Stocks’ Details 

Fortescue Metals Group Limited

FMG Aims to Reach Net Zero Operational Emissions by 2040: Fortescue Metals Group Limited (ASX: FMG) is engaged in the mining, processing, and transportation of iron ore for export. On June 16, 2020, the company informed the market about its industry-leading emissions reduction target to achieve net-zero operational emissions by 2040. The company’s goal is set on the back of its initiatives pertaining to the climate change strategy and decarbonisation, including the reduction of Scope 1 and 2 emissions from existing operations by 26% from 2020 levels, by 2030.

FMG and Downer Expand Relationship: In another update, FMG and Downer EDI Limited announced that they are expanding their strategic relationship through the provision of Early Mining and Maintenance Services at Eliwana iron ore mine, situated in the Pilbara region of Western Australia. The new agreement is valued at ~$450 million for a term of 5 years. As per the deal, Downer will complete early works operations over a time of 2 years and the outstanding operations will be transferred to Fortescue’s autonomous mining fleets.

Record Iron Ore Shipments: During the quarter ended 31 March 2020, robust demand for Fortescue products resulted in record shipment of iron ore of 42.3 million tonnes. The company’s cash on hand at the end of the period stood at US$4.2 billion. In the same time span, the company maintained an industry-leading cost position and reported a 2% reduction in C1 costs to US$13.27/WMT.

Quarterly Operational Performance (Source: Company Reports)

What to Expect: The company is anticipating robust demand for its products in China and is expecting a steady recovery in economic activity. FMG is generating sustained cash flows and is investing in growth to provide returns to shareholders. The company has revised its guidance for FY20 and expects capital expenditure in the range of US$2.0 - US$2.2 billion. It has also raised its FY20 shipments guidance to 175 - 177 million tonnes.

Risk Analysis: On the flip side, the company is exposed to short-term disruptions from a challenging macro-economic environment due to COVID-19outbreak. Further, stiff competition in the market adds to the woes.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of FMG gave a return of 45.98% in the past six months and a return of 22.84% in the past one month. The stock is trading close to its 52-week high of $17.1. During 1H20, gross margin of the company stood at 54.9%, higher than the industry median of 47.4%. In the same time span, net margin of the company was 37.8% as compared to the industry median of 15.3%. Considering the decent returns in the past six months, trading levels, decent financial position, and positive outlook, we have valued the stock using the price to cash flow multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we recommend a ‘Hold’ rating on the stock at the current market price of $16.85, down by 0.237% on 29 July 2020.

Rio Tinto Limited

Interim Results for FY20: Rio Tinto Limited (ASX: RIO) is engaged in the exploration, development, and production of minerals and metals. The company recently declared its operational results for 1HFY20 for the period ended 30 June 2020, wherein the company reported Pilbara iron ore shipments of 159.6 Mt, up by 3% year over year and Pilbara iron ore production of 161.1 Mt, an increase of 3% on y-o-y basis. Gross sales revenues for the period stood at US$11.5 billion, up 2% year over year, mainly driven by higher iron ore prices. Underlying EBITDA came in at US$7.7 billion, up 2% year over year, whereas free cash flow for the period decreased by 7% and came in at US$4.3 billion in the same time span. Consolidated sales revenues for the period stood at US$19.4 billion, down from US$20.7 billion reported in the year-ago period. Consolidated profit after tax came in at US$3.5 billion, up from US$2.9 billion reported in the year-ago period. During the period, the company declared a dividend of US$2.5 billion, equivalent to 155 US cents per share. Net cash generated from operating activities came in at US$5.6 billion. Net debt at the end of the period stood at US$4.8 billion.

1HFY20 Key Highlights (Source: Company Reports)

Outlook: The company continues to expect Pilbara iron ore production to in the range of 324 to 334 MT in FY20. The company will continue to monitor and adjust production levels and product mix to meet customer needs in 2020. The company is working with its customers to lower any interruption in supply. For FY20, capital expenditure is expected to be ~$6 billion and ~$7 billion in both 2021 and 2022.

