Stocks’ Details

Kirkland Lake Gold Ltd

Robust Production in Q2 FY20: Kirkland Lake Gold Ltd (ASX: KLA) is involved in gold mining and exploration. The market capitalisation of the company stood at ~$13.26 billion as on 9^th July 2020. During Q2 FY20, the company reported consolidated production of 329,770 ounces, reflecting a rise of 54% from Q2 FY19. Gold sales for the quarter stood at 341,390 ounces at an average realized price of US$1,716 per ounce against gold sales of 212,091 ounces in Q2 FY19. Moreover, the company reported strong production of 155,106 ounces at Fosterville with an increase of 10% from 140,701 ounces in Q2 FY19. This largely indicates higher tonnes processed.

Production Overview (Source: Company Reports)

Guidance: For FY20, the company expects consolidated production in the range of 1,350,000 oz – 1,400,000 oz. KLA anticipates exploration expenditure of between US$130 million – US$150 million.

Key Risks: The development and operation of the company’s mining assets are mainly funded with Canadian and Australian dollars, while gold is priced on international markets in US dollars. Thus, any fluctuation in currency price leads the business to foreign currency risk. Moreover, the company is also exposed to credit risk, which is influenced by the failure of contractual obligations by the counterparties.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to 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

Stock Recommendation: As of 30^th June 2020, the cash balance of the company stood at US$537 million with no outstanding debt. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Gold Road Resources Ltd (ASX: GOR), Newcrest Mining Ltd (ASX: NCM) and Perseus Mining Ltd (ASX: PRU), etc. Hence, considering the increased gold production and sales during Q2 FY20, zero debt position and guidance, we give a “Hold” recommendation on the stock at the current market price of $67.460 per share, up by 6.741% on 9^th July 2020.

Sandfire Resources Limited

Strong Mine Production: Sandfire Resources Limited (ASX: SFR) is engaged in the exploration of gold and base metals. The market capitalisation of the company stood at ~$901.95 million as on 9^th July 2020. The company recently announced key pillars of the strategic growth plan, which include executing the delivery of its existing operating assets, building a sustainable production profile, accelerating discovery, aligning and empowering its people as well as prudent capital management.  The company has also appointed Sally Langer as an Independent Non-Executive Director, effective from 1^st July 2020. In another update, the company stated that its DeGrussa operations in Western Australia continue to operate at full capacity, with strong mine production during the first half of the June 2020 quarter.  During the same period, the company reported production of 9,932t of contained copper and 6,500oz of contained gold.

Production Overview (Source: Company Reports)

Guidance: Considering the strong performance during the first half of the June 2020 quarter, the company expects production of contained copper of between 70,000t- 72,000t and 38,000oz- 40,000oz of contained gold at a C1 unit cost of around $0.90/lb for FY20. The company has scheduled to release its FY20 results on 25^th August 2020.

Key Risks: As most of the company’s activities are conducted using contractors. Hence, the performance of contractors, their efficiency, costs and associated risks can impact the Group’s operational and financial results. Also, any change in supply and demand fundamentals, currency exchange rates, interest rates, general economic, political and regulatory conditions, speculative activities and other factors can lead the business to commodity price and foreign currency risk, as the company mainly derives its revenues and cash flow from the sale of copper, silver and gold.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to 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

Stock Recommendation: Gross margin and EBITDA margin of the company stood at 62.6% and 45.6% in 1H FY20 as compared to the industry median of 47.1% and 39.3%, respectively. Debt to equity of the company stood at 0.03x in 1H FY20 against the industry median of 0.21x. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as St Barbara Ltd (ASX: SBM), Regis Resources Ltd (ASX: RRL) and Resolute Mining Ltd (ASX: RSG), etc. Therefore, considering the strong performance during the first half of the June 2020 quarter, production guidance, decent growth in margins, and deleveraged balance sheet, we give a “Hold” recommendation on the stock at the current market price of $5.170 per share, up by 2.174% on 9^th July 2020.

South32 Limited

Higher Rates of Calciner: South32 Limited (ASX: S32) is engaged into mining and metal production from a portfolio of assets including alumina, aluminum, bauxite, energy coal, metallurgical coal, manganese ore, manganese alloy, nickel, silver, lead, and zinc. The market capitalisation of the company stood at ~$9.98 billion as on 9^th July 2020. For the 9 months to FY20, the company reported alumina production of 3,911 kt, reflecting a rise of 4%. This implies that the company achieved record year to date production at Brazil Alumina and maintaining higher rates of calciner availability at Worsley Alumina. The company continues to reshape and improve its portfolio by forming the Ambler Metals Joint Venture, which is progressing the sale of South Africa Energy Coal and maintaining momentum at Hermosa.

Production Summary (Source: Company Reports)

Decent Position to Navigate COVID-19: The strong financial position and resilient portfolio of the company have placed S32 in a decent position to weather and respond COVID-19 impact. The company is likely to release its results for Q4 FY20 and FY20 on 16^th July 2020 and 20^th August 2020, respectively.

Key Risks: The company’s business is mainly exposed to global economic uncertainty and liquidity risk and it prioritises a strong balance sheet as well as an investment-grade credit rating to mitigate this risk. The company is also sensitive to market risk, which arises from fluctuation in the fair value of future cash flows as a result of changes in market prices.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to 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

Stock Recommendation: The company operates a simple strategy, which is supported by a disciplined capital management framework. During 1HFY20, the cash flow from the operation has significantly surpassed capital expenditure, and the excess cash has been allocated to establish a strong balance sheet. Current ratio of the company stood at 2.03x in 1HFY20 as compared to the industry median of 1.81x. This indicates that the company is in a decent position to address its short-term obligations against the peer group. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as BlueScope Steel Ltd (ASX: BSL), Alumina Ltd (ASX: AWC) and OZ Minerals Ltd (ASX: OZL), etc. Thus, considering the excess cash from operations, growth in alumina production and decent liquidity position, we give a “Buy” recommendation on the stock at the current market price of $2.090 per share, up by 1.456% on 9^th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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