Stocks’ Details

Mineral Resources Limited

Decent Growth in FY20 Results: Mineral Resources Limited (ASX: MIN) is an integrated mining services provider, with a focus on the iron ore and hard-rock lithium sectors in Western Australia. The market capitalisation of the company stood at ~$5.25 billion as on 11^th September 2020.  During FY20, the company has not experienced any material impact on its financial performance from COVID-19. For FY20, the company reported record statutory EBITDA amounting to $2.01 billion, which included a gain of $1.30 billion on the sale of a 60% interest in the Wodgina Lithium Project. Statutory Net Profit After Tax (NPAT) for the period stood at $1.002 billion, and underlying NPAT amounted to $334 million, reflecting a rise of 63% on pcp.

The company has declared a fully franked final dividend of 77.0 cents per share, taking the fully franked dividend for FY20 to 100.0 cents per share. The company will pay the final dividend on 15^th September 2020.

Key Financials (Source: Company Reports)

Aspects: The company entered FY21 with a healthy balance sheet and positive momentum in its operations. In addition, MIN is vigilant to the ongoing risk created by COVID-19. The company is scheduled to release its Q1 FY21 results on 23 October 2020.

Key Risks: The company’s business activities are exposed to numerous financial risks, such as foreign currency risk, commodity price risk, credit risk and liquidity risk.

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

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Net margin of the company stood at 47.2% in FY20 as compared to the industry median of 8.7%. This indicates that the company possesses decent capabilities to convert its topline into the bottom line against the broader industry. On the technical analysis front, the stock of the company has a support level of ~A$25.89 and a resistance level of ~A$28.76. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Western Areas Ltd (ASX: WSA), Pilbara Minerals Ltd (ASX: PLS), Perenti Global Ltd (ASX: PRN), etc., and arrived at a target price of high single-digit upside (in percentage terms). Hence, considering the decent growth in top-line and bottom-line, healthy balance sheet, improvement in net margins and valuation, we give a “Hold” recommendation on the stock at the current market price of $27.150 per share, down by 2.513% on 11^th September 2020.

OZ Minerals Limited

Follow -Up Drilling Finished at Mount Skipper: OZ Minerals Limited (ASX: OZL) is a mining company with a major focus on copper. The market capitalisation of the company stood at ~$4.74 billion as on 11^th September 2020. In January 2019, the company entered an exploration alliance with Red Metal Limited. The Alliance provides OZ Minerals with a two-year option to fund a series of mutually agreed, proof-of-concept work programs on six of Red Metal’s early-stage projects, which include Mount Skipper Project for zinc-lead-silver-copper in QLD.  On 9^th September 2020, the company has been advised by Red Metal Limited that follow-up drilling has been wrapped up at Mount Skipper Project.

Higher Gold Volumes Supported Bottom Line: In another update, OZL stated that it has resumed drilling for Eloise JV at Cloncurry, northwest Queensland. The company added that a 2,000m diamond drilling program is underway to test two high-priority electromagnetic (EM) targets at Seer and Big Foot. During 1H FY20, the company reported net profit after tax (NPAT) amounting to $80 million, reflecting a rise of 82% due to higher gold volumes and strong gold price. EBITDA for the period stood at $251 million at a robust operating margin of 44%.  Over the year, the operating cash flows increased by 49% to $151 million because of higher customer receipts with higher gold volumes and prices, as well as lower payments for exploration and corporate development activities.

NPAT Bridge (Source: Company Reports)

Production Guidance: For FY20, the company expects gold production in the range of 227,000-249,000 ounces and copper production of between 88,000-105,000 tonnes. The company is likely to release its Q3 FY20 production updates on 22^nd October 2020

Key Risks: OZL’s business is sensitive to physical and non-physical climate risk. Physical climate risk arises from the increased severity of extreme weather events and chronic risks due to long-term changes in climate patterns. Non-physical climate risks are influenced by policy, regulatory, legal, technology, financial and market responses to the challenges posed by climate change and the transition to a lower-carbon economy. Moreover, the business is also exposed to macroeconomic and geopolitical risk, as the company operates in Australia and Brazil and has exploration activities in multiple countries.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Net margin of the company stood at 13.9% in 1H FY20, reflecting YoY growth of 3.4%. This reflects that the company has enhanced its position to convert its topline into the bottom line. Debt to equity of the company stood at 0.12x against the industry median of 0.21x. On the technical analysis front, the stock of the company has a support level of ~A$14.219 and a resistance level of ~A$14.835. We have valued the stock using the Price to Cash flow multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Alumina Ltd (ASX: AWC), Lynas Corporation Ltd (ASX: LYC), Iluka Resources Ltd (ASX: ILU), etc. Thus, in light of higher gold volumes, growth in operating cash flows, deleveraged balance sheet and guidance, we give a “Hold” recommendation on the stock at the current market price of $14.390 per share, down by 1.438% on 11^th September 2020.

IGO Limited

Strategic Review of 30% Interest in Tropicana: IGO Limited (ASX: IGO) is a nickel, gold and copper-zinc-silver mining, development and exploration company. The market capitalisation of the company stood at ~$2.6 billion as on 11^th September 2020. IGO has commenced a strategic review of its options in relation to its 30% interest in Tropicana following the unsolicited approaches from numerous parties and a desire to ensure the value of its interest in Tropicana for IGO’s shareholders is maximised. The strategic review would involve a detailed technical analysis of the various opportunities for improving value via underground development and exploration, as well as the value which may be realised through a full or partial sale or other alternative transaction structures.

In another update, the company announced that its current Chairman, Mr Peter Bilbe would step down from the Board on or before the 2021 Annual General Meeting.  However, the company has appointed Gerard Daniels, an executive search and board consulting company to identify the future Chairman. The company is expecting to appoint a new Chairman by the end of December 2020.

Decent Growth in Topline and Bottom Line: During FY20, the production at Nova surpassed the guidance for all metals while production at Tropicana was in line with the guidance. The company reported revenue and other income amounting to $892 million and underlying EBITDA of $460 million at an improved margin of 52%. IGO recorded a rise of 104% in the bottom-line (NPAT) to $155 million. The financial performance was driven by the continued strength of the Nova Operation.

Key Financials (Source: Company Reports)

Production Guidance: For FY21, the company is expecting production of Nickel in concentrate in the range of 27,000 to 29,000t and Copper in concentrate of between 11,000 to 12,500t at Nova operation. The gold production at Tropicana is expected of between 380 to 430koz. The company is likely to conduct its Annual Shareholders Meeting on 18^th November 2020.

Key Risks: The company’s business activities are sensitive to any change in market supply and demand for products. In addition, the business is also exposed to economic, environmental, and social sustainability risks.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative 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 has resolved to pay an unfranked final dividend of 5 cents per share on 25^th September 2020. This took the full-year dividend to 11 cents per share. During FY20, the net cash position of the company was cemented to $453 million; resultantly, it closed the year with a cash balance of $510 million. On the technical analysis front, the stock of the company has a support level of ~A$4.321 and a resistance level of ~A$4.664. We have valued the stock using the price to cash flow multiple based illustrative relative 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 OZ Minerals Ltd (ASX: OZL), Iluka Resources Ltd (ASX: ILU), Western Areas Ltd (ASX: WSA), etc. Thus, considering the strategic review of Tropicana, decent growth in financials, strengthened net cash position and outlook, we give a “Buy” recommendation on the stock at the current market price of $4.490 per share, up by 2.045% on 11^th September 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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