Stocks’ Details

Woodside Petroleum Limited

Record Production in June Quarter: Woodside Petroleum Limited (ASX: WPL) is primarily engaged in hydrocarbon exploration, evaluation, development, production and marketing.

2QFY20 Production & Sales Highlights: During the quarter ended 30^th June 2020, the company delivered record production of 25.9 MMboe, representing an increase of 7% from the previous quarter. Sales volume for the quarter increased by 13% to 27.1 MMboe, with record equity domestic gas sales volumes. Sales revenue for the period came in at US$768 million, down 29% on the previous quarter.

Sales Volume & Revenue (Source: Company Reports)

Progress on Development Activities: The company reported decent progress on its committed project activities, with continued execution of the Sangomar Field Development Phase 1. Phase 1 subsea infrastructure and overall project planning is on track for delivery of first oil targeted in 2023. The Pyxis Hub project development drilling is progressing well, with commencement of subsea installation work targeted for 2021. Completion of drilling activities for Julimar-Brunello Phase 2 development is targeted for Q3 2020.

Guidance & Update on 1HFY20 Post-tax Loss: For H1FY20, the company expects the trading cost to be in the range of US$490 million  US$530 million. After conducting a review of the carrying values of its assets as of 30^th June 2020, the company updated that the financial statements for the first half are expected to recognize non-cash, post-tax impairment losses of US$3.92 billion. In addition, the financials will also entail a non-cash, post-tax onerous contract provision for the Corpus Christi LNG sale and purchase agreement of US$447 million. The above adjustments will result in a post tax loss of US$4.37 billion. Half year results for the period ended 30^th June 2020 are expected to be published on 13^th August 2020.

H1FY20 Guidance (Source: Company Reports)

Key Risks: The adjustment with respect to impairment losses is majorly due to the significant and immediate reduction in oil and natural gas prices assumed up to 2025. Other contributors to the loss include increased longer-term demand uncertainty impacted by the COVID-19 pandemic and macroeconomic dynamics, and increased risk of higher carbon pricing. A regular check on the above factors is necessary to evaluate the business potential. Moreover, demand for oil and gas may subside as lower-carbon substitutes take market share, impacting the company’s ability to deliver shareholder value. Unsuccessful exploration and renewal of upstream resources may impact the operations and delivery of strategic initiatives.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)  

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of the company corrected by 39.93% in the last six months and is currently inclined towards its 52-week low of $14.93. Despite the risks associated with impairment, the company has a decent outlook for its core product, natural gas to Asia and the opportunities for targeted future products such as hydrogen and ammonia. With a low gearing and high liquidity, the company’s balance sheet depicts the potential for creating long-term shareholder value. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as Oil Search Ltd (ASX: OSH), Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG). Considering the aforesaid factors, we give a “Buy” recommendation on the stock at the current market price of $20.96, down 2.148% on 15^th July 2020.

Syrah Resources Limited

Production of Anode Precursor Material: Syrah Resources Limited (ASX: SYR) is an industrial minerals and technology company based in Australia. The company recently announced the production of anode precursor material (purified spherical graphite) to battery specification from its Battery Anode Material facility in Vidalia, USA. The material will be dispatched to potential customers and supply chain partners for testing and qualification. The company believes that its Vidalia operation is the farthest progressed alternate source of natural graphite anode precursor material excluding China, which currently produces 100% of the natural graphite anode precursor material used for production of lithium-ion batteries in Electric Vehicles and other applications.

March Quarter Highlights: During the quarter ended 31^st March 2020, the company produced 12kt flake graphite, lower than prior quarter production of 15kt due to China market conditions. 7kt of graphite was sold and shipped during the quarter, at a weighted average selling price (CIF) of US$478/t. At the end of the period, the company reported cash and cash equivalents amounting to ~US$64.73 million. The company suspended full year production guidance due to operational and market uncertainty associated with the broader global impacts of COVID19.

