Stocks’ Details

Western Areas Limited

Strong Start to FY20:Western Areas Limited (ASX: WSA) is involved in mining, processing and sale of nickel sulphide concentrate. It is also engaged in the continued assessment of development feasibility of the high-grade nickel mines, exploration for nickel sulphides, and other base metals. The market capitalisation of the company stood at A$853.46 Mn as on 23^rd October 2019. Recently, the company announced its results for the quarter ending 30 September 2019 (Q1 FY20), which was proved to be a strong quarter of cash flow generation. The operations during the quarter were in-line with the expectations, meeting all the production and cost guidance metrics. It added that the nickel price has reacted strongly to the tightening supply situation that is developing in the market, closing the quarter at a spot price of US$7.80/lb. The following picture provides an overview of production for the quarter:


Production Overview (Source: Company Reports)

What to Expect:  As per the 2019 annual report, WSA would continue to focus on providing a safe workplace and minimise its environmental impact across its operations. Western Areas’ Forrestania operations continue to produce reliable and consistent results, and WSA is well-positioned heading into FY20.

Stock Recommendation:Current ratio of the company stood at 3.55x in FY19 as compared to the industry median of 1.75x. This indicates that WSA is in a decent position to meet its short-term obligations against the broader industry. On the valuation front, the stock of WSA is trading at EV to sales multiple of 2.65x in comparison to the industry median of 3.18x. WSA generated a return of 31.09% in the time frame of three months and on a YTD basis, it witnessed a rise of 64.21%. The stock is currently trading at higher band of its 52-week trading range of $1.835 - $3.380. Therefore, in the light of above-stated facts and current trading levels, we maintain a “Hold” rating on the stock at the current market price of A$3.250 per share, up 4.167% on 23^rd October 2019. It looks like the upside in WSA is primarily due to the release of Q1 FY20 results.
 

Independence Group NL

A Quick Look at Q1 FY20:Independence Group NL (ASX: IGO) is a Nickel, Gold and Copper-Zinc-Silver mining, development and exploration company. It has a market capitalisation of ~A$3.56 Bn as on 23^rd October 2019. The company recently updated the market with the results for the quarter ended 30^th September 2019. It stated that strong production along with higher metal prices delivered a rise in earnings in the quarter. It witnessed a surge of 29% on a QoQ basis in revenue and other income which came in at A$263 Mn due to strong nickel and gold prices for the quarter.

Future Aspects:For FY20, the company expects production for Nova Nickel in the range of 6,750t-7,500t, and it anticipated Tropicana AISC in the ambit of A$1,090 to A$1,210 per ounce. More information on FY20 guidance has been given in the following picture:


Production Summary (Source: Company Reports)

Stock Recommendation:The company reported total cash from operating activities of A$89.4 Mn for Q1 FY20, despite a rise of A$51.8 Mn in trade debtors at Nova because of the timing of shipments and revaluation of trade receivables. Gross margin and EBITDA margin of the company stood at 62.6% and 44.3% in FY19 against the industry median of 42.0% and 29.1%, respectively. Looking at the price movement in the recent past, the stock has delivered returns of 10.87% and 25.42% in the time period of three months and six months, respectively. The stock is currently trading towards the higher end of its 52-week high. Thus, considering the decent numbers for Q1 FY20 along with decent outlook for FY20, we maintain a “Hold” rating on the stock at the current market price of A$6.040 per share, up 0.332% on 23^rd October 2019.
 

Mount Gibson Iron Limited

Increase in Cash and Liquid Investment Reserves:Mount Gibson Iron Limited (ASX: MGX) is primarily involved in mining and processing of hematite iron ore at the Extension Hill mine site in the Mid-West region of Western Australia, as well as haulage of the ore via road and rail for export from the Geraldton Port. The market capitalisation of the company stood at ~A$821.95 Mn as on 23^rd October 2019. The company has recently released its results for the quarter ended 30^th September 2019, i.e., Q1FY20, wherein it reported total iron ore sales of 1.4 million wet metric tonnes, comprising 0.7 Mwmt of high-grade direct shipping ore from Koolan Island and 0.7 Mwmt of low-grade material from Extension Hill stockpiles in the Mid-West. The cash and liquid investment reserves increased to $407 Mn even after the company paid most of the $27 million cash component of last year’s dividend to shareholders.



Performance at Glance (Source: Company Reports)

Future Prospects:As per the 2019 annual report, MGX is currently well-placed to deliver on the Board's objective of creating long-term value via investment in exploration, development and efficient operational extraction of mineral resources. However, guidance for 2019/20 remains unchanged at iron ore sales of 3.7–4.0 Mwmt at an all-in group cash cost of A$70-75/wmt FOB.

