Stocks’ Details
 

Beach Energy Limited

Record Oil Production During March 2020 Quarter: Beach Energy Limited (ASX: BPT) is an oil and gas, exploration and production company headquartered in Adelaide, South Australia. The market capitalisation of the company stood at $3.81 Bn as on 3^rd June 2020. The company has recently appointed Ian Grant to the role of Chief Operating Officer. Mr. Grant possesses experience of over 25 years in the energy industry. BPT is a low-cost operator with a flexible growth strategy. Since 2018, the company has reduced its direct controllable operating costs by more than 15%. As of now, the company’s committed growth investment is low, which is providing a high degree of flexibility in executing its growth strategy.  At Victorian Otway Basin, the company has successfully dilled 7,200 metres from an onshore location.

During the quarter ended March 2020 (Q3 FY20), the company reported production of 6.9 MMboe, up 8% QoQ, reflecting record operated oil production ever. However, BPT witnessed a drop of 7% in sales revenue because of declining oil price through the end of the period, which was partly offset by higher realised gas prices.


Sales Revenue (Source: Company Reports)

Guidance: For the financial Year 2020, the company expects its production to be at the lower range of the range of 27MMboe – 28 MMboe and Underlying EBITDA in the ambit of $1.175billion – 1.25 billion. The company anticipates capital expenditure of between $875 million – 950 million.

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


Price to Earnings Multiple Based 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 closed the March 2020 quarter with the cash balance of $80 million and liquidity of $530 million. BPT exercises a conservative approach to balance sheet management. Net margin of the company stood at 29.4% in 1H FY20 as compared to the industry median of 8.0%. This indicates that BPT has decent capabilities to convert its topline into the bottom line against the peer group. We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with an upside of high single digit (in percentage terms). For the purpose, we have taken peers such as Worley Ltd (ASX: WOR), Washington H Soul Pattinson and Company Ltd (ASX: SOL) and New Hope Corporation Ltd (ASX: NHC).

Therefore, considering the strong performance in Q3 FY20, record oil production, and improvement in net margins, we give a “Hold” rating on the stock at the current market price of $1.725 per share, up by 3.293% on 3^rd June 2020.

Galaxy Resources Limited

Execution of Market-Driven Strategy: Galaxy Resources Limited (ASX: GXY) is involved in the production of lithium concentrate and exploration for minerals in Australia, Canada, and Argentina. The market capitalisation of the company stood at $321.44 Mn as on 3^rd June 2020. The company recently announced that Credit Suisse Holdings (Australia) Limited on behalf of Credit Suisse Group AG and its affiliates has reduced its substantial holdings in the company to 5.34% from the previous voting power of 7.20%. In late March 2020, the Government of Argentina imposed a nationwide lockdown with mandatory restrictions due to COVID-19. However, the Government has recently permitted operating mines to resume.

At Mt Cattlin, Australia, the company commenced execution of its market-driven strategy as operations resumed on schedule in February. GXY reported production volume of 14,306 dry metric tonnes of lithium concentrate during Q1 FY20.


Q1 FY20 Production (Source: Company Reports)

Production Guidance: For Q2 FY20, the company expects lithium concentrates production volume to be in the range of 25,000 dmt – 30,000 dmt. The mining and processing operations of GXY possesses the flexibility to quickly ramp up production in response to any market improvements or as required by its customers.

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

EV/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 company stated that the market conditions in the lithium sector has continued to decline because of volatile macroeconomic factors that were heightened from disruptions arising from the COVID-19 pandemic. As at 31 March 2020, the company was debt-free with cash and financial assets of US$129.6 million. GXY applied a 20% salary reduction to the Board and Executive teams in order to assist in preserving the balance sheet in a time of uncertainty around the lithium industry and its market.We have valued the stock using the EV/Sales multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Altura Mining Ltd (ASX: AJM), Pilbara Minerals Ltd (ASX: PLS), Orocobre Ltd (ASX: ORE), etc., and arrived at a target price with an upside of low double-digit (in percentage terms).

