Despite ongoing trade tension with China, Australia reported an increase in exports. The re-opening of the economy has shown traction in exports over the last three months starting from September 2020. The government’s various austerity measures to retaliate the pandemic, revival in business sentiments and resumption of household spend drove the export growth. The economy recovered with GDP growth of +3.3% in Sep’20 quarter (on QoQ basis).
Figure 1. Exports Showing Recovery Since Sept’20
Source: Data from Australian Bureau of Statistics, Chart Created by Kalkine Group
As released by the Australian Bureau of Statistics, exports increased by $166 million in November 2020 over the preceding month to reach $30.51 billion. A surge in exports was mainly driven by non-monetary gold (up by $746 million or 39% over the prior month), natural gas (up by $368 million or 16%), gold coin (increased by $143 million or 153%), and oil seeds which had shown improvement of $4.0 million over the prior month. Exports declined by 4% on a YoY basis in November 2020, indicating the road to recovery is yet to be fully seen.
According to the official release, there was a large increase in exports of non-monetary gold to Singapore in November 2020. The pandemic has created chaos in the market and investors flocked towards safe heaven. A surge in gold prices has led to an increase in investment and exploration activity with several Australian gold miners returning to production. In a separate report by the Australian Bureau of Statistics, gold exploration recorded the highest rise of 17.0% in capex to $356.1 million in Sep’20.
Prices of natural gas underwent an upward correction driven by rising energy demand in the Northern Hemisphere, upward-trending oil prices, and recent outages in Norway and Australia. This translated to an increase in exports of natural gas for two consecutive months in November 2020. Vegetable oil became a stable goods and a surge in preferences for cooking oil following rapid urbanization increased demand for oil seeds. Australian canola oil saw increased off-take from Germany and China. Oil seeds usually follow a seasonal pattern wherein trading commence from November month just after harvest for canola crops got over.
Figure 2. Top Exports Movers (by Categories) in Last 3 Months:
Source: Data from Australian Bureau of Statistics, Chart Created by Kalkine Group
Update on Trade Surplus: China is the largest trading partner for Australia. Following the import restrictions on coal, barley, copper, wine, beef, lobster, and some wood products, exports to China declined from $12.61 billion in Oct’20 to $11.39 billion in Nov’20. On a YoY basis, exports to China declined by about 6%. Singapore served as the top export destination in November 2020 followed by Japan, China, UK, and South Korea. Trade surplus stood at $1.96 billion, down from $4.7 billion reported in Oct’20 mainly due to a surge in imports (by 11%) over the preceding month and a 10% drop in exports to China. Imports posted the highest increase since March 2020, mainly contributed by transportation equipment, mobile phones, and road vehicles.
Key Risks: The economy is yet to fully recover as exports were still lower than last year by 4% in November 2020. A surge in the gold price was led by temporal factors and it may reverse following the roll-back of stimulus, change in monetary policy stance, and stability in the financial markets worldwide.
LNG prices are co-related with crude oil price movement. Global oil consumption continues to be constrained by the COVID-19. Consequently, LNG contract price may gradually recover although they remained relatively weak historically. Supply constraints at major markets like Australia, Qatar, and the US are expected to weigh on LNG prices. The oil seeds production is highly seasonal and exports were historically affected by drought and climate changes. Substitution to soybean oil and palm oil consumption impacted the demand for canola-based vegetable oil worldwide. Ongoing trade disruptions with China and the outbreak of African swine affected oil seeds worldwide production.
Figure 3. Key Risks Affecting Gold, LNG and Oil seeds Production
Source: Chart Created by Kalkine Group
Outlook: The onset of the pandemic saw increased off-take from institutional and retail investors for gold investments given the record low bond yields and accommodative policy stance by the Reserve Bank of Australia. The Australian gold price is estimated to rise by 29% in 2020 to $2,581 per ounce according to The London Bullion Market Association. As the economy recovers and the rollout of vaccines projected to bring down the gold prices to settle at $2,076 an ounce in 2022. Due to this, the value of Australia’s exports of gold is projected to increase to $30 billion in 2020-21 before declining to $27 billion in 2021-22 as per the data released by the Department of Industry, Science, Energy and Resources.
Prices of LNG recovered sharply in Dec’20 to reach $8.70 per GJ. Supply contraction in major markets and colder than usual winter in the Northern Hemisphere drove the robust growth in prices of LNG and natural gas. However, Australia’s LNG exports is forecasted to decline from $48 billion in 2019-20 to $31 billion in 2020-21 due to declining crude oil prices and supply constraints according to the data by the Department of Industry, Science, Energy and Resources.
