South32 Limited 

S32 Details

Trading Update on 3QFY21: South32 Limited (ASX: S32) is engaged in the exploration of Alumina, Aluminium, Coal, and Manganese in Australia. S32 has registered a decline of 13% QoQ in Alumina production in 3QFY21, a decline of 3% QoQ in Manganese production, an increase of 12% QoQ in metallurgical coal production during 3QFY21. The company has reported an increase in net cash to US$517mn on the back of increased commodity prices and better operating performance. S32 has invested US$11mn during the nine-month ending March 2021 to resume exploration activities at Hermosa. 

Unconditional Divestment of a Subsidiary: S32 has announced to transfer its 100% interest in South32 SA Coal Holdings Proprietary limited (South Africa Energy Coal) to Seriti Resources Holdings Proprietary Limited (Seriti). The company has further announced on 17 May 2021 that all the conditions for transfer have now been fulfilled. The transfer is unconditional and expected to be completed by June 2021. S32 is expected to book a loss on sale in a range of US$125mn-US$175mn.

Latest Production Summary (Source: Company Reports) 

1HFY21 Financial Highlights: The company has registered a decline in total revenue to US$2,943mn in 1HFY21 against US$3,216mn in 1HFY20 due to Covid-19 impacts. The company has posted a decline in its profit to US$53mn in 1HFY21 against US$99mn in 1HFY20 on the back of weaker commodity prices. S32 has registered an increase in its liquidity position to US$1,383mn as on 31 December 2020 against US$1,315mn as on 30 June 2020.

Key Risks: The company holds interest-bearing liabilities. Thus, any severe change in interest rate may lead to increased interest payments on the borrowings. The company operates in multiple countries. Any severe movement in foreign exchange prices may lead to forex losses for the company.

Outlook: S32 has provided production guidance for FY21. S32 expects total production of 3,965kt of Alumina production from Worsley Alumina and 1,370kt from Brazil Alumina in FY21. S32 expects total production of 720kt of Aluminum production from Hillside Aluminum and 273kt of Aluminium production from Mozal Aluminium in FY21. The company expects a total coal production of 8,000 kt from Illawarra Metallurgical Coal in FY21. Manganese ore production is expected at 3,500kwmt from Australia Manganese in FY21. 

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: The stock of S32 gave a return of ~2.77% in the last one month and a return of ~13.84% in the last three months. The current market capitalisation of S32 stands at ~13.82$bn as of 17 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$1.865-~$3.090. On the technical analysis front, the stock has a support level of ~$2.76 and a resistance of ~$3.308. We have valued the stock using an EV/Sales Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount as compared to its peer median, considering a decline in production of Alumna and Manganese in Q3FY21 and a decline in revenue and profit in 1HFY21. For this purpose, we have taken peers Metals X Ltd (ASX: MLX), Panoramic Resources Ltd (ASX: PAN), Western Areas Ltd (ASX: WSA). Considering an increase in cash position, decent operating performance, recovery in commodity prices, and valuation, we recommend a “Hold” rating on the stock at the current market price of $2.96, up by ~1.023% as on 17 May 2021.

S32 Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Syrah Resources Limited 

SYR Details

Trading Update on 1QFY21: Syrah Resources Limited (ASX: SYR) is engaged in the construction and development of the Balama Graphite Project in Mozambique. SYR has reported recommencement of graphite production at its Balama Graphite Project on the back of higher demand for natural graphite from Electric Vehicle (EV) sales. SYR is working towards a detailed design for the expansion of production capacity at Vidalia. The company has commissioned a furnace to achieve commercial scale at its Active Anode Material (AAM) facility at Vidalia, USA. Further, SYR has announced on 17 May 2021 about achieving successfully the first fully integrated production of AAM at Vidalia. The company will be supplying the material to battery manufacturer and OEM to support commercial engagements. SYR expects attractive margins at current AAM prices of US$5,479 per tonne.

AAM Production Volumes (Source: Company Reports)

FY20 Financial Highlights: The company has registered a significant decline in its top line to US$10.78mn in FY20 against US$72.18mn in FY19 on the back of suspended production at Balama in March 2020 and Covid-19 impacts. SYR has registered a loss in FY20 to US$60.87mn. The company has recorded a decline in its cash position at US$74.99mn in FY20 against US$80.57mn in FY19.

Key Risks: The company is engaged in the production of graphite. Henceforth, any fluctuation in the graphite prices may impact the financials of the company. The company operates in multiple countries. Any severe movement in foreign exchange prices may lead to forex losses for the company.

Outlook: SYR is expecting a Final Investment Decision (FID) for the construction of a 10ktpa AAM facility is planned during 2H 2021. SYR continues to focus on strengthening Balama’s position in the natural graphite market. 

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: The stock of SYR gave a return of ~-8.29% in the last one month and a return of ~-17.08% in the last three months. The current market capitalisation of SYR stands at ~$485.44mn as of 17 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$0.260-~$1.375. On the technical analysis front, the stock has a support level of ~$0.808 and a resistance of ~$1.366. We have valued the stock using an EV/Sales Value 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 a cost optimisation in FY20 and a decline in total current liabilities. For this purpose, we have taken peers Orocobre Ltd (ASX: ORE), Pilbara Minerals Ltd (ASX: PLS), and Galaxy Resources Ltd (ASX: GXY). Considering recommencement of production at its Balama graphite project, expansion of its production capacity at AAM facility at Vidalia, increasing demand of graphite from EV industry, and valuation, we recommend a “Hold” rating on the stock at the current market price of $0.995, up by ~2.051% as on 17 May 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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