Thus, in light of the resumed operation of mines, debt-free balance sheet, and market conditions in the lithium sector, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.860 per share, up by 9.554% on 3^rd June 2020.

Perseus Mining Limited

Perseus to Acquire Exore: Perseus Mining Limited (ASX: PRU) is West African gold producer with a market capitalisation of $1.57 billion as on 3^rd June 2020. Perseus Mining Limited and Exore Resources Limited have entered into a Scheme Implementation Deed, wherein PRU would acquire 100% of the issued share capital of Exore. The total consideration for the scheme stood at A$59.8 million, which is on a fully diluted basis applying a purchase price of A$0.098 per share. PRU will pay consideration in the form of shares in Perseus with each Exore shareholder receiving 1 Perseus share for every 12.79 Exore shares held. The company added that the share swap ratio is based on the 10-day VWAP of PRU shares on 2 June 2020 and implies a price of A$0.105 per Exore share based on Perseus’s closing share price on the same date.

The Implied Scheme Consideration reflects a premium of 69% to Exore’s closing share price of A$0.062 on 2 June 2020 and 78% to the 20-trading day VWAP of Exore of A$0.059, up to and including 2 June 2020. The objective of the transaction mainly revolves around gaining ownership of Exore’s highly prospective ~2,000km land package in northern Cote d’Ivoire. Moreover, the shareholders of both the company would potentially benefit from the strength of the combined entity through a share-based transaction. However, the transaction is subject to the approval of Exore shareholders, Regulatory and Court approvals, and other conditions customary for a transaction of this nature.
 

Pro Forma Metrics (Source: Company Reports)

Outlook: The company stated that the production and costs for the June 2020 Half Year would likely be low in the absence of external factors such as COVID-19.

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

Price to Earnings Multiple Based 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 closed the March 2020 quarter in a strong financial position with cash of $204.4 million and 23,166 ounces of bullion on hand. The stock of PRU has moved up by 40.31% and 34.67% during the span of one month and three months, respectively. As a result, the stock of PRU is trading closer to 52-week higher level of $1.345. We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at correction of low single-digit (in percentage terms). For the purpose, we have taken peers such as Regis Resources Ltd (ASX: RRL), OceanaGold Corp (ASX: OGC) and Evolution Mining Ltd (ASX: EVN). Thus, it can be said that the stock of PRU is overvalued at the current juncture. 

Hence, considering the proposed acquisition of Exore Resources Limited and current trading levels, we have a wait and watch stance on the stock at the current market price of $1.175 per share, down by 12.313% on 3^rd June 2020.

Pilbara Minerals Limited

A Quick Look at March 2020 Quarter:Pilbara Minerals Limited (ASX: PLS) is engaged in the exploitation of lithium and tantalum. The company is also in the mine development. The market capitalisation of the company stood at $578.16 Mn as on 3^rd June 2020. The company’s Pilgangoora Lithium-Tantalum Project is well-positioned for the future of lithium raw material supply. During March 2020 quarter, the company had a significant focus on health and safety initiatives in response to the COVID-19 pandemic. For the same period, the company reported production of 20,251 dry metric tonnes of spodumene concentrate and shipments for the same stood at 33,729 dmt. PLS experienced softer market conditions during the quarter with spodumene concentrate pricing lower as compared to the December 2019 half-year. 


Quarterly spodumene concentrate shipments (dmt) (Source: Company Reports)

Optimistic About Longer-Terms Demand: The company is confident about the medium to long-term demand growth for lithium raw materials. However, the company stated that there is material uncertainty on the near-term outlook considering the pre-existing weakness.

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

EV/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 moderated production strategy, improved recoveries and lower costs ensure strong cash position and places the company in a decent position for market recovery. The company managed to end the quarter with a healthy cash balance of $108.2 million. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Lynas Corporation Ltd (ASX: LYC), Nickel Mines Ltd (ASX: NIC), and Orocobre Ltd (ASX: ORE) and arrived at a target price with an upside of low double-digit (in percentage terms).
Thus, considering the moderated production strategy, lower costs, healthy cash balance and softness in the market, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.295 per share, up by 13.462% on 3^rd June 2020.

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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