Stocks’ Details 

BHP Group Limited

March 2020 Quarterly Highlights: BHP Group Limited (ASX: BHP) is engaged in the exploration, production, and processing of minerals. Recently, the company stated that Vanguard Group, a substantial holder of the company, increased its voting power 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. During the quarter ended 31st 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. Copper production went down by 7% quarter over quarter, owing to lower production at Escondida, obstructed by expected lower copper grades, partially offset by continued solid concentrator throughput. Production was also impacted by lower volumes at Olympic Dam owing to unexpected downtime at the smelter. During 1HFY20, Group EBITDA stood at 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.

Production Highlights (Source: Company Reports)

What to Expect: Petroleum production in FY20 is expected to be around the bottom of 110 – 116 MMboe. The company’s copper guidance of its operating assets remains unchanged and Antamina guidance is under review, subsequent to the temporary delay of operations due to COVID-19 pandemic. 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.Risk Analysis: 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 a positive trajectory.

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 14.14% in the last three months and is currently inclined towards its 52-week high price of $41.98. The company retains a strong financial position, with net debt and cash as on 31st 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 P/E 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 $36.46, up 1.986% on 9 July 2020.

Rio Tinto Limited

RIO Starts Planning to Wind-Down Operations: Rio Tinto Limited (ASX: RIO) is engaged in the exploration, development, and production of minerals and metals. On 9 July 2020, the company stated that New Zealand Aluminium Smelters (NZAS) has terminated electricity power contract and has provided notice to Meridian Energy for the same. Following the conclusion, the company has commenced the development for the wind-down of operations.

Managerial Changes: In a recent update, the company appointed Peter Toth as Group executive, Strategy and Development, to strengthen its transformation strategies around climate change, while working in collaboration with the product consortium and commercial teams. Further, Stephen McIntosh, Group executive of Growth & Innovation and Health, Safety & Environment, has decided to retire after serving the company for more than 30 years. Notably, Mark Davies will assume the role post his retirement. 

Other Recent updates: Recently, the company, in combination with Turquoise Hill and the Government of Mongolia has reached a deal on a preferred long-term power supply solution for Oyu Tolgoi. The agreement declares that the parties will work towards finalising a Power Purchase Agreement by March 2021 end.

First Quarter Highlights: During the first quarter ended 31st 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 went down 8% on pcp and came in at 133 kt, reflecting anticipated lower copper grades. Demand in China continued to recover during the quarter, particularly for high-quality iron ore and imported bauxite.

Production Highlights (Source: Company Reports)

What to Expect: The company continues to expect Pilbara iron ore production to be in the range of 324 to 334 MT in FY20. The company will continue to monitor and adjust production levels and product mix to meet customer needs in 2020.

Guidance (Source: Company Reports)

Key Risks: Apart from China, the demand outlook for other markets is uncertain. COVID-19 restrictions have affected commodity supply due to interferences in supply chains and people movement. The company’s major projects are being affected by these restrictions, which may impact the progress, going forward.

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

P/CF 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 7.04% in the last three months and is currently trading towards its 52-week high price of $107.79. The company has an annualised dividend yield of 5.95%, with a P/E ratio of 13.62x. The company possesses a world-class portfolio and a strong balance sheet to serve well in the current volatile environment. The company’ debt to equity ratio stood at 0.35x in FY19, higher than the industry median of 0.11x. We have valued the stock using the Price to Cash Flow multiple based illustrative relative valuation method and arrived at a price correction of low single-digit (in percentage terms). Hence, we have a watch stance on the stock at the current market price of $98.67, up 3.276% on 9 July 2020.

Fortescue Metals Group Ltd

FMG Targets to Reach Net Zero Operational Emissions by 2040: Fortescue Metals Group Ltd (ASX: FMG) is engaged in the mining, processing, and transportation of iron ore for export. In a recent update, the company informed the market about its industry leading emissions cutback target to attain net zero operational emissions by 2040. The company’s goal is set on the back of its initiatives pertaining to the climate change strategy and decarbonisation, including the reduction of Scope 1 and 2 emissions from existing operations by 26% from 2020 levels, by 2030.

FMG and Downer Expand Relationship: In another update, FMG and Downer EDI Limited announced that they are expanding their relationship through the provision of Early Mining and Maintenance Services at Eliwana iron ore mine, situated in the Pilbara region of Western Australia. The new agreement is valued at ~$450 million for a term period of 5 years. As per the deal, Downer will complete early works operations over a time period of 2 years and the remaining operations will be transferred to Fortescue’s autonomous mining fleets.

Record Iron Ore Shipments: During the quarter ended 31 March 2020, robust demand for Fortescue products resulted in record shipment of iron ore of 42.3 million tonnes. The company’s cash on hand at the end of the period stood at US$4.2 billion. In the same time span, the company maintained an industry leading cost position and reported a 2% reduction in C1 costs to US$13.27/WMT.

Quarterly Operational Performance (Source: Company Reports)

Key Risks: On the flip side, the company is exposed to shorter-term disruptions from a challenging macro-economic environment due to COVID-19 led outbreak. Further stiff competition in the market adds to the woes. 

Future Expectations: The company is anticipating robust demand for its products in China and is expecting a steady recovery in economic activity. FMG is generating sustained cash flows and is investing in growth to provide returns to shareholders. The company has revised its guidance for FY20 and expects capital expenditure in the range of US$2.0 - US$2.2 billion. It has also raised its FY20 shipments guidance to 175 - 177 million tonnes. 

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of FMG gave a return of 37.88% in the past six months and a return of 30.4% in the past three months. The stock is trading close to its 52-week high of $15.25. During 1H20, gross margin of the company stood at 54.9%, higher than the industry median of 47.1%. In the same time span, net margin of the company was 37.8% as compared to the industry median of 14.3%. Considering the decent returns in the past six months, trading levels, decent financial position, and positive outlook, we have valued the stock using the price to cash flow multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). Hence, we recommend a ‘Hold’ rating on the stock at the current market price of $14.87, up by 1.363% on 9 July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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