Stocks’ Details 

BHP Group Limited

BHP Seems to be Well-Positioned to Maximise long-term value: BHP Group Limited (ASX: BHP) is involved in the exploration, production, and processing of minerals including coal, iron ore, copper and manganese ore and hydrocarbon. The market capitalisation of the company stood at $109.7 Bn as on 15^th September 2020.

Strong Underlying Performance in FY20: The company had six major projects under development at the end of FY20 having a combined budget of US$11.4 billion over the life of the projects. In addition, the company achieved the first production from Atlantis Phase 3 in the month of July 2020. The Spence Growth Option and South Flank are likely to deliver the first production in the next 12 months. For FY20, the company reported revenue from continuing operations amounting to $42,931 million, reflecting a rise of 3% on a YoY basis. BHP recorded profit from operations of US$14.4 billion and underlying EBITDA of US$22.1 billion at a margin of 53%, with a reduction of 9% in unit costs at its major assets owing to foreign exchange, better productivity, and improved operating stability.

Net operating cash flows for the period stood at US$15.7 billion as compared to US$17.4 billion. This indicates weaker commodity prices in coal and petroleum, partially offset by stronger iron ore prices and strong underlying operating and cost performance across the portfolio. Free cash flow (continuing operations) amounted to US$8.1 billion, after payment of US$7.6 billion capital and exploration expenditure. The company closed the year with a healthy balance sheet comprising net debt of US$12.0 billion. BHP has resolved to pay an additional amount of US17 cents per share or US$0.9 billion as dividend, which took the final dividend to US55 cents per share.

Key Financials (Source: Company Reports)

Segment Overview: BHP operates the world’s leading metallurgical coal assets with a focus on quality, productivity, and disciplined capital volume creep. With respect to iron ore, BHP happens to be the lowest cost producer with high margins.

Positive Long-Term Outlook for Economic Growth: For FY21, the company is uncertain about the economic outlook due to the impact of COVID-19. However, world economies are rebounding. The company anticipates that China and the OECD will return to their pre COVID-19 trend growth rates from around 2023. In addition, the company is optimistic about the outlook for long-term global economic growth and commodity demand. 

Guidance: For FY21, the company is expecting capital expenditure of around US$ 7 billion and around US$8.5 billion for FY22. BHP is expecting iron ore production in the range of 244 Mt – 253Mt for FY21. The company has scheduled to release its 1H FY21 results on 16 February 2021, and it will pay a dividend for the same period on 23^rd March 2021.

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 Month

Stock Recommendation:  Return of Equity of the company stood at 16.7% in FY20 as compared to the industry median of 8.1%. In the past three and six months, the stock of BHP gave a positive return of 5.65% and 47.78%, respectively. The stock of BHP is inclined towards its 52-week high level of $41.770. On the technical analysis front, the stock of the company has a support level of ~A$36.352 and a resistance level of ~A$39.005. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a price of the upside of high single-digit (in percentage terms). For the purpose, we have taken peers such as Rio Tinto Ltd (ASX: RIO), Sandfire Resources Ltd (ASX: SFR), South32 Ltd (ASX: S32) to name few. Thus, considering the healthy balance sheet, decent return to shareholder and modest outlook, we give a “Hold” recommendation on the stock at the current market price of $37.490 per share, down by 0.671% on 15^th September 2020.

St Barbara Limited

Maintained Consistent Dividend Payment Since FY17: St Barbara Limited (ASX: SBM) is involved in the production and exploration of gold with a market capitalisation of ~$2.35 billion as on 15^th September 2020.

Acquisition of Moose River Resources Incorporated: On 7^th September 2020, the company notified the market that it has finished all outstanding conditions in relation to its previously announced acquisition of Moose River Resources Incorporated (MRRI), which was completed on 4 September 2020. The company added that its wholly owned subsidiary Atlantic Mining NS acquired the remaining ~93% of the issued capital in MRRI. It paid net consideration of A$61 million, which was financed from SBM’s existing cash reserves.

