Stocks’ Details

Alumina Limited

Q3 FY20 Earnings of Alcoa Corp: One of the leading global bauxite and alumina company, Alumina Limited (ASX: AWC) is a metals and mining company having 40% interest in the Alcoa World Alumina & Chemicals (AWAC). The market capitalisation of the company stood at ~$4.35 Bn as on 20^th October 2020. Recently, the company noted the Q3 FY20 earnings release of Alcoa Corp, wherein, adjusted EBITDA of Alcoa Alumina stood at US$119 million against US$88 million in Q2 FY20. Adjusted EBITDA of Alcoa Bauxite segment amounted to US$124 million as compared to US$131 million in Q2 FY20, owing to appreciation of the Australian dollar.

1H FY20 Highlights of AWC: For the half-year ended 30^th June 2020, AWC reported alumina production of 6.4Mt as compared to 6.2Mt in 1H FY19. During 1H FY20, the company recorded a statutory net profit after tax of US$90.5 million against $210.9 million reported in the year-ago period. This was mainly due to a decline in the profit of AWAC, which stood at US$507 million against $950 million in 1H FY19.  AWC paid an interim dividend of 2.8 US cents per share on 25^th September 2020.

Key Financials (Source: Company Reports)

Outlook: For FY20, AWAC expects to report alumina production of around 12.8 million tonnes and aluminium production to be around 160,000 tonnes. AWAC expects third-party bauxite sales to reach the level of 6.5 million BD tonnes in FY20. 

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

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: AWC closed the half-year with cash and cash equivalents of US$32.6 million. Net debt as of 30 June 2020 stood at US$77.4 million, with gearing ratio of 4.5%.  In the past three months, the stock of AWC has corrected 15.42%, and as a result, the stock is inclined towards its 52-week low level of $1.295, offering decent opportunities for accumulation. On a technical front, the stock of AWC has a support level of ~$1.338 and a resistance level of ~$1.642. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as South32 Ltd (ASX: S32), BlueScope Steel Ltd (ASX: BSL) and Lynas Corporation Ltd (ASX: LYC), to name few. Therefore, considering the consistent dividend, low gearing, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.480 per share, down by 1.334% on 20^th October 2020.

Perenti Global Limited

Issue of Notes in US Bond Market: Perenti Global Limited (ASX: PRN) is a diversified mining services group, which provides surface mining, underground mining, and mining support services. The market capitalisation of the company stood at ~$793.10 million as on 20^th October 2020. Recently, the company notified that its wholly owned subsidiary, Perenti Finance Pty Ltd, has successfully finished a US$450 million issue of Guaranteed Senior Unsecured Notes (Notes) in the US bond market. However, the size of the issue has been increased by US$100 million from the initial target of US$350 million, owing to strong interest from global investors. The company would use these proceeds for the repayment of existing borrowings.

Topline Surpassed the Toll of $2 Billion: During FY20, the company has exceeded the toll of $2 billion in revenue for the first time in its history and posted revenue of $2.04 billion. Underlying EBITDA for the period amounted to ~$443.8 million, indicating a rise of 6.8% over pcp. PRN has resolved to pay a fully franked final dividend of 3.5 cents per share on 3^rd November 2020. The company improved its robust balance sheet with increased cash reserves of $327.5 million as compared to $243.7 million as on 31^st December 2019 along with an improved leverage ratio of 1.3x against 1.4x as on 31 December 2019.

Financial Summary (Source: Company Reports)

Outlook: The company has entered FY21 with strong liquidity position comprising cash and undrawn revolving credit facilities of $600 million. In addition, the company has secured $1.7 billion of revenue for FY21 with 69% gold exposure.

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

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Looking forward, the company is aiming a significant tender pipeline of $8.8 billion, which includes significant opportunities anticipated to commence in 2H FY21 or early FY22. The 52-week low-high range for the stock stands at $0.450 - $2.400, respectively.  On a technical front, the stock of PRN has a support level of ~$1.04 and a resistance level of ~$1.20. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price of low double-digit upside (in percentage terms). Therefore, in light of the strong balance sheet, improved liquidity position, decent outlook and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.115 per share, down by 1.328% on 20^th October 2020.

Silver Lake Resources Limited

Increased Gold Sales Supported EBITDA Growth: Silver Lake Resources Limited (ASX: SLR) is mainly involved in the production of gold and exploration of tenements in the Mount Monger goldfields of Western Australia. The market capitalisation of the company stood at ~$2.07 Bn as on 20^th October 2020. During FY20, SLR recorded total gold production of 273,071 ounces gold equivalent, reflecting a rise of 64% year over year. In addition, the company witnessed a rise of 54% in gold sales to 263,362 ounces gold equivalent at a realised price of A$2,132/oz. On the back of increased sales, EBITDA for the period increased by 224% to $260.1 million. During FY20, the company made an investment of $23 million in exploration activities focused on Mineral Resource to Ore Reserve conversion and advancing the pipeline of prospective opportunities within proven mineralised corridors.

Key Financials (Source: Company Reports)

Guidance: For FY21, the company is expecting gold sales in the range of 240,000 to 250,000 gold at an AISC of between A$1,400 to A$1,500/oz. In addition, SLR would continue to invest in exploration with a budget of $21 million. The company has scheduled to conduct its 2020 Annual General Meeting on 20^th November 2020.

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

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:  During FY21, the company would undertake numerous capital projects, which are likely to grow the fundamental value of the business via a combination of growth, increased margins, and risk mitigation. The company closed FY20 with an increased cash balance of $269.4 million and nil debt in its balance sheet. The 52-week low-high range for the stock stands at $0.950 - $2.750, respectively. On a technical front, the stock of SLR has a support level of ~$2.242 and a resistance level of ~$2.516. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Perseus Mining Ltd (ASX: PRU), Resolute Mining Ltd (ASX: RSG), Saracen Mineral Holdings Ltd (ASX: SAR), to name a few. Thus, considering the growth in gold sales, investment in exploration activities and decent outlook, we give a “Hold” recommendation on the stock at the current market price of $2.310 per share, down by 2.119% on 20^th October 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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