Stocks’ Details
 
Copper Market Overview: Three-month copper on the London Metal Exchange and the most-traded copper contract on the Shanghai Futures Exchange fell by 0.3% and 0.2%, respectively, on 22 June 2020. As per information available on media platforms, prices fell after US trade advisor stated that the trade deal with China was over, accusing the latter of the outbreak of coronavirus and the lack of transparency in relation to the spread initially. It was later clarified that the trade deal with China would remain intact and the above comments indicated the lack of trust in China after it concealed the origins of the novel coronavirus. As a result, the Shanghai Futures Exchange copper contract rose by 0.1% (~US$6,723.37 per tonne) on 23rd June 2020. Three-month copper on the LME fell by 0.3% (~US$5,862 per tonne), recovering from a larger drop earlier during the day.Earlier, London Metal Exchange copper prices witnessed a fall due to weak demand following an increase in coronavirus cases across the globe. Alongside, the risk of supply disruption in the world’s largest copper producer, Chile, and lower inventories, drove Shanghai copper prices upward.

While copper prices have recovered after a dip in prices due to COVID-19, expecting the prices to get back to pre-COVID levels is highly uncertain. LME copper has improved significantly when compared to mid-March levels but is behind the price level prior to the COVID-19 outbreak. Demand for industrial commodities, including copper, has declined sharply due to a significant decline in industrial and manufacturing activities in large economies. For instance, demand from China, one of the top consumers of copper, has fallen despite the commencement of industrial activities in the country. The above scenario indicates that the copper market will be characterized by a surplus in the near term and may continue to witness pressure on prices.

On the other hand, optimism around the development of a COVID-19 vaccine and reopening of economies may drive a recovery in demand for industrial commodities. However, a quick turnaround is unlikely, given the disruptions in industrial activities arising from the pandemic and US-China trade tensions. While the weak demand outlook for copper will be a factor defining prices in the short term, the long-term prices and outlook remain dependent on how the above macro-economic events unfold in the future. Let us have a look at 3 stocks that generate revenue from copper segment.
 

BHP Group Limited

Strong Financial Position: BHP Group Limited (ASX: BHP) is engaged in the exploration, production, and processing of minerals. The company recently announced that the voting power of Vanguard Group increased from 5.001% to 6.011%. In another update, the company announced that David Lamont was appointed as the Chief Financial Officer, effective 1 December 2020.

Quarterly Highlights: During the quarter ended 31^st March 2020, the company reported petroleum production of 25 MMboe, down 11% on the previous quarter. Copper production for the period stood at 425 kt, down 7% on the previous quarter. YTD copper production stood at 1,310 kt, up 5% on pcp. On a sequential basis, copper production went down by 7%, due to lower production at Escondida impacted by expected lower copper grades, partially offset by continued strong concentrator throughput. Production was also impacted by lower volumes at Olympic Dam due to unplanned downtime at the smelter.

Over the period covering FY15-FY19, the company reported gross profit and net income CAGR of 3.8% and 44.4%, respectively. During 1HFY20, Group EBITDA amounted to US$12.1 billion, up 15% on pcp. Iron Ore contributed 60% to group EBITDA at US$7.1 billion, followed by Copper at US$2.4 billion. EBITDA from Metallurgical coal and Petroleum stood at US$1.1 billion and US$1.6 billion, respectively. Net debt at the end of the period amounted to US$12.8 billion, with free cash flow at US$3.7 billion.
 
Guidance & Outlook: Petroleum production in FY20 is expected to be around the bottom of 110 – 116 MMboe. Copper guidance for the company’s operating assets is broadly unchanged and Antamina guidance is under review following the temporary suspension of operations due to COVID-19 pandemic. Industrial activity has restarted at a low pace due to the uncertainty surrounding COVID-19. While industrial and manufacturing activities in China have been recovering, copper demand in China could be marginally weaker than steel in 2020 due to copper’s greater exposure to indirect exports.
 

Production Guidance (Source: Company Reports)
 
Key Risks: Major economies are expected to contract heavily in the June 2020 quarter. While domestic industrial activity in China has been improving, the possibility of a second wave of infection poses a major risk to the positive trajectory. Other markets such as the US and Europe are expected to see disruptions in activities and a flatter recovery trajectory, which will impact the demand for resources. Trade and other restrictions in India, Japan, and South Korea will also impact the industrial activity in these countries.
 
Valuation Methodology:EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA 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 stock of the company gave positive returns of 30.82% in the last three months and is currently inclined towards its 52-week high price of $42.330. The company retains a strong financial position, with net debt and cash as on 31^st December 2019 amounting to US$12.8 billion and US$14.3 billion, respectively. The business remains resilient and has flexibility in capital and exploration expenditure. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $35.64, up 0.792% on 23^rd June 2020.
 

