Cleveland-Cliffs inc.

CLF Details

Cleveland-Cliffs inc. (NYSE: CLF) is a producer of flat-rolled steel and iron-ore pellets in North America. The company is vertically integrated from mined raw materials and direct reduced iron to primary steelmaking and downstream finishing, stamping, tooling, and tubing. In FY20, CLF acquired AK Steel and ArcelorMittal USA, vertically integrating its iron ore business with quality-focused steel production, and focusing on the automotive end market.

Latest News:

• Inorganic Growth Initiatives: On November 18, 2021, CLF acquired Ferrous Processing and Trading Company (FPT), a US-based ferrous scrap processor, and its related entities, thus making it its wholly-owned subsidiary. FPT presently processes about three million tons of scrap per year, with prime grade scrap accounting for almost half of that. CLF anticipates its prime scrap business to develop due to its current connections with industrial steel buyers.
• Taking a step towards a Better Climate: On November 03, 2021, CLF partnered with the United States Department of Energy (DOE) as part of the Better Climate Challenge program. This new government-sponsored initiative encourages businesses to establish aggressive portfolio-wide GHG emission reduction targets. The program provides additional opportunities for peer relationships and technical assistance.

Q3FY21 Results:

• Surge in Topline: The company reported YoY growth of 264.76% in total revenue to USD 6.0 billion in Q3FY21 (ended September 30, 2021) compared to USD 1.65 billion in Q3FY20. The Steelmaking segment, representing 97.75% of the total revenue in Q3FY21, improved 289.71% YoY, whereas the Other Businesses segment declined by 3.57% YoY.
  • Expansion of Net income: CLF reported a net income of USD 1.27 billion in Q3FY21 vs. a net loss of USD 10 million in Q3FY20.
• Cash and Debt Position: As of September 30, 2021, the company had cash & cash equivalents of USD 42 million and total debt of USD 5.35 billion.

Key Risks:

• Market Concentration Risk: In FY20, the Automotive segment accounted for ~40% of AK Steel and ArcelorMittal USA's revenue. Hence, any unfavorable impact on the automotive market could harm its financials.
• Regulatory Risk: CLF is a metal mining company that is governed by a range of federal and state laws. As a result, tighter rules or non-compliance with mandatory legislation could harm the company's profitability.

Valuation Methodology: Price/Cash Flow Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

CLF Daily Technical Chart (Source: REFINITIV)

Stock Recommendation:

CLF's share price has declined 5.09% in the past three months and is currently leaning towards the higher-band of the 52-week range of USD 8.78 to USD 26.51. The stock is currently trading above its 50 and 200 DMA levels, and its RSI Index is at 47.85. We have valued the stock using the Price/Cash Flow-based relative valuation methodology and arrived at a target price of USD 28.38.

Considering the slight correction in the stock price in the past three months, strong top and bottom-line performance, a recent acquisition, current valuation, and associated risks, we recommend a "Buy" rating on the stock at the current price of USD 21.99, up 2.37% as of November 19, 2021, 1:21 PM ET.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Fortuna Silver Mines Inc.

FSM Details

Fortuna Silver Mines Inc. (NYSE: FSM) is a Canadian precious metals and mining company operating in Peru, Mexico, Argentina, and Côte d'Ivoire. The open-pit Lindero gold mine in northern Argentina, the underground Yaramoko mine in southwestern Burkina Faso, the underground San Jose silver and gold mine in southern Mexico, the underground Caylloma silver, lead, and zinc mine in southern Peru, and the open pit Séguéla gold mine in southwestern Côte d'Ivoire are all operated by the company. As of November 19, 2021, the company's market capitalization stood at USD 1.15 billion.

Latest News:

• Update on the Denial Order: On November 19, 2021, FSM provided an update on the appeal status to the denial order issued by Mexico's Secretara de Medio Ambiente y Recursos Naturales (SEMARNAT) on November 10, 2021, in connection with the application to extend the environmental impact authorization (EIA) at the San Jose mine. FSM's Mexican subsidiary Companía Minera Cuzcatlán is working with its legal advisors to file an appeal to the Denial Order before the end of November 2021.
• Construction of Séguéla Gold Project: On September 29, 2021, FSM announced that its Board of Directors approved the building of an open-pit mine at the Séguéla gold project. Séguéla is expected to become its fifth operating mine with first gold in mid-2023, with a nine-year mine life in reserves, 130,000 oz of annual gold output in the first six years, and appealing economics.

Q3FY21 Results:

• Surge in Topline: The company reported YoY growth of 94.84% in total revenue to USD 162.57 million in Q3FY21 (ended September 30, 2021) compared to USD 83.44 million in Q3FY20, driven by gold sales from Yaramoko and Lindero mines.
• Decline in Profitability: FSM reported a decrease in net income to USD 0.21 million during Q3FY21 vs. USD 13.09 million in Q3FY20.
• Cash and Debt Position: As of September 30, 2021, the company had cash & cash equivalents (including short-term investments) of USD 136.26 billion and total debt of USD 219.15 billion.

Key Risks:

• Metal Price Risk: The company's sales will be affected by USD 1,118, USD 537, USD 459, and USD 333 for every +/-10% change in Silver, Gold, Lead, and Zinc prices from the prices used as of September 30, 2021. As a result, any adverse price movement may harm the company's financial situation.
• Regulatory Risk: FSM operates as a metal mining company, which is subject to several federal and state regulations. Therefore, the issuance of stricter regulations or non-compliance with required laws could adversely affect the company's profitability.

Outlook:

FY21 Guidance (Source: 3QFY21 Earnings Presentation, November 12, 2021)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

FSM Daily Technical Chart (Source: REFINITIV)

Stock Recommendation:

FSM' share price has declined 47.53% in the past nine months and is currently leaning towards the lower-band of the 52-week range of USD 3.74 to USD 9.85. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 33.94. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 4.91.

Considering the correction in the stock price in the past nine months, strong top-line performance, current valuation, and associated risks, we recommend a "Buy" rating on the stock at the closing price of USD 3.83, down 3.28%, as of November 19, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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