I. Sector Landscape
The International demand for rare earth metals, mostly batteries and magnets, has gone through the rood as climate crisis and sustainability concerns prevailed. Australia has maintained its dominant position in catering battery manufacturers, considering ample natural resources. Continuous demand for Australia’s uranium, aluminum, lithium, and graphite resources, accompanied by associated downstream investment, may enter the expansionary territory in the battery value-add supply chain.
Australia remains to be the most extensive economic demonstrated resource of uranium at a global level. Australia’s build-up of nuclear momentum holds a substantial uncovered demand in the forthcoming decades. Uranium prices have languished since 2011, during the disaster of Fukushima in Japan. As nuclear energy is making a cautious comeback, uranium prices resurged to reclaim its dominance in the energy sector.
Mining Activities in Australia
Economic Support Delivered by Mining Activities: In June 2021 quarter, Australia’s terms of trade surged by 7.0%, claiming the highest levels in history and primarily driven by solid export prices of mining commodities. As a result, the mining industry turned to be a significant contributor to a 3.2% surge in gross operating surplus plus gross mixed income (GOSMI). Despite diluted production levels, mining operating surplus edged up by 16.9% QoQ and an astonishing 34.3% PcP.
Figure 1: Mining and non-mining contributions to quarterly growth in Gross Operating Surplus plus Gross Mixed Income (GOSMI)
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Private New Capital Expenditure: For June 2021 quarter, total new capex surged by 4.4% sequentially and 11.5% PcP, clocking an investment of $32.68 billion. Specifically, in mining activities, capital expenditure inclined marginally by 0.4% on a sequential basis and bulged by an astonishing 15.3% PcP. For the same quarter, mineral exploration expenditure edged up by 3.7% on a sequential basis and grew 33.3% through the year.
Figure 2: Mineral Exploration Expenditure Soaring as Commodity Prices Manifest Upward Trajectory
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Updates in Uranium Space
Global Perspective over the Yellowcake: Nuclear power usage has gradually uplifted over the past few years worldwide, partly from a rise in the number of countries developing nuclear plants and partly due to the increased demand and supply gap in the global energy sector amid pandemic circumstances. China remains a critical global uranium market, as the nation now holds 25 nuclear plants with a total capacity of over 28,000 MW.
Uranium Prices Clocking New Highs: Uranium exploration businesses and ETFs have skyrocketed amid rising demand from China and India amidst the growing need for meeting electricity demand. Large uranium purchases by the Sprott Physical Uranium Trust, a Canadian Closed-End Fund (CEF), have pushed uranium prices to their highest level. As of 07 November 2021, uranium closed at US$43.85/ounce.
Developments in Rear Earth Minerals
Figure 3: Australia’s Contribution in World Rare Earth Supply
Source: Department of Industry, Science, Energy and Resources, Analysis by Kalkine Group
Government Backing Australia’s Critical Minerals: On 28 September 2021, the Australian government announced establishing a $2 billion loan facility for critical mineral projects to assist in securing vital supplies of resources. The facility will operate for ten years in the National Interest Account or until $2 billion financings has been provided.
Uproar in Rare Earth Metals: World demand for lithium is expected to soar from 305k tonnes of lithium carbonate equivalent 2020 to 486k tonnes in 2021 as demand for electric vehicles maintains an upswing from 2021 to 2023. The outlook for rare earth elements varies vastly, primarily dependent on the end-use application. As demand for low-emissions technologies surged, permanent magnets witnessed a breakout, with elements being praseodymium, neodymium, and dysprosium.
Index Performance:
The ASX 300 Metals and Mining (GIC) Index posted 5-year returns of ~+67.01% compared to ~+37.45% by the ASX 200 Index. Increasing emphasis on emission reducing technologies, widening global nuclear installations, considerable green energy investments, and economic recovery prospects.
Figure 4: The ASX 300 Metals and Mining Index (GIC) outperformed the ASX 200 Index in the past one years by ~29.56%:
Source: REFINITIV as of 11 November 2021
Key Risks and Challenges
Figure 5: Key Drivers and Restraining Factors
Source: Analysis by Kalkine Group
International competition to cater EV sector has taken a sharp uplift, which may translate into high pricing pressures on lithium, nickel, and graphite. Despite considerable government subsidies, EVs face high affordability issues and potential diseconomies of scale. Furthermore, recent distress in China’s manufacturing sector may pose significant demand threats for battery input products on a global scale. In addition, potential concerns over the long-term availability of rare earth may flag supply shortages. The rare earth market has had frequent shortages, volatile history, volatile prices, oversupply, quotas, and export restrictions.
Outlook
Investment into Critical Metals: The Australian Government's stance for delivering $2 billion liquidity to the critical metal production objectifies to establishing a formal structure for the critical metal space and developing supply-chains in the free and open Indo-Pacific.
Widening Global Nuclear Installations: The build-up of global nuclear installations as more countries installs reactors, uranium seeks high growth prospects. Prices already surged through the roof in September and October 2021, presenting favourable conditions for growth in export earnings.