Metals X Limited

Renison Tin 2020 Life of Mine Plan Completed:Metals X Limited (ASX: MLX) is primarily engaged in the operation of tin and copper mines in Australia. The company recently received a notice regarding the intention of APAC Resources Strategic Holdings Ltd to remove three directors of MLX named, Patrick O’Connor, Brett Lambert and Tony Polglase. APAC also communicated its intention to propose the appointment of Grahame White and Peter Gunzburg as Directors.
Update on Operations:The company recently completed the 2020 Life of Mine Plan at its Renison Tin operations, confirming 10-year Life-of-Mine. The capital expenditure of $50 - $55 million for Area 5 development will be funded through operating cash flow, with production ramp up from ~8,500 tpa in early years to more than 10,000 tpa from FY25. A Nifty Scoping Study concerning the Paterson Copper operations indicated that the 10-year mine will deliver ~26,000 tpa copper-in-concentrate. The company is enhancing value and building long-term strength with these high value and high margin projects and expects the same to generate strong future cashflows. As on 31^st March 2020, the company reported closing cash and working capital of $26.3 million, comprising cash of $20.8 million.


Renison Tin Production & Costs (Source: Company Reports)
 
Over the period covering FY16-FY19, the company reported a revenue CAGR of 41.7%. During 1HFY20, revenue from the Renison Tin operations stood at ~$38.50 million, as compared to ~$36.59 million in pcp, driven by higher tin production, partially offset by a lower tin price. Revenue from the Nifty Copper operations stood at ~$70.18 million, as compared to pcp revenue of ~$55.41 million, driven by higher copper production and the timing of copper shipments. Cash and cash equivalents at the end of the period stood at $40.52 million and total debt came in at $39.6 million.
 
JV with IGO Limited: The company executed a binding agreement Joint Venture Term Sheet with IGO Limited in relation to its Paterson Exploration Project, with IGO’s exploration activities expected to commence during the September quarter. IGO has a rich experience of exploration in the Paterson Province and this agreement will create shareholder value for both IGO and Metals X through discovery.

Key Risks: The company’s operations are affected by various types of financial risks including foreign currency risk, credit risk, interest rate risk, commodity price risk. The commodity price risk directly impacts the company’s revenues and can be a threat to its performance if not managed properly. The recent uncertain environment and its impact on commodity prices call for a strict inspection of commodity prices to take timely corrective actions.

Stock Recommendation: The stock of the company gave positive returns of 8­0% in the last three months and is currently inclined towards its 52-week low price of $0.043. On TTM basis, the stock is trading at a price to book value multiple of 1.0x as compared to the industry median of 1.6x. Considering the recent development across operations, expected benefits out of the JV with IGO Limited, risk profile, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.078, down 3.704% on 23^rd June 2020.
 

Rio Tinto Limited

Robust Production in Q1FY20:Rio Tinto Limited (ASX: RIO) is engaged in the exploration, development, and production of minerals and metals. The company has recently launched the board-led review of its heritage management processes within Iron Ore pursuant to the events at Juukan Gorge, with a focus on recommending improvements to its internal processes and governance. The review began immediately, with the final report targeted by October 2020.

First Quarter Highlights: During the first quarter ended 31^st March 2020, the company achieved robust production performance. Pilbara iron ore production stood at 77.8 Mt, up 2% on pcp. Bauxite production stood at 13.8 Mt, up 8% on pcp.Mined copper for the quarter stood at 133 kt, down 8% on pcp, reflecting anticipated lower copper grades. Demand in China continued to recover during the quarter, particularly for high-quality iron ore and imported bauxite. Copper demand remained reasonable during the quarter but bears the threat of deteriorating industrial growth expectations globally.


Production Highlights (Source: Company Reports)
 

Guidance (Source: Company Reports)
 
Over the period covering FY15-FY19, the company reported a revenue and gross profit CAGR of 5.5% and 10.2%, respectively. During FY19, gross sales revenue amounted to ~US$45.37 billion, comprising Iron Ore revenue of US$24.1 billion, Aluminium revenue of US$10.3 billion, Copper & Diamonds revenue amounting to US$5.8 billion and Energy & Minerals accounting for US$5.2 billion. Underlying EBITDA for the above segments came in at US$16.1 billion, US$2.3 billion, US$2.1 billion and US$1.8 billion, respectively.
 
Key Risks: Apart from China, the demand outlook for other markets is uncertain. COVID-19 restrictions have affected commodity supply due to disruptions in supply chains and people’s movement. The company’s major projects are being affected by these restrictions, which may impact the progress, going forward.
 
Valuation Methodology:P/E Multiple Based Relative Valuation (Illustrative)

P/E 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 stock of the company gave positive returns of 22.86% in the last three months (as at 22 June 2020) and is currently trading towards its 52-week high price of $107.79. The company possesses a world-class portfolio and a strong balance sheet to serve well in the current volatile environment. The company pledged US$25 million investment in COVID-19 related community projects to contain the virus spread. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target price of limited upside (in percentage terms). Hence, we have a watch stance on the stock at the current market price of $98.05, up 1.396% on 23^rd June 2020.
 
 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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