Global demand for oil seeds outpaced the supply leading to higher production and high carry-over stocks. Australia canola-based oil seeds production to show sharp rebound after periods of drought-affected production. The increase in EU demand for biodiesel market is projected to drive the Australian canola exports by a 71% increase to 2.7 million tonnes in 2020-21, according to the Department of Agriculture, Water and the Environment.
Exports of non-monetary gold, natural gas, and oil seeds drove the increase in overall exports for the month of November 2020. Gold stocks are likely to see an impact from the increase in gold exploration activity and projected rise in gold prices. LNG prices showed a sharp rebound which will benefit natural gas stocks. Canola-based oil seeds exports are expected to improve on the back of strong demand from EU which may affect oil seeds stocks. Considering the improvement and outlook, we figured out 4 stocks on ASX from gold mining, natural gas, and oil seeds production to see the momentum from the development.
(1) Resolute Mining Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 877.59 Million, Annual Dividend Yield: 0%)
Improved Average Price Realization and Margin: Resolute Mining Limited (ASX: RSG) is a gold miner with open pit and underground gold mines in Australia and Africa. Resolute Mining Limited currently operates the Syama Gold Mine in Mali and the Mako Gold Mine in Senegal. Gold production have increased by 4.5% to 217,946 ounces of gold during H1 FY20 over pcp. It had achieved average price realization of US $1,427 per ounce of gold. This translated to healthy EBITDA margin of 33% in H1 FY20 as compared to 12% registered in pcp. During the half-year period, RSG sold-off Ravenswood mine for about US $100 million. RSG reported net profit of US $36.29 million in H1 FY20 as compared to US $27.45 million in H1 FY19, up by 32.2% mainly driven by strong gold price movement, higher recovery of sulphide at Syama mine, partly offsetting loss of revenue from the sale of Ravenswood.
As per the latest trading update, gold production was down by 19% in the quarter ending Sep’20 to 87,303 ounces of gold compared to the preceding quarter mainly due to COVID related disruptions specifically at its Syama site. Nevertheless, upward trending gold prices translated to increase in average realization to US $1,694 per ounce (up from $1,446/oz in June’20 quarter). As of Sept’20, cash balance stood at US $85.8 million (up from US $62.3 million in June’20). It had closed the H1 FY20 with liquid assets of US $187.4 million as compared to US $157.7 million as of June 2020. Total debt stood at US $340.8 million as of Sep’20.
Outlook: Due to production disruptions following the pandemic, RSG revised the gold production target downward in the range of 400,000 to 430,000 ounces for the full-year 2020. Average cash cost has been revised upward in the range of US $980-US $1,080 per ounce. Capital expenditure is projected at US $70 million.
As per the data by the Australian Bureau of Statistics, non-monetary gold exports have increased by 39% (or $746 million) in November 2020 over the preceding month. With easing restrictions and revival in the economy, Australia’s gold production to increase to $30 billion in 2020-21 as estimated by the Department of Industry, Science, Energy and Resources. This would directly benefit Resolute Mining Limited.
Valuation Methodology: Price/ Earnings Multiple Based Relative Valuation (Illustrative)
Price/ Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs RSG (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive returns of 9.15% in last one month after being corrected in last 3 months and 6 months with returns of -11.17% and 29.24%, respectively. RSG is trading lower than the average of 52-week high price of $1.497 and 52-week low price of $0.605. The company reported healthy EBITDA margin of 33% in H1 FY20 benefited from upward trending gold prices and improved price realization. The company has been selling non-core assets in a measure to reduce net debt. In the recent press release, RSG entered into a binding agreement to sell the Bibiani Gold Mine in Ghana to Chifeng Jilong Gold Mining Co. Ltd. for cash consideration of US $105 million. It had earmarked US $25 million for exploration and development of mines.
The stock is well-positioned to benefit from the Australia’s gold exports that are projected to increase by $30 billion by 2020-21 according to the Department of Industry, Science, Energy and Resources. The stock underperformed the market volatility index. We have valued the stock using the Price/ Earnings multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For this purpose, we have taken peers such as Regis Resources Ltd. (ASX: RRL), OceanaGold Corp. (ASX: OGC), Gold Road Resources Ltd. (ASX: GOR), to name a few. Considering the strong EBITDA margin posted in H1 FY20, the current valuation and trading levels, we give a “Buy” recommendation on the stock at the current market price of $0.835, up by 5.031% on 4th January 2021.