2020 Guidance (Source: Company Reports)

RIO Reveals Maiden Resource at Winu: In a recent update, the company disclosed the maiden Inferred Mineral Resource at the 100% owned Winu copper-gold project. It also revealed the discovery of a new zone of gold dominant mineralisation ~2 km east of the Winu deposit in the Paterson Province of Western Australia.

Second Quarter Highlights: During the second quarter, the company achieved a robust production performance. Pilbara iron ore production stood at 83.2 Mt, up 4% on pcp. Bauxite production stood at 14.6 Mt, up 9% on pcp. Mined copper for the quarter stood at 132.8 kt, down 3% on pcp, reflecting anticipated lower copper grades. Demand in China continued to recover during the quarter, particularly for high-quality iron ore and imported bauxite. Copper demand remained reasonable during the quarter but bears the threat of deteriorating industrial growth expectations globally.

Key Risks: Apart from China, the demand outlook for other markets is uncertain. COVID-19 restrictions have affected commodity supply due to interferences in supply chains and people movement. The company’s projects are being affected by these restrictions, which may impact the progress, going forward.

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of the company gave positive returns of 21.4% in the last three months and is currently trading near its 52-week high of $107.79. The company has an annualised dividend yield of 5.46%, with a P/E ratio of 14.84x. The company possesses a world-class portfolio and a decent balance sheet to serve well in the current volatile environment. The company’ debt to equity ratio stood at 0.35x in FY19, higher than the industry median of 0.11x. We have valued the stock using the price to cash flow multiple based illustrative relative valuation method and arrived at a price correction of low single-digit (in percentage terms). Hence, we have a wait and watch stance on the stock at the current market price of $103.4, down 0.682% on 29 July 2020. 

Champion Iron Limited

First-Quarter FY21 Results & Growth Impetus: Champion Iron Limited (ASX: CIA) is engaged in the exploration and development of iron-ore and mining projects. Group’s net income for the first quarter ended June 30, 2020 was reported at CAD 75.6 Mn, as compared to net income of CAD 74.2 Mn in the previous quarter. Further, revenues for the period stood at CAD 244.6 million in 1QFY21 as compared to CAD277.9 million in 1QFY20. EPS during the quarter stood at CA 15 cents per share as compared to CA 18 cents per share reported in the year-ago period. The company’s first-quarter production stood at 1,798,800 wmt, with the grading of 66.5% Fe iron ore concentrate. With this momentum, the company remains on track to upgrade its processes in order to boost the reliability of its operations and advance key items for the Phase II expansion project.

The company exited the period with a cash balance of CAD 330.2 million, with long-term debt amounting to CAD 244.8 million. Cash generated from operating activities came in at CAD 75.3 million.

1QFY21 Key Highlights (Source: Company Reports)

COVID-19 Impact on CIA: The company stated that it has decided to not continue with the re-domicile proposal from Australia to Canada owing to the recent pandemic of COVID-19 outbreak and ongoing market volatility and global uncertainty. The Company reckoned that due to the ongoing high market volatility and global uncertainty, it might not be able to realise the benefits associated with the re-domicile. The company is taking necessary measures to curb the spread of COVID-19. With robust financial liquidity, the company will take responsible actions to minimize the risk for employees, partners, and affected communities. Going forward, the company seems to be well-positioned to complete the phase II development, given robust partnerships, and strong cash position.

Risks: Till date, the company is witnessing significant market declines and volatility, in commodity and foreign exchange markets, due to coronavirus pandemic. Further disruptions among major producers, unforeseen delays in reinstating production, or additional Chinese stimulus measures could put pricing pressure on the stock.

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

Stock Recommendation: As per ASX, the stock of CIA gave a return of 10.4% in the past six months and a return of 45.26% in the past three months. The stock is trading above the average of its 52-week trading range of $1.36 and $3.23. During FY20, gross margin of the company stood at 46.3%, higher than the industry median of 41.1%. In the same time span, net margin of the company was 15.4% as compared to the industry median of 8.1%. Considering the decent returns in the past three months, current trading levels, and decent financial position, we have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). Hence, we recommend a ‘Hold’ rating on the stock at the current market price of $2.88, up by 4.348% on 29 July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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