Fortescue Metals Group Ltd

FMG’s Subsidiary Signs Two Different Joint Venture Agreements: Fortescue Metals Group Ltd (ASX: FMG) has an engagement in the exploration, development, production, processing, and sale of iron ore. The company recently announced that its subsidiary FMG Resources Pty Ltd has entered into the Joint Venture Agreement with Strategic Energy Resources. This was done to explore SER’s Myall Creek Copper-Gold project in South Australia. FMG will spend $1.5 Mn on exploration over 5 years, including a minimum of 1500 meter of drilling at Myall Creek (EL6140 and EL5898) to earn an 80% interest in the project. The Myall Creek tenements lie within the Cultana Training Area controlled by the Department of Defence. SER has built a solid relationship with Defence over many years and has already been granted access to explore within the training area. In another update, FMG Resources Pty Ltd and Tasman Resources Ltd signed a conditional, formal farm-in and joint venture agreement over Tasman’s wholly owned ‘Exploration Licence 5499’ that hosts the Vulcan iron oxide-copper-gold-uranium (IOCGU) prospect.

March’19 Quarter Key Highlights:The company reported safety TRIFR (Total Recordable Injury Frequency Rate) of 3.6, which is an improvement of 10% as compared to TRIFR in the previous quarter. The company reported Cash on hand of around US$1.1 billion as on March 31, 2019. The net debt remained at US$2.9 Bn as on March 31, 2019, with gross debt of US$4.0 Bn.


Q3FY19 Sales by Product Data (Source: Company Reports)

H1FY19 Performance Highlights:The company reported safety TRIFR (Total Recordable Injury Frequency Rate) of 4.0. Its underlying EBITDA was reported at US$1.6 Bn. Its net profit after tax was reported at US$644 Mn. Around 82.7 Mn wmt of ores were shipped during the period. The net debt was reported at US$3 Bn, with inclusive of US$962 Mn cash on hand as on December 31, 2018. The Board of Directors declared a fully franked dividend of A$0.30 per share as compared to A$0.11 per share in H1FY18.


H1FY19 Financial Bar Chart (Source: Company Reports)

What To Expect: The company expects shipments of 165-170mt ore including West Pilbara Fines product of 8-10mt.The C1 cash cost is expected to be in the range of US$13-13.50/wmt. The total capital expenditure is expected to be US$1.2 Bn, including the company’s share of the Iron Bridge Magnetite Project for FY19. The depreciation & amortization is expected to around US$7.10/wmt for FY19.

Stock Recommendation: Its EBITDA margin and net margin for H1FY19 stood at 44.9% and 18.2%, which are better than the industry median of 34.6% and 13%, respectively, implying decent financial position for the company than its peer group. Its ROE for H1FY19 is in line to the industry median of 6.5%, which implies the company generated a decent return for its shareholders. Currently, the stock is trading close to a 52-week high price of $8.980 with an annual dividend yield of 3.49%. Hence, considering the aforesaid facts and current trading level, we maintain our “Hold” rating on the stock at the current market price of $8.870 per share (up 1.72% on June 21, 2019).
 

Whitehaven Coal Limited

A Look At The Recent Updates: Whitehaven Coal Limited (ASX: WHC) has an engagement in the development and operation of coal mines in New South Wales. The Company recently announced a change in the interest of its substantial holder, where Lazard Asset Management Pacific Co increased its voting power from 6.39% to 7.78%, effective from June 17, 2019. In another update, BlackRock Group ceased to be a substantial holder in WHC, effective from June 12, 2019.

March’19 Quarterly Production Report: WHC highlighted that its safety performance remains well under the New South Wales (NSW) coal industry average with Group TRIFR (Total Recordable Injury Frequency Rate) of 8.3 at the end of March. The quarterly ROM coal production stood at 4.9 Mt. The saleable coal production was reported at 5.1 Mt for the period. WHC highlighted that demand for high-quality coal in its four key markets of Korea, Japan, Taiwan, and India remain strong, underpinning sales and the strategic growth agenda.

WHC’s equity coal sales for the March quarter, including purchased coal, stood at 4.893 Mt, which is 16% higher than the previous corresponding period. Its managed coal sales, including sales of purchased coal, stood at 6.042Mt, which is 12% above than the previous corresponding period.

H1FY19 (ended on December 31, 2018) Financial Performance: The company’s sales revenue increased by 11% pcp to $1,270.1 Mn, majorly due to a substantial increase in realised prices to an average of A$155/t in H1FY19 up from $124/t in H1FY18. Its underlying EBITDA before significant items increased by 12% pcp to $550.8 Mn.


H1FY19 Operating Cash Flow Metrics (Source: Company Reports)

What To Expect: ROM coal guidance for Maules Creek has been reduced modestly due to mine scheduling and its related impact on saleable coal production guidance for the year, which has been revised to the range of 20.5 Mt to 21.0 Mt. Sustained Capital Expenditure guidance includes the first staged payment in FY2019 for the new hydraulic cylinders for Narrabri, while the project capital section features all of the growth projects and includes the June 2019 final payment of US$50 Mn for Winchester South.


FY19 Guidance Summary (Source: Company Reports)

Stock Recommendation:Its gross margin, EBITDA margin and net margin for H1FY19 stood at 57.0%, 43.4% and 24.1%, which are better than the industry median of 52.5%, 35.9% and 19.1%, respectively, implying a decent financial position for the company than its peer group.

Its ROE for H1FY19 stood at 8.8%, which is better the industry median of 6.4%, which implies the company generated a decent return for its shareholders than its peer group. Moreover, on the valuation front, its EV/Sales and Price/Book multiple for TTM stand at 1.6x and 1.1x, respectively.

It is currently trading close to its 52 weeks low level of $3.620 with an annual dividend yield of 7.61%. Hence, considering the aforesaid facts and current trading level, we recommend a “Buy” rating on the stock at the current market price of $3.810 per share up 2.695% on June 21, 2019.

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