(2) St Barbara Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.66 Billion, Annual Dividend Yield: 3.38%)
Investing in Exploration and Feasibility Study Programs: St Barbara Limited (ASX: SBM) is a gold producer with mines in Western Australia, Papua New Guinea and Nova Scotia. The company had mineral resources of 11.6 Moz and ore reserves of 6.0 Moz as of Sep’20. Acquisition of Atlantic Gold on July 2019 resulted in increase in gold production to 381,887 ounces in FY20, up from 362,346 ounces in FY19. Atlantic Gold production stood at 107 koz in FY20 (up from 93 koz in FY19). SBM is undergoing consolidation at Atlantic mine with expansion project at Touquoy site. Its high-grade Gwalia mine saw a drop in production to 171 koz in FY20 (vs. 220 koz in FY19). The company is conducting plant study to identify opportunities for higher utilization. Simberi mine delivered production of 104 koz from the remaining oxide reserves. SBM is conducting a feasibility study to determine the expansion potential. The company’s Gwalia and Simberi mines witnessed depletion in mining reserves. EBITDA margin slipped from 44.3% in FY19 to 43.4% in FY20 owing to an increase in production costs with All-In Sustaining Cost (AISC) increased from $1,036/oz in FY19 to $1,369/oz in FY20.
In the latest trading update, SBM witnessed a drop in gold production to 73 koz in the quarter ending Sep’20 (vs. 88 koz in Q1 Sep’19). Seismic events and planned development activity affected mine volume at Gwalia. However, mining grade has improved from 7.0 g/t Au in Q4 FY20 to 8.1g/t Au in Q1 FY21. Production costs (AISC) further increased on the back of expansion activity at mines. SBM closed Q1 FY21 with cash balance of $93 million after repayment of $200 million syndicated debt facility. The company had a debt of $105 million as of Sep’20.
Outlook: SBM has maintained the initial gold production estimate for FY21 in the range of 370-410 koz. The company is expecting gold grade at Gwalia mine to improve to 8.3 g/t Au in FY21. Overall costs (represented by AISC) to be in the range of 1,360-1,510/oz. It had earmarked growth capex of $49-$57 million and sustaining capex of $97-$115 million for FY21.
As gold exports have improved by $746 million in November 2020 or 39% over the prior month, SBM is well-positioned to benefit from it. Further, increase in projected capex spend on the exploration activity at SBM’s Gwalia and Atlantic mines is likely to benefit from the favourable outlook of Australia’s gold exports by the Department of Industry, Science, Energy and Resources for 2020-21.
Valuation Methodology: Price/Earnings Multiple Based Relative Valuation (Illustrative)
Price/Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs SBM (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company corrected 1.98% in last one month. SBM is deploying sizeable capex to increase the reserve base and utilization from mines. Acquisition of Atlantic gold mine lifted the resources and reserve base of SBM. Its margin was impacted by an increase in the development activity at mines, but overall EBITDA margin of 43.4% in FY20 is far higher than Industry Median of 22.4%. The company is also focused on deleveraging debt – its syndicated debt was fully repaid during the quarter. The stock generated annual dividend yield of 3.38%. The stock under-performed the market volatility index. We have valued the stock using the Price/ Earnings multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For this purpose, we have taken peers such as Regis Resources Ltd. (ASX: RRL), Northern Star Resources Ltd. (ASX: NST), Resolute Mining Ltd., (ASX: RSG), to name a few. Given the superior EBITDA margin ahead of its peers, valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $2.470, up by 4.661% on 4th January 2021.
(3) Viva Energy Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 3.07 Billion, Annual Dividend Yield: 0%)
Decline in Refining Margins offset by Retail Fuel Business: Viva Energy Group Limited (ASX: VEA) operates retailing of shell fuels lubricants in Australia through network of more than 1,260 service stations across the country. The company also owns Geelong Refinery in Victoria supported by more than 20 terminals and 50 airports and airfields across the country. Its fuel retailing business was impacted by border closures in-home restrictions with total sales volume declined by 10.5% to 6,381 ML in H1 FY20. Both its Jet fuel and retail Alliance business showed declining trend, but its diesel retailing business was in-line with last year aided by strong Agriculture season. Overall revenues declined by 15.6% in H1 FY20 over pcp. Global transition to low sulphur marine fuels coupled with lower production rates on account of weak demand for oil products resulted in negative EBITDA margin at its Refining business in H1 FY20. Its retail business showed improvement in EBITDA margin benefited from steady recovery in fuel demand following easing restrictions, integration of Liberty Oil Holdings and various cost reduction measures. Overall underlying EBITDA declined by 9.4% to $269.3 million in H1 FY20 over pcp.
VEA closed H1 FY20 with cash balance of $480.9 million contributed from exit of Waypoint REIT business which had fetched net proceeds of $680.0 million. It had adequate liquidity with current debt facility limits of US $700 million. The company had debt outstanding of $159.2 as of June 2020.
