Fortescue Metals Group Ltd

FMG Details

Robust Operating Performance in 1HFY21: Fortescue Metals Group Ltd (ASX: FMG) is engaged in the exploration, development, production, processing, and sale of iron ore. Fortescue owns and operates a fully integrated infrastructure and supply chain. FMG has exhibited a robust operating performance in 1HFY21. The company has posted a growth of 44% YoY in its revenues to US$9.3bn on the back of higher price realisation. The company has registered a growth of 57% YoY in its underlying EBITDA of US$6.6bn for 1HFY21 ending December 2020. Similarly, EBITDA margin improved to 71%. FMG has reported a growth of 66% YoY in Net Profit after Tax (NPAT) to US$4.1bn in 1HFY21. FMG has registered a 2% YoY growth in shipments at 90.7mt.

Revenue and Profits Growth in 1HFY21 (Source: Company Reports)

Higher Dividends: Backed by strong operational performance, FMG has declared higher interim dividends in 1HFY21. FMG has declared a fully franked interim dividend of A$1.47 per share, which is 93% higher than FY20 interim dividends representing an 80% payout on 1HFY21 NPAT.

Change in Director’s Interest: FMG’s Director, Jennifer Morris, has acquired an additional 1,219 ordinary shares for the value of $29,987.40 on 23 February 2021.

Outlook: FMG will remain focused on enhancing its capacity through debottlenecking. The company has given guidance for an increased shipment to 178-182mt in FY21 based on strong 1HFY21. The company is likely to keep its capital expenditure at the upper end of the guided range of US$3.0-US$3.4bn due to the revision of exchange rates. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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.

Stock Recommendation: In the last one month, FMG has decreased by 2.02% and increased by 7.7% in the last three months. The current market capitalisation of FMG stands at $77.71bn as on 4 March 2021. The stock is currently trading above the average 52-week price level range of $8.20-$26.40. On the technical analysis front, the stock has a support level of ~$21.64 and a resistance of ~$23.04. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer median, considering an increase in revenues and profits in 1HFY21 and enhancing shareholder’s value. For the purpose we have taken peers Aurelia Metals Ltd (ASX: AMI), Metal X Ltd (ASX: MLX), and Rio Tinto Ltd (ASX: RIO). Considering robust financial results in 1HFY21, positive outlook, dividend declaration, valuations, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $22.25, down by ~2.584% as on 4 March 2021.

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

Resolute Mining Limited

RSG Details 

Turnaround with Profits in FY20: Resolute Mining Limited (ASX: RSG) is an Australia-based gold miner. The company is engaged in exploring, developing, and operating gold mines in Australia and Africa. It operates through two segments: Syama and Bibiani. FMG has posted a NPAT of US$4.9mn in FY20 as compared with a Net Loss of US$78.47mn in FY19. As per the company reports, RSG’s operating segment - Syama is a long-life asset with mineral resources of 7.6Moz and ore reserves of 3.3Moz. Production of sulphide has increased by 102% YoY in 2020 to 123,500oz. Syama has registered a 91.2% recovery for oxide and produced 90,860oz at an AISC of US$844/oz. Mako contained mineral resources of 965Koz and ore reserves of 780Koz.   

Revenue and EBITDA Growth (Source: Company Reports) 

Key Risks: RSG is present in gold mining and any fluctuations in the prices of Gold or related commodities may impact the financials of the company. Moreover, there are risks associated with adverse climatic conditions, any earthquake or high rainfall can disturb the operations of the business.

Outlook: As per the company report, RSG is forecasting gold production of 350,000oz to 375,000oz at an estimated AISC in a range of US$1,200/oz – US$1,275/oz. FMG is likely to incur US$29mn in 12 months to December for capital expenditure. The company has plans to reduce its debt through monetisation of its operational segment – Bibiani.

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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.

** 1USD = ~1.28AUD

Stock Recommendation: In the last one month, RSG has decreased by 12.76% and by 22.15% in the last three months. The stock is currently trading below the average 52-weeks’ price level range of $0.605-$1.497. On the technical analysis front, the stock has a support level of ~$0.608 and resistance of ~$0.681. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight premium as compared to its peer median, considering a turn around with profits in FY20 backed by higher gold sales and an increase in average price realisation. For the purpose, we have taken peers OceanaGold Corp (ASX: OGC), Sandfire Resources Ltd (ASX: SFR), and Ramelius Resources Ltd (ASX: RMS). Considering high reserves and resources, long-life for operating assets, turnaround profits in FY20, valuations, and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $0.615, down by ~3.150% as on 4 March 2021.

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

Core Lithium Ltd

CXO Details

Agreement to Acquire Mineral Leases: Core Lithium Ltd (ASX: CXO) is engaged in the exploration of lithium, copper, and uranium. CXO is developing lithium projects near Darwin port in Australia. CXO has recently signed an option agreement to acquire six granted mineral leases for the expansion of lithium pegmatite holding in the Northern Territory. Mineral leases are located near Darwin and include more than 30 pegmatites. CXO will pay a cash amount of $500,000 through its subsidiary Bynoe Lithium to Outback Metals and Victory Polymetallic for the option to acquire the leases. Bynoe must pay $5mn, including cash and shares to exercise the option. Drilling for these mineral leases is expected to start by next quarter after acquiring approval with the 2021 field season.  

Gold Confirmation on Drilling at Bynoe Gold Project: As per the reports, CXO has confirmed the gold mineralisation on initial drilling at Bynoe Gold Project beneath 100-150m wide and 1.6 km long series of sulfide-rich, gold bearing quartz veins.

CXO to Benefit from Higher Lithium Demand: As per the company reports, China’s Yahua signed an agreement to supply battery-grade lithium hydroxide to US electric vehicle manufacturer Tesla over the next 5 years. CXO is expecting demand coming from Yahua to its Finniss Project. Yahua is currently under a three-year agreement for 75,000 tonnes per annum offtake with CXO. The company has sufficient cash on its balance sheet to meet its short-term and medium-term objectives. The company has registered $4.53mn of cash and cash equivalents at the end of the December 2020 quarter.

Cash Highlights (Source: Company Reports)

Key Risks: CXO has not posted any revenues and any major increase in working capital expenditure will lead to extended losses to the company. Moreover, any fluctuations in the prices of Gold or other related commodities will impact the financials of the company. 

Outlook: As per the company reports, CXO has been awarded NT Government’s offer of a mineral lease for the high-grade BP-33 Lithium deposit for a term of 25 years.

Stock Recommendation: On 3 March 2021, the securities of CXO were placed in a trading halt pending the release of an announcement about material acquisition. The trading halt has now been uplifted after the company has made an announcement to the market on 4 March 2021 regarding the signing of an option agreement to acquire six granted Mineral Leases containing over 30 lithium pegmatite targets adjacent to the company’s 100%-owned Finniss Lithium Project. In the last one month, CXO has decreased by 37.68% and increased by 144.31% in the last three months. The stock is currently trading below the average 52-weeks’ price level range of $0.013-$0.420. On the technical analysis front, the stock has a support level of ~$0.206 and a resistance of ~$0.224. Considering a strong balance sheet with nil debt, increase in total assets and increase in cash, confirmation on gold mineralisation, higher demand for lithium from the US, lifting of the trading halt and current trading levels along key risks associated with the business, we recommend a “Speculative Buy” on the stock at the current market price of $0.215, down by 2.273% as on 4 March 2021.

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

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