Stocks’ Details

Alumina Limited

Record Production by AWAC: Alumina Limited (ASX: AWC) is primarily engaged in activities related to its 40% interest in the series of operating entities forming Alcoa World Alumina and Chemicals (AWAC), including bauxite mining, alumina refining and aluminium smelting.

Alcoa Corp 2Q2020 Earnings Update: Alumina Limited owns 40% of each of the AWAC entities, which form a part of the Alcoa bauxite & alumina business segments. The company recently noted that despite the COVID-19 pandemic, AWAC has achieved record quarterly daily alumina production in the June quarter. As a result of strong production, lower caustic soda input costs and energy prices, alumina production cost fell by US$11 per tonne. During the quarter, Alumina Limited received US$58.6 million of net cash distributions, up from US$31.3 million received in the previous quarter.

Alcoa Corp Results Highlights (Source: Company Reports)

AoA Tax Assessments: The company updated regarding the statement of audit position (SOAP) issued to Alcoa of Australia Limited (AoA), by the Australian Taxation Office regarding proposed adjustments that would result in additional income tax payable by AoA. After examining the same, the ATO has issued Notices of Assessment for additional income tax payable by AoA of approximately A$214 million and claims for compounded interest on the primary tax amount totalling approximately A$707 million. In accordance with the ATO’s dispute resolution practices, AoA expects to pay 50% of the assessed primary income tax amount, i.e., A$170 million, out of 3Q2020 cash flows. This will reduce Alumina’s share of AWAC distributions by approximately ~US$28 million in August 2020. Payment of the rest of the amount will be subject to objection and court processes available to AoA.

Guidance: AWAC alumina production for 2020 is expected to be ~12.7 million tonnes. Aluminium production for the year is estimated at ~162,000 tonnes. Following increased import from China, alumina prices have increased from their lows of $225/t in April, to $284/t. Favourable global demand for smelter-grade alumina, improved market sentiment and signs of economic recovery in China have been some of the positive trends noticed lately. However, the economic impact of the pandemic is yet to be seen. The company expects to release H1FY20 results on 25^th August 2020.

AWAC Guidance (Source: Company Reports)

Key Risks: The company’s performance is exposed to the risk of changes in the market price of alumina, and some extent, the market prices of bauxite and aluminium, impacted by movement in production disproportionate to demand, the related cyclicality of industries that are significant consumers of aluminium and overall performance of world economies. While a significant proportion of AWAC’s costs are incurred in A$, its sales are denominated in US$, exposing business profitability to fluctuations in exchange rates.

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

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

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

Stock Recommendation: The stock of the company gave positive returns of 10.86% in the last three months and is currently trading below the average of its 52-week low and high of $1.295 and $2.510, respectively. We have valued the stock using the P/BV multiple based illustrative relative valuation method. For the purpose, we have taken peers such as BlueScope Steel Ltd (ASX: BSL), South32 Ltd (ASX: S32), etc., and arrived at a target price of low double-digit upside (in percentage terms). Consideration the recent update on AWAC production, improved market conditions, recovery in alumina prices, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.725, up by 2.374% on 16 July 2020.

Pilbara Minerals Limited

March Quarter Highlights: Pilbara Minerals Limited (ASX: PLS) is involved in the exploration of lithium and tantalum through the development of its 100% owned, Pilgangoora Lithium-Tantalum Project.

During the quarter ended 31^st March 2020, the company produced 20,251 dry metric tonnes (dmt) of spodumene concentrate, as compared to 14,711 dmt produced in the December quarter. Production during the quarter was impacted by the production moderation strategy, which led to delayed mining activity, extended process plant shutdowns and draw down on existing stockpiles to conserve cash. Spodumene concentrate shipments came in at 33,729 dmt, as compared to 33,171 dmt in the previous quarter. The company further diversified its global customer based by signing a 75,000tpa, 5-year offtake agreement with Yibin Tianyi, with the first shipment of spodumene concentrate completed in March 2020.

