Stocks’ Details

Sandfire Resources Limited 

A Look at June 2020 Quarter: Sandfire Resources Limited (ASX: SFR) is engaged in the exploration of gold and base metals. The market capitalisation of the company stood at $991.08 Mn as on 30^th July 2020. Recently, the company released its operational activities for the quarter ended June 2020. At DeGrussa operation, the company produced 19,313t of copper and 13,541oz of gold, which took the FY20 production to 72,238t of contained copper and 42,263oz of contained gold. The unaudited revenue for FY20 stood at $657 million. The company also finished the acquisition of 100% of Trans Kalahari Copper Namibia (Pty) Ltd, which holds a block of nine licences in Namibia covering a total area of around 6,700km².

Production Highlights (Source: Company Reports

Production Guidance: For FY21, the company expects gold production in the range of 36koz-40koz, while production for copper is likely to be between 67kt-70kt. The company anticipates headline C1 cash operating costs to be in the ambit of US$0.90-US$0.95/lb. The company is likely to release its FY20 results on 24 August 2020. 

Key Risks: SFR’s mining operations are subject to various uncertainty, which mainly includes ore tonnes, mine grade, ground conditions, metallurgical recovery, or unanticipated metallurgical issues. The company mainly derives its revenues and cash flow from the sale of copper, silver, and gold. Hence, any fluctuation in prices of these commodities may affect the financial performance of the company. 

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

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

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

Stock Recommendation: The pillars of the strategic growth plan of the company revolve around executing the delivery of its existing operating assets, building a sustainable production profile, accelerating discovery, aligning, and empowering its people and cautious capital management. As of 30^th June 2020, the cash balance of the company stood at $291 million (unaudited). 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). Thus, considering the decent growth in production, acquisition of Trans Kalahari Copper Namibia (Pty) Ltd, guidance for FY21 and key strategic growth pillars, we give a “Hold” recommendation on the stock at the current market price of $5.240 per share, down by 5.755% on 30^th July 2020. 

Orocobre Limited 

ORE Rides on Acquisition Synergies: Orocobre Limited (ASX: ORE) is engaged in the exploration, development, and production of lithium at its flagship Olaroz Lithium Facility. The market capitalisation of the company stood at $853.44 Mn as on 30^th July 2020. During the quarter ended 30^th June 2020, the company reported a fall of 3,455 tonnes in production to 2,511 tonnes, owing to COVID-19 related operational restrictions, diminished operating rates and the scaling of production to sales demand. Product sales for the period stood at 1,601 tonnes of lithium carbonate with an average price of US$3,913/tonne on an FOB basis, and the total sales revenue amounted to US$6.3 million. The company wrapped up the acquisition of Advantage Lithium Corp. during the quarter. As a result of this acquisition, the company’s resource base has increased by 4.8 million tonnes (Mt) of Measured and Indicated Resources and 1.5 Mt of Inferred Resources at Cauchari.

Key Metrics (Source: Company Reports)

Suspension of Guidance: Previously, the company has suspended full-year production guidance for FY20 due to restrictions with production in Argentina and the high likelihood of disruption of future demand in global markets. 

Key Risks: The company is exposed to market risks, such as interest rate risk and foreign currency risk, which may affect the company’s financial performance. In addition, the group is also sensitive to other financial risks, such as liquidity risk and credit risk.

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

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

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

Stock Recommendation: The available corporate cash balance with the company stood at US$154.9 million as of 30^th June 2020. Out of this, the company has set aside US$11.1 million and US$36 million as pre-completion guarantees for the Naraha debt facility and Olaroz Expansion debt facility, respectively. Current ratio of the company stood at 2.60x in 1H FY20 as compared to the industry median of 1.85x. This indicates that the company is well-placed to pay off its short-term obligations. We have valued the stock using Price to Sales multiple based valuation method and arrived at a target price of high-single digit (in percentage terms). For the purpose, we have taken peers such as Galaxy Resources Ltd (ASX: GXY), and Pilbara Minerals Ltd (ASX: PLS), to name few. Hence, in light of the acquisition of Advantage Lithium Corp and decent liquidity position, we give a “Hold” recommendation on the stock at the current market price of $3.080 per share on 30^th July 2020.

Karoon Energy Ltd 

Revised Terms for Acquisition of Bauna Field:  Karoon Energy Ltd (ASX: KAR) is involved in oil and gas exploration. The market capitalisation of the company stood at $406.67 Mn as on 30^th July 2020. Recently, the company advised the market that CEO and Managing Director, Mr Robert Hosking will step down from his post on the 2020 Annual General Meeting. Also, KAR has appointed an independent specialist search firm to complete a global search for the replacement of CEO. In another update, the company stated that Karoon Petróleo & Gás Ltda, a wholly owned subsidiary of KAR, has reached a binding deal to modify the sale and purchase agreement to own 100% operating interest in the Baúna field situated in the Santos Basin. Per the altered deal, the previously announced “headline” of US$665 million consideration is now split into US$380 million of “firm” consideration and US$285 million of “contingent” consideration. The following picture provides an overview of operational cash flows for March 2020 quarter:

Cash flow from Operations (Source: Company Reports)

Rebound in Oil Demand: Post COVID-19 crisis, the company expects a meaningful rebound in oil demand as economic activity returns and lower energy prices stimulate incremental demand.  

Key Risks: The company stated that volatile market conditions for oil and gas can affect its ability to attract capital and may cause a variable return on its operations. Further, fluctuation in foreign currency exchange rates and stiff competition in the market remains potential headwinds.  

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

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

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

Stock Recommendation: Gross margin of the company stood at 85.4% in 1H FY20 as compared to the industry median of 46.8%. The company has scheduled to release its FY20 results on 25^th September 2020.

We have valued the stock using the P/E multiple based illustrative 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 Cooper Energy Ltd (ASX: COE), Z Energy Ltd (ASX: ZEL), Senex Energy Ltd (ASX: SXY), to name few. Thus, considering the expected rebound in oil demand, revised terms for the acquisition of Baúna field and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.730 per share, down by 0.68% on 30^th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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