Strong Cashflows to Support Future Growth: During FY20, the company recorded gold production of 381,887 ounces, which was comprised of lower production from Gwalia and Simberi against the previous year. For FY20, the company reported underlying EBITDA of $339 million, reflecting the growth of 22%. Underlying net profit after tax for the period amounted to $108.  Cash flow from operating activities for the year stood at $280 million, reflecting a rise of 16% over pcp. This placed the company in a decent position for its future growth plan. The company has resolved to pay a fully franked final dividend of 4 cents per ordinary share on 29 September 2020.

Dividend History (Source: Company Reports)

Production Guidance: For FY21, the company is expecting gold production in the range of 370,000 to 410,000 ounces at an All-In Sustaining Cost of between $1,360 per ounce to $1,510 per ounce. Growth capital is expected to be in the ambit of $49 million to $57 million. The company has scheduled to release its Q1 FY21 mining and production update on 21 October 2020.

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

Price to Earnings 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: Current ratio of the company stood at 4.41x in FY20 as compared to the industry median of 1.76x. This reflects that the company is well-placed to address its short-term obligation. The stock of SBM has provided returns of 11.33% and 100.60% in the last three and six months, respectively. On the technical analysis front, the stock of the company has a support level of ~A$3.188 and a resistance level of ~A$3.530. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Regis Resources Ltd (ASX: RRL), OceanaGold Corp (ASX: OGC), Resolute Mining Ltd (ASX: RSG), to name few, and arrived at a target price of high single-digit upside (in percentage terms). Therefore, in light of the growth in cash flows, dividend history, decent liquidity position and guidance, we give a “Hold” recommendation on the stock at the current market price of $3.480 per share, up by 4.192% on 15^th September 2020. 

Pilbara Minerals Limited

Financing Facility to Provide Strong Position and Greater Flexibility: Pilbara Minerals Limited (ASX: PLS) is involved in the exploration of lithium and tantalum. The market capitalisation of the company stood at $756.68 million as on 15^th September 2020.

Execution of Finance Facility: Recently, the company notified the market that it has completed and executed the finance documents for the senior secured US$110 million Finance Facility with leading international bank, BNP Paribas, and the Clean Energy Finance Corporation.  The company would use the proceeds from the Finance Facility to redeem the outstanding balance owing under the existing US$100 million Nordic Bond, which was utilised to finance the Stage 1 development of the Pilgangoora Lithium-Tantalum Project.

Moderated Production Strategy Supported Cash Margins: During FY20, the company reported spodumene concentrate production of 90,768 dry metric tonnes and shipped 116,256 dmt of spodumene concentrate. The company managed to deliver an improved cash gross margin of $13.7 million in 2H FY20. This was supported by moderated production strategy, which was deployed from September 2019 quarter onwards to preserve cash and working capital. During FY20, the company recorded EBITDA loss of $33.9 million before non-cash inventory write-down of $21.3 million, depreciation and amortisation of $16.4 million and net financing costs of $27.6 million. The financial results reflected soft market conditions in China and weaker customer demand for lithium raw materials.

Financial Summary (Source: Company Reports)

Outlook: The focus of the company revolves around expansion and diversification strategy to become one of the biggest and lowest cost lithium producers, as well as a fully integrated lithium raw materials and chemicals supplier in future.

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 Month

Stock Recommendation:  The stock of PLS has provided returns of 28.30% and 112.50% in the past three and six months, respectively. The 52-week low-high range for the stock stands at $0.135-$0.430, respectively. On the technical analysis front, the stock of the company has a support level of ~A$0.29 and a resistance level of ~A$0.371. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a price of the upside of low double-digit (in percentage terms). For the purpose, we have taken peers such as Orocobre Ltd (ASX: ORE), Lynas Corporation Ltd (ASX: LYC) and Nickel Mines Ltd (ASX: NIC) to name few. Thus, considering the recent finance facility, improved cash margins and returns in the past months, we give a “Hold” recommendation on the stock at the current market price of $0.340 on 15^th September 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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