Electric Vehicle (EV) Turnover Touches All-time Highs: EV sales have bulged 21% QoQ in June 2021 quarter, with sales dominated by Europe and China. The long-term demand is forecasted to surge to near 30% of annual vehicle sales by 2030.
The Green Investments by EU and US HRC Prices: The EU announced several new initiatives in July 2021 as part of the European Green Deal, which targets curtail net emissions by almost 55% by 2030. US HRC (Hot-Rolled Coil) prices have also surged by as much as 300% over the past 12 months.
Lithium Production and Export Forecasts: Australia’s lithium carbonate equivalent production is estimated to surge from 217,000 tonnes in FY21 to 374,000 tonnes in FY23. Australia’s lithium exports earnings are estimated to incline from $1.1 billion in FY21 to $2.8 billion in FY23 as lithium hydroxide production increases.
II. Investment theme and stocks under discussion (NTU, VML, S32, ERA)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed on the TTM based valuation, EV/Sales multiple and based on the technical review.
1. ASX: NTU (Northern Minerals Limited)
(Recommendation: Speculative Buy, Mcap: A$276.55 million)
NTU is engaged as a principal supplier of ethically produced rare earth metals and separated products.
Valuation
The stock of NTU gave a positive return of ~75.758% in the past year. On a TTM basis, the stock of NTU is trading at a Price/Book Value multiple of 9.2x lower than the industry average (Metals and Mining) of 385.8x. Considering the growing demand for rear earth elements, expansion plans for the Browns Range project, TTM based valuation, and technical levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.056, as of 11 November 2021, at 09:45 AM (GMT+10), Sydney, Eastern Australia. Investors with a high-risk appetite should evaluate this stock given the technical support and resistance levels and take into consideration associated risks such as highly concentrated exposure to uranium and potential regulatory risks.
Technical Overview
NTU prices broke the downward sloping trend line by upside on monthly chart and prices are sustaining above the trend line from past three weeks. Prices are sustaining above its 21-period and 50-period SMA that further indicates bullishness in the stock. RSI (14-period) is hovering ~64.62 on a daily chart that indicates the prices are trading in a strong upside momentum. Immediate support levels are $0.050 while immediate resistance levels are $0.067.
2. ASX: VML (Vital Metals Limited)
(Recommendation: Speculative Buy, Mcap: A$233.26 million)
VML is engaged in mineral exploration in Burkina Faso, West Africa. Further, its Doulnia Gold Project is in southern Burkina Faso, West Africa.
Valuation
The stock of VML gave a positive return of ~117.857% in the past year. On a TTM basis, the stock of VML is trading at a Price/Book Value multiple of 3.6x lower than the industry average (Metals and Mining) of 385.8x. Considering sufficient liquidity position, acquisition of Zeus and Kipawa, TTM valuation, and technical levels, we give a "Speculative Buy" recommendation on the stock at the current market price of $0.056, as of 11 November 2021, at 09:47 AM (GMT+10), Sydney, Eastern Australia. Investors with a high-risk appetite should evaluate this stock given the technical support and resistance levels and take into consideration associated risks such as highly concentrated exposure to uranium and potential regulatory risks.
Technical Overview
On a weekly chart, VML's prices are sustaining above an upward sloping trend line and above the trend following indicators 21-period SMA and 50-period SMA, indicating an upward trend for the stock. The RSI (14-period) is trading above mid-point, further supporting a positive bias. Now an important resistance level for the stock is placed at $0.066, while support is at $0.051 level.
3. ASX: S32 (South32 Limited)
(Recommendation: Hold, Potential Upside: Single High-Digit, Mcap: A$16.13 billion)
S32 is engaged in the exploration of Alumina, Aluminium, Coal and Manganese in Australia.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 7.82% on 11 November 2021. Moreover, the stock might trade at some premium compared to its peers' average EV/Sales (NTM trading multiple), considering the improving aluminium production estimates and favourable demand upside. For valuation, peers like Regis Resources Ltd (ASX: RRL), Perenti Global Ltd (ASX: PRN), Capral Ltd (ASX: CAA) are considered. Considering the initiative to exit low returning projects, diverting capex in Mozal, improved aluminium production estimates, and valuation, we give a “Hold” recommendation on the stock at the closing price of $3.470, up by ~0.289% as on 11 November 2021. In addition, the stock has delivered an annualised dividend yield of 2.67%.
4. ASX: ERA (Energy Resources of Australia Limited)
(Recommendation: Hold, Mcap: A$1.51 billion)
ERA is engaged in the business of mining, processing as well as selling uranium oxide.
Valuation
The stock of ERA gave a positive return of ~170.97% in the past year. On a TTM basis, the stock of ERA is trading at a EV/Sales multiple of 10.1x lower than the industry average (Energy) of 44.0x. Considering the high potential of nuclear adoption, resistance outbreak in uranium prices, and TTM valuation, we give a “Hold” recommendation on the stock at the closing price of $0.420, up by ~2.439% on 11 November 2021.
Note: All the recommendations and the calculations are based on the closing price of 11 November 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the factors discussed above.
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