Production and Shipments (Source: Company Reports)

Market Opportunity: As per the Benchmark Mineral Intelligence forecast provided in Q12020, lithium chemical demand is expected to rise exponentially by 2040 which will increase the demand for Pilgangoora Stage 1 Projects (equivalent). The current demand of 300k Lithium Carbonate Equivalent (LCE) tonnes is expected to grow to 930k LCE tonnes in 2025 and 2.1m LCE tonnes in 2030, depicting robust long-term business prospects.

Key Risks: While the company did not see any material impact from COVID-19 initially, it is essential to continuously monitor the implications of the COVID-19 pandemic, both within China and globally, This will help in determining the potential impact on the lithium market, including engagement with existing customers and potential new customers on future spodumene concentrate sales and shipments. In addition, the company is exposed to credit risk arising from sales of spodumene concentrate to customers and manages it through contracts requiring a provisional payment of typically 100% of the value of the sale. Through its holding of US$ denominated cash, borrowings and trade receivables, the Group is also exposed to foreign exchange risk.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)  

EV/Sales 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 PLS gave a return of 33.33% in the past three months and is trading close to the average of its 52-weeks’ low and high of $0.135 and $0.517, respectively. The company closed the March quarter with a cash balance of $108.2 million, representing an increase of $2.7 million on the balance at the end of December. As at 31 March 2020, the company’s US$15 million working capital facility remained undrawn. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Galaxy Resources Ltd (ASX: GXY), Orocobre Ltd (ASX: ORE), etc., and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.315, up by 5% on 16 July 2020.

Titan Minerals Limited

Encouraging Assay Results: Titan Minerals Limited (ASX: TTM) is an exploration and development company focused on exploring and developing potential Tier One projects in Ecuador’s southern Andean copper-gold belt.

Drilling Program Update: The company reported assay results for the recently completed diamond drilling program at the Dynasty Gold Project, which confirmed the presence of additional mineralisation outside the previous mineral resource estimate, anticipated to deliver additional metal endowment from extensions to mineralised zones along strike and down-dip, and from broader mineralised zones haloing some of the veins previously modelled. The broader zones reported include drilled intercepts measuring three to five times wider at a 0.5g/t gold cut-off. Pursuant to the results, the company is looking forward to starting the new 6,000m drill campaign to further develop the project. Below is a snapshot of the assay results received for the first 10 diamond holes of the recent production drill program at the Dynasty Gold Project.

Assay Results (Source: Company Reports)

Strategy: The company aims to conduct a drilling campaign across the Dynasty Gold Project, with a focus on the conversion of the substantial Canadian NI 43-101 Resource to a JORC Code compliant resource estimate by Q4 2020. The company is currently evaluating bids for re-commencement of diamond drilling at the Dynasty Gold Project during 3Q 2020, with the planning of the programmes now in its final stages. To accelerate its Dynasty and Copper Duke projects, the company appointed Freddy Villao as Vice President of Government Affairs and Sinisa Glisic as the Exploration Manager in Ecuador.

Key Risks: The company’s operations are exposed to foreign exchange risk arising from its subsidiaries, primarily with respect to the US dollar. The company’s performance is also exposed to commodity price risk through its gold sales from the Toll processing operations.

Stock Recommendation: The stock of the company gave positive returns of 94.92% in the last three months and is currently trading close to the average of its 52-week low and high of $0.030 and $0.210, respectively. In FY19, the company had a debt/equity multiple of 0.64x, as compared to the industry median of 0.11x. As on 31^st December 2019, cash and short-term investments of the company stood at $1.79 million and total debt came in at $8.73 million. Considering the recent assay results, plans in the pipeline, progress towards re-commencement of drilling, key risks, and price movement in the last three months, we have a wait and watch stance on the stock at the current market price of $0.115 as on 16^th July 2020. 

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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