limitations on the driving range. Potential concerns over the long-term availability of nickel supply have flagged the preference of lithium-iron-phosphate battery over nickel-heavy battery chemistries. Forecasts for Nickel Prices are revised downwards, which may cause a contraction in export earnings.
Figure 4: Key Risks and Challenges:
Source: Analysis by Kalkine Group
Outlook
Figure 5 – Key Drivers for the EV and Battery Offtake:
Source: Analysis by Kalkine Group
The Green Investments by Countries Underpinned the Growth Story for Battery Metals: The resilient US Green Deal shall earmark US$1.7 trillion for infrastructure projects, including ‘green infrastructure.’ coupled with green investment in EU countries’ EUR750 billion fiscal stimulus package shall deliver growth in battery minerals.
Favorable Market Growth Expectations Supporting New Projects: High expectations in the battery sector, combined with higher prices, have translated into numerous announcements of new projects or project restarts. As a result, Australia estimates a 25% contribution in new global mined supply by 2030.
Upward Revision in Lithium Export Forecasts: Australia’s lithium exports are revised by 44% amidst strong price support on spodumene price. Spodumene prices have appreciated to US$640/tonne, well above the 2021 forecast of US$508/tonne.
Australia’s Dominance in Global Lithium Hydroxide Refining Capacity: Australia accounts for 26% of global lithium hydroxide refining capacity. Considering vertical integration of lithium hydroxide and spodumene production in Australia shall enable producers to customize refineries according to battery producers’ requirements.
Positive Insights on Nickel Production from Companies: In April 2021, Panoramic Resources announced the re-opening of the Savannah nickel project in Western Australia. Poseidon Nickel completed the drill drive at the Golden Swan, which expects a final call on investment decisions by 2021. Mincor Resources opened the Cassini Nickel Mine by late March 2021, with expectations of the first delivery of nickel concentrates by March 2022. Considering the improvement in the Australia’s EV and battery market, we have figured out 4 stocks on ASX that are set to see the momentum.
(1) Nickel Mines Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.75 billion, Annual Dividend Yield: 0.00%)
Robust Top-line Substantially Improved Cash Flows: Nickel Mines Limited (ASX: NIC) is involved in mining nickel ore and nickel pig iron production in Australia. In FY20, the company registered sales revenue of US$523.49 million relative to US$236.06 million posted in six months period to 31 December 2019. As a result of resilient top-line and proliferated production, net income increased to US$153.70 million relative to US$91.28 million PcP. In addition, the cash balance substantially increased to US$351.45 million relative to US$49.82 million PcP due to improved cash receipts from customers.
In Q1FY21, NPI production assumed a modest incline to 36,927.8 tonnes from the previous quarter of 36,811.4 tonnes. For the period, the average cost of production inclined to US$23.48/wmt relative to US$22.78/wmt in the previous quarter.
Business Update: On 3 May 2021, NIC entered into an MoU with Shanghai Decent Investment (Group Co., Limited) to modify RKEF lines to produce nickel matter products suitable for entering the electric vehicle battery market. On 21 April 2021, NIC announced its 100% ownership in RKEF lines and 380MW power stations.
Outlook: NIC has successfully initiated development activities at Hengjaya mine in Indonesia Morowali Industrial Park. NIC further explores diversification opportunities in customer base by entering into EV battery markets. NIC has improved its expectations from RKEF assets.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
NIC Daily Technical Chart, Data Source: REFINITIV
Stock Recommendation: Over the last month, the stock of NIC went up by ~1.896%. The stock made a 52-weeks' low and high of $0.595 and $1.535, respectively. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at a slight premium compared to its peer's average, considering 100% ownership in RKEF assets and top-line diversification. For this purpose, we have taken peers like Mincor Resources NL (ASX: MCR), Strandline Resources Ltd (ASX: STA), Newcrest Mining Ltd (ASX: NCM), to name a few. Considering the diversification activities, increased top-line & production in Q1FY21 despite the pandemic, and valuation, we give a 'Buy' rating on the stock at the current market price of $1.075, down by ~1.827% as of 09 August 2021.
(2) Battery Minerals Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 33.64 million, Annual Dividend Yield: 0.00%)
Continuous Project Developments Seek Growth Prospects: Battery Minerals Limited (ASX: BAT) is engaged in mining development and mineral exploration in Mozambique. The company is focused on Montepuez and Balama projects to produce high-grade graphite. In FY20, BAT registered an increase in other income to $0.117 million relative to $0.016 million in FY19. The company has incurred a loss of $6.547 million in the period. The cash balance improved to $7.303 million as of 31 December 2020 relative to $4.119 million in 2019. BAT holds no long-term debts in its accounts.
During Q2FY21, BAT completed 3,526 meters of the Aircore drilling at the Frying Pan prospect in Victoria. In addition, BAT acquired the Russell Copper Project in the East Kimberly region of Western Australia with prospects of copper and silver exploration. In addition, the company initiated a pilot plant study for Montepuez Graphite Project to secure an African-focused grant. Net cash outflow from operations stood at $1.362 million in Q2FY21 with total available funding of $4.615 million.
