Stocks’ Details

Buru Energy Limited

Delay in Lifting of Ungani Crude: Buru Energy Limited (ASX: BRU) is engaged in the exploration and production of oil and gas in the Canning Basin. The market capitalisation of the company stood at A$71.29 Mn as on 15^th January 2020. The company recently notified the market that the latest lifting of Ungani crude was the largest to date (13^th January 2020), which stood at around 78,000 barrels. It added that the lifting was by Petro-Diamond Singapore Pte Ltd from CGL storage Tank 10 at Wyndham Port on 9/10 January 2020. It was also mentioned that the lifting got delayed against the original plan, because of delays incurred by the ship at its previous port. The following picture provides an overview of net cash used in operating activities for the September 2019 quarter:


Net Cash Used in Operating Activities (Source: Company Reports)

What to Expect:  The company is anticipating production cash inflow for December 2019 quarter or Q4 FY19 to be $2.2 million. Development and exploration expenditure for the quarter is expected to be ~$7.3 million and ~$7.7 million, respectively. Total cash outflow is expected to be $16.7 million.

Stock Recommendation: Current ratio of the company stood at 4.99x in 1H FY19 in comparison to the industry median of 1.17x. This reflects that the company is in a better position to address its short-term obligations as compared to the broader industry. The stock of BRU is trading at a price to book multiple of 0.8x, as compared to the industry average (Energy) of 9.7x on TTM basis.  EV/Sales multiple of the stock stood at 1.5x, in comparison to the industry median (Energy) of 26.3x on TTM basis. Thus, considering the company’s planned drilling activities on large prospects with large equities, strong balance sheet and positive cash flow, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.170, up 3.03% on 15^th January 2020.

Galaxy Resources Limited

An Overview of December 2019 Quarter: Galaxy Resources Limited (ASX: GXY) is involved in the production of lithium concentrate as well as exploration of minerals in Australia. The market capitalisation of the company stood at A$520.04 Mn as on 15^th January 2020. The company recently announced that it would be releasing its quarterly activities report for the quarter ended 31 December 2019 on 23^rd January 2020. Though, for giving an idea of the quarterly performance, the company stated that it has achieved lithium concentrate production volume of 43,222 dry metric tonnes for the quarter at Mt Cattlin, which stood at the upper end of the guidance of 35,000 – 45,000 dmt. Moreover, the quarter experienced the sale of lithium concentrate at 29,778 dmt, which stood just below the guidance of 30,000 - 45,000 dmt. The below picture depicts an idea of forecasted lithium demand growth:


Lithium Demand Growth (Source: Company Reports)

Expectation of Double-Digit Growth: The company is expecting double-digit demand growth for lithium over the next decade. The company added that mid-2020 is anticipated to be the key inflection point for EV sales, which happens to be the key driver of forecasted demand growth.

Valuation Methodology: Price to Cash Flow Multiple Approach

Price to Cash Flow Based Valuation (Source: Thomson Reuters), *1USD = 1.45 AUD
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: With respect to Mt Cattlin, the company is planning for the installation of front-end optical sorting units for facilitating the treatment of low-grade stockpiled ore. For Sal de Vida, it is aiming for the final investment decision on stage one in Q2 – Q3 FY2020. We have valued the stock using the Price to Cash Flow based relative valuation method, and for this purpose, we have taken the peer group - Orocobre Ltd (ASX: ORE), Pilbara Minerals Ltd (ASX: PLS), Imdex Ltd (ASX: IMD) and Red 5 Ltd (ASX: RED) and arrived at a target price, which is offering an upside of mid-single-digit (in percentage terms). Therefore, considering the decent outlook and favourable valuations, we give a “Buy” recommendation on the stock at the current market price of A$1.210 per share, down by 4.724% on 15^th January 2020.
 

Pilbara Minerals Limited

Material Improvement in Product Recovery: Pilbara Minerals Limited (ASX: PLS) is engaged in the exploration of lithium and tantalum. The market capitalisation of the company stood at A$867.24 Mn as on 15^th January 2020. The company recently announced that Anthony William Kiernan has made a change to his holdings in the company by disposing 8,000,000 unlisted options at an exercise price of $0.626 on 12^th December 2019. During the December 2019 quarter, the campaign mining and processing programs were underway. The company witnessed material improvement in product recovery performance after the recent plant modifications.


Quarterly Production of Spodumene Concentrate (Source: Company Reports)

Strong Outlook for the Lithium Market: The company is aiming for cash operating costs in the vicinity of US$320 per dmt - $350 per dmt CFR China from June 2020. The Management is of the view that the underlying fundamentals and outlook for the lithium market is strong, despite the recent softness.

Valuation Methodology: P/BV Multiple Approach

P/BV Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Current ratio of the company stood at 2.13x in FY19 as compared to the industry median of 1.81x. This reflects that PLS is in a decent position to meet its short-term obligations as compared to the peer group. We have valued the stock using P/BV based relative valuation method and for the purpose, we have taken peers such as Galaxy Resources Ltd (ASX: GXY), Orocobre Ltd (ASX: ORE), Altura Mining Ltd (ASX: AJM), etc. We have arrived at a target price which is offering an upside of lower double-digit (in percentage terms). Therefore, considering the decent liquidity position and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.360 per share, down by 7.692% on 15^th January 2020. 
 
 
Comparative Price Chart (Source: Thomson Reuters)

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