OZ Minerals Limited

 

OZL Details
 
OZL to Buy Cassini Resources: OZ Minerals Limited (ASX: OZL) is an Australia-based modern mining company that has a market capitalisation of ~$3.37 billion as on 22 June 2020. Recently, the company stated that Coopers Investors Pty Limited, a substantial holder of the company, has increased its voting power from 5.141% to 6.267%. On June 22, 2020, the company stated that it has entered into a mandatory agreement to acquire Cassini Resources through a Scheme of Arrangement, bolstering its ownership of the West Musgrave Project to 100%. This apart, Cassini also undertook an inter-conditional demerger of its Yarawindah Brook and Mount Squires assets into a new company, Caspin Resources Limited (“Caspin”), which will be listed on ASX, subject to regulatory approvals. The move will aidOZL to gain maximum optionality regarding the development of the West Musgrave Project. As part of the agreement, Cassini shareholders will obtain Caspin shares, along with a consideration of ~$0.16 per share in both cash and shares.
 
Q1FY20 Update: Despite the COVID-19 pandemic constraints, the company’s operations delivered a strong opening to 2020 with Prominent Hill providing 15,580 tonnes of copper and 49,049 ounces of gold at a negative C1 cost. During Q1FY20, the company extended the revolving credit facility to $480 million which further strengthened its financial position.
 

Key Highlights (Source: Company Reports)
 
What to Expect: The company has provided guidance for FY20 and expects to produce 83,000-100,000 tonnes of copper and 207,000-234,000 ounces of gold. It also expects All-in sustaining costs between US$115-130 cents/lb. The company has a net cash positive position and a $480 million revolving debt facility, providing sufficient liquidity in the current volatile environment. For 2020, the company intends to embed the new operations, allow the assets and its people to catch up and systemise all the good initiatives it has developed over the years, as it continues to deliver against the COVID-19 impacts.
 
Key Risk: The company is susceptible to certain risks such as climate change (disruption in the mine production, logistics and water supply), operational risks (cost estimation accuracy which may affect project’s cost, efficiency and profitability), risks associated with the fluctuation of global commodity prices and exchange rates.
 
Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)
 
 
P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: As per ASX, the stock of OZL gave a return of 66.93% in the past three months and is trading above the average of its 52-weeks’ low and high level of $5.83 and $11.72, respectively. In FY19, the company reported an EBITDA margin of 31.4% and net margin of 14.8%, both higher than the industry medians. For the same period, the company reported Debt/Equity ratio of 0.06x, lower than the industry median of 0.13x. We have valued the stock using the P/BV multiple based illustrative relative valuation method and arrived at a target price, which is offering an upside of lower double-digit (in percentage terms). For the purpose, we have taken peers such as IGO Ltd (ASX: IGO), South32 Ltd (ASX: S32), and Mineral Resources Ltd (ASX: MIN). Considering the aforesaid facts, OZL’s decent performance in Q1FY20, and the company’s financial strength, we give a “Hold” rating on the stock at the current market price of $10.42, up by 0.192% on 22 June 2020.

 
OZL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
 

Pilbara Minerals Limited

 

PLS Details
 
March 2020 Quarter Update: Pilbara Minerals Limited (ASX: PLS) is involved in the exploration of lithium and tantalum. The company is also engaged in mine development. The market capitalisation of the company stood at ~$589.28 Mn as on 22 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 remained focused on health and safety plans in response to curb the impact of 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 came in at 33,729 dmt. The company also entered a 75,000tpa offtake deal with Yibin Tianyi for a period of 5 years. The company’s strategy to moderate production and reduce costs has aided it to maintain a strong balance sheet. The move places the company to capitalise on the market improvement. The company ended the quarter with cash balance of $100.97 million.
 

Quarterly spodumene concentrate shipments (dmt) (Source: Company Reports)
 
Future Growth Impetus: The company is confident about the medium to long-term demand growth for lithium raw materials. The company is also focused on growth and modification strategy to become one of the top and lowest cost lithium producers.
 
Key Risk: The company stated that there is material uncertainty on the near-term outlook considering the market weakness. Further, the company is exposed to various types of financial risks, which include, interest rate risk and credit risk. Also, a leveraged balance sheet remains a headwind.
 
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: As per ASX, the stock of PLS gave a return of 60.61% in the past three months and is trading below the average of its 52-weeks’ low and high level of $0.135 and $0.670, respectively. In Dec’20, the company reported debt/equity ratio of 0.41x, higher than the industry median of 0.26x. However, the moderated production plan, increased recoveries and lower costs, safeguard a strong cash position and place the company in a decent position for market revival. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Galaxy Resources Ltd (ASX: GXY), Altura Mining Ltd (ASX: AJM), 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, and softness in the market, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.275 per share, up by 3.774% on 22 June 2020.
 
 
PLS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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