Outlook: Looking forward, BAT would continue to focus on finishing project finance to develop and bring the Montepuez Graphite Project successfully into commercial production. In addition, BAT is also focused on becoming a successful production company in the graphite market.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
BAT Daily Technical Chart, Data Source: REFINITIV
Stock Recommendation: Over the last month, the stock of BAT went down by ~10.526%. The stock made a 52-weeks' low and high of $0.009 and $0.040, respectively. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at a slight premium compared to its peer's average, considering its debt-free financial position. For this purpose, we have taken peers like Venturex Resources Ltd (ASX: VXR), Sunrise Energy Metals Ltd (ASX: SRL), Talga Group Ltd (ASX: TLG), to name a few. Considering the potential commercial production, exploration plans for graphite, and valuation, we give a 'Speculative Buy' rating on the stock at the market price of $0.016, as on 09 August 2021, 11:12 AM (GMT+10), Sydney, Eastern Australia.
(3) Mineral Resources Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 11.12 billion, Annual Dividend Yield: 2.99%)
Favourable Iron Ore Market Drives Promising Results: Mineral Resources Limited (ASX: MIN) operates a portfolio of mining projects across lithium and iron ore in Australia. During FY20, revenue climbed up by 41% YoY and stood at $2.125 billion, and underlying EBITDA surged by 77% YoY and stood at $765 million. The favourable top-line and bottom-line were primarily driven by record growth in mining services from Koolyanobbing ramp-up, record sales in iron ore and strong support in iron ore prices. For the period, net free cash flow turned positive at $403 million.
In H1FY21, revenue touched $1.531 million, a significant jump of 55% PcP. With high operational efficiencies in place, underlying EBITDA surged to $763 million, up by 131% PcP. Favourable revenue and EBITDA results were primarily driven by growth in mining services from the Yilgarn Hub and support from external contracts and record sales in iron ore with favourable prices. Operating cash flows and net free cash flows stood at $654 million and $303 million, respectively.
Business Updates: On 30 July 2021, MIN announced that it entered into an agreement with Red Hill Iron Limited (RHI) to acquire 40% interest in Red Hill Iron Ore Joint Venture (RHIOJV) in the West Pilbara region.
Outlook: As per company reports, MIN will likely produce natural gas and LNG with low emissions intact. The company expects to explore its wells in the next six months and two wells each year to initiate its clean energy goals.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
MIN Daily Technical Chart, Data Source: REFINITIV
Stock Recommendation: Over the last month, the stock of MIN went up by ~3.235%. The stock made a 52-weeks' low and high of $23.960 and $65.380, respectively. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit (in percentage terms). Moreover, we believe that the company can trade at a slight premium compared to its peer's average, considering expansion prospects into LNG and natural gas. For this purpose, we have taken peers like Newcrest Mining Ltd (ASX: NCM), Northern Star Resources Ltd (ASX: NST), BCI Minerals Ltd (ASX: BCI), to name a few. Considering the favourable global market for iron ore, diversification into clean energy, and valuation, we give a 'Hold' rating on the stock at the current market price of $59.030, up by ~0.135% as of 09 August 2021.
(4) Cleanaway Waste Management Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 5.19 billion, Annual Dividend Yield: 1.73%)
Diversified Operations in Waste Management and Resilient Operational Efficiency Delivers Significant Bottom-Line Improvements: Cleanaway Waste Management Limited (ASX: CWY) is primarily involved in providing integrated total waste management solutions to its clients. Despite covid-19 impact and lower commodity prices, gross revenue inclined by 2.1% YoY and stood at $2,332 million. EBITDA inclined by 2.5% and $473 million with 60 bps widened margins recorded 22.5% during the period. Strong operational efficiency emerged from concentration on higher-margin work, increased per unit utilization of assets and labour and realization of synergies from ongoing integration activities.
In H1FY21, net revenue for the period remained almost unchanged on a PcP basis. It stood at $1,070.2 million, primarily attributed to high revenue inflows from solid waste services with offsetting revenue declines in industrial & waste services and liquid waste & health segments. Underlying EBITDA stood at $263.8 million, up by 2.9% PcP, coupled with a margin expansion of 60 bps at 24.6%. Operating cash flow increased by 28.8% PcP and stood at $204.4 million, primarily attributed to lower remediation cash flow, lower tax liability and low cash outflows from underlying adjustments.
Outlook: Although uncertainties prevail in the trading environment, CWY estimates FY21 EBITDA to outpace FY20 figures. CWY continues to explore integration strategies to incur operational efficiency. The waste management services already exhibit high diversification, and hence high resilience from external factors.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
CWY Daily Technical Chart, Data Source: REFINITIV
Stock Recommendation: Over the last month, the stock of CWY went down by ~3.101%. The stock made a 52-weeks' low and high of $2.050 and $2.865, respectively. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at a slight premium compared to its peer's average, considering highly diversified revenue segments in waste management services. For this purpose, we have taken peers like HRL Holdings Ltd (ASX: HRL), SG Fleet Group Ltd (ASX: SGF), Bingo Industries Ltd (ASX: BIN), to name a few. Considering the continuous operational efficiency, high cash flow levels, prudent integration strategies, and valuation, we give a 'Hold' rating on the stock at the current market price of $2.500, down by ~0.794% as of 09 August 2021.
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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