Stock Recommendation:Net margin of the company stood at 46.0% in FY19 as compared to the industry median of 11.0%. This implies that the company has better capabilities to convert its top-line into the bottom-line against the broader industry. On the valuation front, the stock of MGX is trading at EV to sales multiple of 1.52x in comparison to the industry average of 2.36x. It has EV to EBITDA multiple of 5.09x against the industry average of 6.30x. Thus, it can be said that MGX is undervalued at current trading levels. Hence, in light of above-stated factors, we give a “Buy” recommendation on the stock at the current market price of A$0.695 per share, down 2.113% on 23^rd October 2019.
 

Saracen Mineral Holdings Limited

A Notable Rise in Cash and Equivalents:Saracen Mineral Holdings Limited (ASX: SAR) is in production and exploration of gold. It has a market capitalisation of ~A$2.94 Bn as on 23^rd October 2019. The company published a release as on 22^nd October 2019, wherein it communicated about its results for the quarter ended 30^th September 2019.It added that the cash and equivalents witnessed a rise from A$154.5 Mn at 30 June to A$196.1 Mn at 30 September, despite incurring A$5.5 Mn on tax instalment payments and A$34.6 Mn on exploration and growth capital, net of development receipts. The following picture gives an idea of the group’s production and AISC for the September 2019 quarter:

 
Group Production and AISC (Source: Company Reports)

Future Guidance:In FY20, the company stated that the gold production would be principally sourced from the Karari / Dervish underground mines and potentially the Deep South underground mine with the balance coming from third party ore purchase agreements and various ore stockpiles. It provided production guidance at CDO (Carosue Dam Operations) for FY2020 to come in the range of 190,000ozs to 200,000ozs.

Stock Recommendation:In September 2019 quarter, the company continued its regional “bolt-on” acquisition strategy, with two transactions successfully wrapped up in the Thunderbox district. Bligh Resources was acquired in an A$38 Mn all-scrip off-market takeover. The Sinclair Project was acquired from Talisman Mining for the consideration amounting to A$10 million cash, and 2.0% NSR payable on the metal production from Sinclair, and non-precious metals production from Saracen’s Waterloo tenement. Return on equity of the company stood at 21.2% in FY19 as compared to the industry median of 12.3%, which implies that the company has provided decent returns to its shareholder against the peer group. As per the ASX, the stock of SAR is trading at a price to earnings multiple of 31.240x as compared to the industry average of 34.42x. The stock is currently trading above the average of its 52-week low and high of $2.320 - $4.750. Therefore, considering the above-stated facts and current trading levels, we give a “Hold” recommendation on the stock at the current market price of A$3.710 per share, up 5.099% on 23^rd October 2019. 
 

South32 Limited

Update on Share Buy-Back:South32 Limited (ASX: S32) is in mining and metal production, from a portfolio of assets that included alumina, aluminium, bauxite, energy coal, metallurgical coal, manganese ore, manganese alloy, nickel, silver, lead and zinc. The market capitalisation of the company stood at ~A$12.91 Bn as on 23^rd October 2019. The company recently announced with the help of its daily share buy-back notice that it has bought back 374,474,141 shares at the consideration of $1,151,662,462.

In Sep-2019 quarter, the company increased its production at Illawarra Metallurgical Coal by 30% as the longwalls continued to perform strongly after the completion of two moves in the previous quarter. It has maintained higher rates of manganese ore production at its low-cost, flexible operations, and commenced exploration drilling in the Southern Areas target at GEMCO post receipt of approvals. The below picture provides an idea of production summary for the September 2019 quarter:


Production Summary (Source: Company Reports)

Future Aspects:The company progressed its Hermosa project pre-feasibility study which it expects to be completed in the June 2020 half-year. Advanced study work at the Eagle Downs Metallurgical Coal project, ahead of a final investment decision is scheduled for the December 2020 half year.

Stock Recommendation:On the valuation front, the stock of S32 is trading at EV to sales multiple of 1.13x in comparison to the industry median of 2.21x. The stock has a price to cash flow multiple of 4.81x against the industry median of 5.84x. As per ASX, at the current market price of A$2.570 per share, the annual dividend yield of the stock stood at 4.34%. Therefore, considering the above-stated facts, we give a “Hold” rating on the stock at the current market price of A$2.570 per share, down 1.154% on 23^rd October 2019.

 
Comparative Price Chart (Source: Thomson Reuters)

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