Stocks’ Details

Iluka Resources Limited

Treatment of Iluka Resources Ltd Demerger within S&P/ASX: Iluka Resources Limited (ASX: ILU) is engaged in the production of mineral sands. As on 27 October 2020, the market capitalization of the company stood at ~$2.24 billion. S&P Dow Jones Indices announced certain changes in the S&P/ASX 200 Index, because of the scheme of arrangement under which Iluka Resources Limited will spin-off Deterra Royalties Limited. Under the scheme, ILU will spin-off 1 share of Deterra Royalties Limited for every 1 Iluka Resources Limited share held and Deterra Royalties Limited was added to the S&P/ASX 200 Index on 23 October 2020.

Demerger Rationale: Iluka’s Mineral Sands business and Royalty business are two fundamentally different businesses, consequently a demerger has the potential to unlock shareholder value over time. During FY19, MAC contributed ~13.8% in EBITDA. The demerger will allow greater flexibility and focus when pursuing growth opportunities for each business and will enhance management focus and alignment of incentives to drive business performance.

Contribution of MAC in 2019 Financial Performance (Source: Company Reports)

Quarterly Performance (For the Period Ended 30 September 2020): During the quarter, the company produced 749.7kt and sold 518.8kt of mineral sands. In the same time span, the company reported a fall of 16.5% in revenue to $666.7 million.

Quarterly Operational Performance (Source: Company Reports)

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: As per ASX, the stock of ILU is inclined towards its 52-weeks’ low level of $5.06, proffering a decent opportunity for investors. The stock of ILU gave a negative return of 44.39% in the past three months and a negative return of 44.57% in the last one month. On a technical front, the stock of ILU has a support level of ~$5.09 and a resistance level of ~$8.63. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, a value-driven marketing model, and the spin-off Deterra Royalties Limited, we recommend a ‘Buy’ rating on the stock at the current market price of $5.210, down by 1.884% on 27 October 2020.

Whitehaven Coal Limited

Quarterly Production Report (For the Period Ended September 2020): Whitehaven Coal Limited (ASX: WHC) is engaged in the mining and exploration of coal. As on 27 October 2020, the market capitalisation of the company stood at ~$1.04 billion. During the quarter ended September 2020, the company produced 4.9Mt of coal and sold 6.0Mt of coal, reflecting an increase of 13% on the pcp. In the same time span, the company reported decent liquidity levels and finalised an agreement with finance providers to amend ICR covenant ratio to generate enhanced headroom.

Quarterly Operational Performance (Source: Company Reports)

Guidance: WHC is on track to meet FY21 managed coal sales guidance of 18.5Mt to 20.0Mt. The company has also refined unit cost range from $69/t to $72/t. The short-term outlook for thermal and metallurgical coal is dependent upon post-pandemic economic and industrial recovery in the region in which the company operates. The long-term outlook remains healthy as the need for industrial products such as steel, cement and alloys, and electricity generation remain strong for the future growth of Asia.

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: Despite the global pandemic, the fundamentals of the business remain strong and the company is cautiously progressing well to expand its business. As per ASX, the stock of WHC is inclined towards its 52-weeks’ low level of $0.830, proffering a decent opportunity for investors. The stock of WHC gave a negative return of 32.72% in the past three months and a negative return of 2.47% in the last one month. On a technical front, the stock of WHC has a support level of ~$0.89 and a resistance level of ~$2.12. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered Yancoal Australia Ltd (ASX: YAL), Stanmore Coal Ltd (ASX: SMR), Coronado Global Resources Inc (ASX: CRN), etc. as peers. Considering the current trading levels, decent liquidity levels, and positive guidance, we recommend a ‘Buy’ rating on the stock at the current market price of $0.985, down by 2.476% on 27 October 2020.

Mount Gibson Iron Limited

Quarterly Activities Report (For the Quarter Ended 30 September 2020): Mount Gibson Iron Limited (ASX: MGX) is an established independent Australian iron ore producer with operations in the Mid-West and Kimberley regions of Western Australia. As on 27 October 2020, the market capitalisation of the company stood at ~$806.42 million. During the quarter ended 30 September 2020, the company sold 1.4 million wet metric tonnes and generated $32 million of cash flows. In the same time span, the company reported net profit after tax of $84 million and Cash and liquid investments of $445 million. The decent financial and operational performance enabled the Board to declare a fully franked final dividend of 3.0 cents per share, which was distributed on 24 September 2020.

Quarterly Operational Highlights (Source: Company Reports)

Outlook and Guidance: The company has provided guidance for 2020/21 and expects ore sales in the range of 2.8Mwmt to 3.3 Mwmt at a group cash cost of $60-65/wmt. The company is also on track to achieve first ore sales from the Shine Project in mid-2021 and is progressing rapidly given positive prevailing market conditions and outlook.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings 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 company is targeting to maintain and grow long-term profitability through the discovery, development, operation, and acquisition of mineral resources. As per ASX, the stock of MGX is inclined towards its 52-weeks’ low level of $0.542, proffering a decent opportunity for the investors to enter the market. The stock of MGX gave a return of 12.5% in the past six months but a negative return of 8.16% in the last one month. On a technical front, the stock of MGX has a support level of ~$0.574 and a resistance level of ~$0.796. We have valued the stock using the Price to Earnings multiple based approach and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, valuation, and decent guidance, we recommend a ‘Buy’ rating on the stock at the current market price of $0.675, down by 0.736% on 27 October 2020.

Comparative Price Chart (Source: Company Reports)

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