Outlook: The pandemic to weigh on FY20 revenues with volumes expected to decline about 16.3% from FY19. Lower refining output following weak demand at Victoria and high crude premiums to pull down the EBITDA of Refining business by $211.0 million in FY20. Non-refining underlying EBITDA to grow by 14.3% on the back of strong performance of non-aviation commercial business and reduced overheads. The company downwardly revised its capex projections to $70 million for FY20. The company continues to develop an energy hub at Geelong.
The company restarted all processing units at its Geelong Refinery and experienced an increased margin for the month of November 2020 to US $5.1/bbl (as compared to US $2.9/bbl from Jan’20 2020 to Nov’20). This correlates to the data released by the Department of Industry, Science, Energy and Resources which mentioned that LNG prices showed recovery to reach $8.70 per GJ driven by colder than usual winter in the Northern Hemisphere.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs VEA (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock is corrected 0.528% in last one month. Refining business of VEA continues to be under pressure. But the company experienced uptick in gross margin at its Geelong Refinery in November 2020 driven by upward price correction in LNG prices recently followed by colder than usual winter in the Northern Hemisphere. Further, it had received expression of interest for LNG regasification (energy hub project) which is slated completed by 2020-end. VEA expressed to return $530 million (out of total proceeds from the sale of REIT) in the form of capital return (of $0.2146 per share) and unfranked special dividends of $0.0594 per share. The existing buy-back program for $50 million is expected to continue. The stock performed well over market volatility index. We have valued the stock using the EV/EBITDA Multiple Based multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For this purpose, we have taken peers such as Cooper Energy Ltd. (ASX: COE), Woodside Petroleum Ltd. (ASX: WPL), Ampol Ltd. (ASX: ALD), to name a few. Considering the proposed dividend distribution plans, the valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $1.885, down by 1.309% on 4th January 2021.
(4) GrainCorp Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 958.90 Million, Annual Dividend Yield: 1.67%)
Surge in Oil Seeds Crushing Volumes Lifted Revenues: Graincorp Limited (ASX: GNC) operates the largest grain storage and handling business in East Coast of Australia (ECA) and the leading edible oil processor and oilseed crusher in Australia and New Zealand. Commencement of Crop Production Contract resulted in revenue growth despite drought affected grain output at ECA. Agribusiness revenues improved by 3.9% to $3,415.0 million in FY20. Processing segment revenues surged by 14.8% over pcp benefited from increase in oil seeds crushing volumes. Overall revenues grew by 3.6% in FY20 over FY19. Its underlying EBITDA from continuing operations improved to $108 million in FY20 (vs. loss of $107 million in FY19) led by Agribusiness. During the period, GNC demerged United Malt Group which had contributed underlying EBITDA of $78 million in FY20. Overall, net profit improved to $343.3 million in FY20 (including discontinued operations). GNC had reported operating cash flows of $30.6 million benefited from lower inventories. Liquidity seems adequate with cash balance of $124.7 million. In addition, GNC had about $1,870.1 million available under its commodity inventory financing and working capital facilities.
Outlook: Weather conditions to remain favourable throughout autumn and winter as projected by the company. Increased supply of canola seeds to drive crush margins. Sustaining capex expected to be in the high-end range of $35-$45 million. Crushing capacity expansion at Numurkah to benefit Processing segment margin. Expansion in Canada, Ukraine, and India to fully materialize in FY22.
Shift to home cooking trends following in-home restrictions and increase in consumption of vegetable oil lifted the Processing segment revenues of GNC in FY20. This corresponds to the revival in global demand for oil seeds that outpaced the supply as mentioned by the Department of Agriculture, Water and the Environment. GNC is well-positioned to benefit from increase in Australian canola exports of oil seeds by 71% to 2.7 million tonnes in 2020-21.
Valuation Methodology: Price/Earnings Multiple Based Relative Valuation (Illustrative)
Price/Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs GNC (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company corrected 5.10% in last one month, but delivered positive returns in last 3 months and 6 months with +11.17% and 4.39%, respectively. GNC reported positive underlying EBITDA from continuing operations of $108 million in FY20 as compared to loss of $107 million in FY19. Its Processing Segment benefited from surge in consumption of vegetable oil following in-home cooking trend and increase in consumption. GNC is expecting favourable weather conditions supporting summer crop plantings. Increased supply of canola seeds to support crush margin. The stock generated annual dividend yield of 1.67%. The stock performed well over market volatility index. We have valued the stock using the Price/ Earnings multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For this purpose, we have taken peers such as United Malt Group Ltd. (ASX: UMG), Ridley Corporation Ltd., (ASX: RIC), Elders Ltd. (ASX: ELD), to name a few. Considering the valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $4.280, up by 2.147% on 4th January 2021.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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