Stocks’ Details

BHP Group Limited

Mike Henry to Become CEO of the Company:BHP Group Limited (ASX: BHP) is among the world’s top producers of major commodities, like iron ore, metallurgical coal and copper. The company also has substantial interests in oil, gas and energy coal. The market capitalisation of the company stood at ~$108.44 billion as on 15^th November 2019. Recently, Mike Henry has been appointed as Chief Executive Officer (CEO) of the company, effective from 1^st January 2020. He is the replacement of Andrew Mackenzie, the former CEO, who will retire on 31^st December 2019.

Brief of its Petroleum Operations: The company recently updated that the petroleum segment is set to deliver strong returns and contribute significant value for BHP though the 2020s and beyond, backed by a foundation of quality assets and attractive growth options.The Management is of the view that petroleum is a terrific business with aggressive growth capability and is aligned with the company’s plan of being in the best commodities, with the best assets, supported by the best culture and capabilities. Ms Slattery outlined a picture that could potentially generate strong EBITDA margins of more than 60% and an average ROCE of more than 15% over the next decade. The company has the potential to report an average IRR of about 25% for major projects.


Petroleum Guidance (Source: Company Reports)

Outlook for FY20: The company remains cautious in the short-term, however,is positive about the long-term outlook.The company enters FY20 with a positive outlook for its business and is confident that its portfolio is well-positioned to seize the opportunities coming from population growth and better living standards.
Stock Recommendation: The company has achieved a decent CAGR growth of 44.41% in its bottom-line over the period of five years i.e., FY15 to FY19. Its FY19 EBITDA margin stood at 50.8%, well above the industry median of 28.7%. The company has improved its return on equity ratio from 11.4% in FY17 to 16.8% in FY19. Based on its positive outlook for FY20, improvement in return ratios and decent prospects for petroleum business, we recommend a “Hold” rating on the stock at the current market price of $37.280, up 1.277% on 15th November 2019 in view of iron ore sectoral movement coming from China's probable measures on financing of infrastructure projects.

Rio Tinto Limited

To Support ERA’s Plans:Rio Tinto Limited (ASX: RIO) is engaged in the business of minerals and metals exploration, development, production and processing and marketing. The market capitalisation of the company stood at ~$34.29 billion as on 15^th November 2019. The company recently updated that it will support Energy Resources of Australia Limited’s (ERA) plans for a renounceable entitlement offer to raise $324 million (A$476 million) for the rehabilitation of the Ranger Project Area in Australia’s Northern Territory.

The company has a 68.4% stake in ERA. Hence, RIO will subscribe to its full entitlement of approximately $221 million (A$326 million).As ERA is not able to secure third-party underwriting support, Rio Tinto has decided to fully underwrite the offer to ensure that ERA has the funds required to meet its current rehabilitation obligations.

Well-Positioned to Maintain Good Results: The company has generated $10 billion of free cash flow in 2019 at spot prices, showing the ongoing cash generation resilience of its world-class assets in a volatile macro environment.

Rio Tinto Limited continues to maintain an appropriate balance between investment in the business and cash returns to shareholders. In the last three years, RIO’s pay-out ratio, excluding returns from divestments, has averaged more than 70%, which is above the company’s returns policy range of 40-60% in recognition of the strong free cash flow generation of the business.



Company’s Margins and Returns (Source: Company Reports)

Guidance for FY19 and FY20: For Iron Ore, Pilbara shipment and cash unit cost guidance for 2019 remain unchanged at 320-330 million tonnes and $14-15 per tonne.The sustaining capital expenditure is projected to be between $1 billion to $1.5 billion per year from 2020 as compared to the previous guidance of around $1 billion. Annualised capacity of 360MTPA is expected once the Koodaideri phase 1 is fully commissioned, with first ore still expected late in 2021.

Stock Recommendation: Return on capital employed (ROCE) for the company improved from a 9% in FY15 to 23% in 1H2019. EBITDA margin also improved from 34% in FY15 to 47% in 1H2019.Its net margins for 1H2019 stood at 14.1%, which is above the industry average of 10.6%. The stock has risen 26.12% on YTD basis and 23.24% in last one year. RIO is likely to conduct an operational review for the fourth quarter, which is expected to be held on 17 January 2020. We suggest investors to keep a close eye on the event and its outcome as it might contain some important financial information in the form of outlook and current trading scenario of the business. Apart from that, we would also like to see how ERA’s fund raising program closes. Based on the aforesaid facts, we have a watch stance on the stock at the current market price of $93.540, up 1.278% on 15th November 2019.
 

Fortescue Metals Group Limited

Updates on the Simandou Blocks 1 and 2 Tender:Fortescue Metals Group Limited (ASX: FMG) is engaged in the business of exploration, development, production, processing and sale of iron ore. The market capitalisation of the company stood at ~$26.88 billion as on 15^th November 2019.

This has been notified by the Government of the Republic of Guinea that the company is not the preferred bidder in the recent tender for mining rights on mineral deposits on Simandou Blocks 1 and 2. The Guinean Government has instructed that it will continue with detailed negotiations with the preferred bidderover the coming months.

Implementation of $2 Million Farm-In and Joint Venture Agreement: Reward Minerals Limited, an exploration and development company, has announced that it has executed a Farm-in and Joint Venture Agreement with Fortescue Metals Group Limited in the McKay Range, located in north-western Western Australia.The company has the right to earn an 80% joint venture interest in the tenements by spending $2 million over four years, with a minimum expenditure obligation of $400,000. Once the $2 million expenditure limit has been met, a JV will be formed, after which both parties will either contribute to expenditure in accordance with their respective JV interests or dilute.

The company recently released its September 2019 quarterly production results, reporting shipments of 42.2 million tonnes (mt) and cash production costs (C1) of US$12.95 per wet metric tonne (wmt).


Production Summary (Source: Company Reports)

Guidance for FY20: The company has given FY20 shipping guidance to be in the range of 170 to 175mt, which includes 17-20mt of West Pilbara Fines products.The C1 cost is expected to be in the range of US$13.25/mt to US$13.75/mt. Total expenditure is forecasted at US$2.4 billion, with an average strip ratio of 1.5. Total dividend payout ratio is likely to be between 50 and 80% of full-year profit after tax.

Stock Recommendation: The company has registered a CAGR of 78.07% in its bottom-line over the period of FY15 to FY19. Looking at the margins of the company, FMG has improved its net margin from 12.7% in FY18 to 32.0% in FY19. Its ROE has improved from 9.0% in FY18 to 31.4% in FY19. As per the ASX, the stock has gained 15.62% in the last six months. Considering the decent financials, optimistic FY20 guidance and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $9.060 per share, up by 3.78% on 15^th November 2019.

 
Comparative Price Chart (Source: Thomson Reuters)

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