Stocks’ Details
 

Western Areas Limited

Western Gawler Drilling Strikes Significant Nickel & Copper: Western Areas Limited (ASX: WSA) is engaged in the mining, processing, and sale of nickel sulphide concentrate. As on 23 June 2020, the market capitalization of the company stood at ~$632.96 million. The company has recently announced the results from the first diamond drill hole at the Sahara prospect within the Western Gawler Project. The diamond hole at Sahara prospect has intersected over 200m of nickel and copper bearing sulphides and has an average sulphide content of 2-5% across the entire intrusive body. The company has acquired ~19.9% stake in Panoramic Resources. This will expose the company to the emerging New Energy Vehicles market dynamic.

Quarterly Performance (For the Period Ended March 2020): During the quarter, the company mined 5,896 tonnes and sold 6,038 tonnes of nickel. WSA continued to maintain a strong financial position with cash balance of $181.4 million and no debt. During the quarter, operating cashflow was $22.5 million. The decent financial and operational performance enabled the Board to declare a fully franked interim dividend of 1 cent per share, which was paid on 1 April 2020.


Quarterly Operational Highlights (Source: Company Reports)

Key Risks: The rapidly changing situation requiring social distancing measures has had an impact on the economy. While the operations of the company have not been impacted yet, the increasing effect of the virus may impact the future operations. Forrestania Nickel Operations is the Company’s sole production hub. A significant interruption at FNO would impact the ability to supply nickel concentrate to customers and therefore may curtail revenue.

Outlook: The company has maintained its guidance for FY20 and expects to produce 21,000 to 22,0000 tonnes of nickel in FY20 at unit cash cost in between $2.90/lb to $3.30/lb. 

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

EV/ EBITDA 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 company has pro-actively instigated procedures to mitigate the impact of the global pandemic. The operations of the company have been qualified as essential and hence did not face any disruptions. As per ASX, the stock of WSA gave a return of 39.16% in the past three months and a return of 4.05% in the last one month. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation and have arrived at a target upside of high single-digit (in percentage terms). For the said purposes, we have considered Sandfire Resources Ltd (ASX: SFR), Regis Resources Ltd (ASX: RRL) and Saracen Mineral Holdings Ltd (ASX: SAR) as peers. Considering the decent returns in the past three months, guidance for FY20 and quarterly operational performance, we recommend a ‘Hold’ rating on the stock at the current market price of $2.680, up by 16.017% on 23 June 2020, owing to its recent results from Diamond Drill Hole.
 

Origin Energy Limited

Mahalo Gas Project Receives State Environmental Approval: Origin Energy Limited (ASX: ORG) operates energy businesses, including exploration and production of natural gas, and electricity generation. As on 23 June 2020, the market capitalization of the company stood at ~$10.55 billion. The company has recently announced that the Mahalo Gas Project has been granted environmental approval for the gas development from the Queensland State Government. APLNG has 30% stake in the project where ORG is the development Operator.

Quarterly Highlights (For the Period Ended 31 March 2020): During the quarter, Australia Pacific LNG reported stable production with an increase in gas sales to the domestic market. In the same time span, the company produced 66.8 PJ of natural gas and reported commodity revenue of $628.5 million. During the quarter, the company made electricity sales of 8.7 TWh and Natural gas sales of 57.7 PJ. 


Quarterly Operational Highlights (Source: Company Reports)

Key Risks: Milder weather and lower customer numbers and usage due to the COVID-19 pandemic may contribute to lower demand of electricity. The company has paused exploration activities in various regions which might impact the revenues of the company. 

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

Price to Earnings 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 company is prudently funded and is well-positioned for growth. As per ASX, the stock of ORG gave a return of 57.63% in the past three months and a return of 10.52% in the last one month. The stock is trading slightly below the average 52-weeks’ level of $3.750 to $8.890. We have valued the stock using Price to Earnings Multiple Based Illustrative Relative Valuation and have arrived at a target upside of lower double-digit (in percentage terms). Considering the attractive returns in the past three months and decent operational performance, we recommend a ‘Buy’ rating on the stock at the current market price of $6.030, up by 0.668% on 23 June 2020. 

Galaxy Resources Limited

Quarterly Performance: Galaxy Resources Limited (ASX: GXY) is engaged in the production of lithium concentrate and exploration for minerals in Australia, Canada, and Argentina. As on 23 June 2020, the market capitalization of the company stood at ~$352.15 million. During the quarter ended 31 March 2020, the company mined 72,640 bcm material in total and processed 154,457 wmt of ore. In the same time span, it sold 32,512 dmt of concentrate. During the quarter, the company reported a strong debt-free balance sheet with cash balance of US$129.6 million.


Quarterly Operational Performance (Source: Company Reports)

Key Risk: The company has swiftly responded to the global pandemic and has adhered to the Government rules. However, the volatile macro-economic environment heightened from disruptions arising from the COVID-19 pandemic resulted in decline in Market conditions in the lithium sector. Apart from this, GXY is also exposed to risks relating to additional funding requirements, metal prices, exploration, development and operating risks, competition, production risks etc.

What to Expect: The company remains on track to achieve the key operating parameters of the mine and processing plan for 2020. It expects to produce 25,000 – 30,000 dmt of Lithium concentrate in the second quarter of FY20. GXY is likely to process 900,000 – 1,000,000 wmt of ore in FY20.

Stock Recommendation: GXY has achieved development breakthroughs and operational success and remains poised to execute its growth strategy. It is a low-cost producer and is in a sound financial position. As per ASX, the stock of GXY gave a return of 12.42% in the past three months and a return of 10.26% in the past one month. The stock is inclined towards its 52-weeks’ low level of $0.685, proffering a decent opportunity for the investors to enter the market. On a trailing twelve month basis (TTM), the stock is trading at a price to book value multiple of 1x, lower than the industry median (Basic Materials) of 1.6x, and thus seems undervalued. Considering the decent returns in the past one month, attractive trading levels, and guidance for FY20, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.825, down by 4.07% on 23 June 2020.

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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