Production & Sales Highlights (Source: Company Reports)

Market Opportunity: As per Benchmark Mineral Intelligence anode composition forecast for Q1 2020, natural graphite will account for approximately 39% of the total anode production volume in 2020, with the proportion to increase to 49% by 2025.

Key Risks: Achievement of the targeted performance is subject to a number of variables including fluctuations in commodity prices, exploration risks, including the risks of obtaining necessary licences and diminishing quantities or grades of reserves, availability of adequate funding, impact of inflation on costs, environmental regulation risk, currency and exchange rate risk, political risk, war and terrorism and global economic conditions.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)  

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of the company corrected by 57.75% in the last six months and is currently inclined towards its 52-week low of $0.150. The production of battery specification anode precursor material represents a key milestone for progression of the company’s strategy to become the first ex China vertically integrated producer of Active Anode Material from natural graphite. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as Orocobre Ltd (ASX: ORE), Pilbara Minerals Ltd (ASX: PLS), Galaxy Resources Ltd (ASX: GXY) etc. Considering the aforesaid factors, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.335, up 11.667% as on 15^th July 2020.

Dacian Gold Limited

Committed to Reduce Debt Levels: Dacian Gold Limited (ASX: DCN) is engaged in gold mining, processing and exploration at its 100% owned Mt Morgans Gold Operation.

Operations and Corporate Update: During the June quarter, the company produced 31,883oz of gold, in line with the production of 31,695oz in March, but below the guidance range of 33,000 – 36,000oz. Production during the last quarter was partially impacted by slower than planned open pit mining rates during June at the Heffernans open pit. FY20 production stood within the guidance range of 138,000-144,000oz, at 138,814oz. Given the production levels in June, MMGO AISC for the quarter is expected to be near the upper end of the guidance range of $1,550-$1,650/oz.

Production in March (Source: Company Reports)

Outlook & Guidance: For FY21, the company expects production in the range of 110,000-120,000oz, as compared to the previous guidance of 120,000-130,000oz. The guidance has been reduced to incorporate the impact of cessation of mining activities at Westralia four months earlier than planned and rescheduling of the Jupiter open pit. FY21 AISC is estimated between $1,400-$1,550/oz. Moreover, the company also reaffirmed average annual production of 110,000oz for FY21 – FY23, at an AISC of $1,425/oz. The company is developing a holistic underground strategy across the MMGO complex and is formulating numerous workstreams, including a $6 million investment in a drill drive and diamond drilling program, with an update due later in calendar year 2020.

Steps towards Deleveraging: The company is committed to deleveraging its balance sheet, with refinancing of the project loan facility advancing towards a 1HFY2021 targeted completion. Further repayments of $25 million are expected to be made in the September quarter, which will bring the total debt to $39.1 million. As at 30^th June 2020, total debt amounted to ~$64.1 million and cash and cash equivalents were around ~$57.3 million. Moreover, total hedge commitments continued to reduce during the June quarter and stood at 84,589oz at an average gold price of $2,055/oz at the end of the period, reflecting 25% of the company’s three-year outlook.

Key Risks: The Group is exposed to credit risk arising from the sale of gold bullion to a customer, which is minimized by selling to high credit quality financial institutions. Liquidity risk arises from the inability to meet financial obligations when they fall due. This requires strict monitoring of cash reserves and forecast spending, which can lead to financial challenges if miscalculated. The Group is also exposed to commodity price risk arising largely from Australian dollar gold price fluctuations. Moreover, the company’s June production was impacted due to some disruptions in operations, including  delayed access to higher grade ore until late June and localized geological variations at the upper boundary of the Cornwall Shear Zone at Heffernans, that are to be looked upon.

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

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of the company corrected by ~31.18% in the last one month and is currently trading close to its 52-week low of $0.290. By May 2020, the company raised total equity amounting to ~$98 million through its Entitlement Offer, which will support the execution of its three-year outlook. We have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as Westgold Resources Ltd (ASX: WGX) and OceanaGold Corp (ASX: OGC). Considering the continued efforts towards deleveraging, long-term outlook, key risks, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.330, up 3.125% as on 15^th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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