Stocks’ Details

Grange Resources Limited

Decline in Pellet Production: Grange Resources Limited (ASX: GRR) is a magnate producer with a market capitalisation of ~$295.12 million as on 17^th July 2020. During the quarter ended March 2020, the company had continued to prioritise the safety and well-being of its workforce. The company implemented and expanded on its business continuity response plan to address the COVID-19 outbreak. The company reported a decline in Pellet production to 589kt as compared to 650kt for the December 2019 quarter. The sales for Pellet also went down to 557kt against 732kt of the previous quarter. The company experienced a rise in average received prices to US$118.34/t as compared to US$104.04/t for the December 2019 quarter.

Shipping and Sales (Source: Company Reports)

Focus of GRR: Looking ahead, the company is focused on delivering value and striving to ensure that it remains strong. GRR is also focused on providing superior returns to shareholders in the short, medium, and long term.

Key Risks: The company stated that the downside risks to iron ore prices would increase with falling steel prices, which would threaten to squeeze the operating margins for steelmakers. GRR is also exposed to various business risks which mainly include fluctuations in iron ore market; movements in foreign exchange rates; volatility in the electricity and gas price and availability; and production risks and costs associated with aging infrastructure.

Stock Recommendation: The company closed the March 2020 quarter with the cash and liquid investments of $168.98 million and trade receivables of $40.25 million. The stock of GRR surged by 24.39% in the last three months, and it is inclined towards its 52-week high levels of $0.285. Therefore, in light of current trading levels, we have a wait and watch stance on the stock at the current market price of $0.250 per share, down by 1.961% on 17^th July 2020. We also suggest investors to wait for further catalysts to drive the stock.

GR Engineering Services Limited

Awarded with EPC Contracts: GR Engineering Services Limited (ASX: GNG) is engaged in the provisioning of process engineering, design and construction services to mining and minerals processing industries. The market capitalisation of the company stood at ~$131.37 million as on 17^th July 2020. The company recently announced that Ora Banda Mining Limited has presented an engineering, procurement and construction (EPC) contract associated with the restart of the existing Davyhurst Gold Processing Plant located in Western Australia. The contract value stood at $10.8 million and would be undertaken on a fixed price basis which includes a provisional sum component. As per the terms of the contract, GNG would work on refurbishment, optimisation and recommissioning of the existing 1.2 Mtpa Davyhurst Gold Processing Plant, borefields and associated infrastructure and it is likely to be completed in the Q1 FY21. Previously, the company also received engineering, procurement and construction (EPC) contract for the Thunderbox Paste Plant Project with a value of $29 million. During 1H FY20, the company reported sales revenue amounting to $95.3 million, underlying EBITDA of $2.0 million and a loss before tax of $16.7 million.

Key Financials (Source: Company Reports)

Revenue Guidance: As per the release of 1HFY20 financial results, GNG is likely to progress on its major design and construction projects into commissioning and testing phases during the next 12 months. For FY20, the company expects revenue in the range of $200 million to $220 million.

Key Risks: The company’s business is exposed to risks in relation to its financial instruments, which include market risk (consisting of foreign currency risk and interest rate risk), credit risk, and liquidity risk. Market risk arises from the change in the market prices such as foreign currency, interest rate, etc. Credit risk is influenced by the default of counterparties in their contractual obligations.

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

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

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company reported a cash balance of $20.7 million as of 31^st December 2019. The company finished the acquisition of a US-based multi-disciplinary engineering services firm “Hanlon Engineering & Associates, Inc” in February 2020. The acquisition is likely to become EPS accretive in FY21. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Thus, considering the recent EPC contracts presented to GNG, acquisition of Hanlon Engineering & Associates, Inc and revenue guidance, we give a “Hold” recommendation on the stock at the market price of $0.855 per share, with no change on 17^th July 2020.

Cygnus Gold Limited

Received Firm Commitments for Placement: Cygnus Gold Limited (ASX: CY5) is engaged in the mineral exploration. The market capitalisation of the company stood at ~$14.09 million as on 17^th July 2020. Recently, the company announced that Steve Parsons has become an initial substantial holder in the company with the voting power of 9.31% on 7^th July 2020. The company has received firm commitments from sophisticated and professional investors to raise around $1,370,000 (before costs) through the issue of up to 30,455,556 fully paid ordinary shares in the company at an issue price of $0.045 per share. CY5 would utilise the funds raised from the placement for the exploration activities in the south-west, on tenement holding expenses, toward business development opportunities as well as for general working capital.

On 5^th June 2020, the company announced the commencement of drilling on the Lake Grace and Yandina Joint Venture (JV) Projects, wherein the drilling program would comprise around 7,320m of aircore (AC) drilling, 950m of reverse circulation (RC) drilling and 400m of diamond core (DD) drilling targeting gold mineralisation on three prospects identified within the Hammerhead Project.

Drilling Prospects (Source: Company Reports)

Outlook: The company is focused on the exploration of its key assets in the Wheatbelt region of Western Australia, and executing a strategy to seek out further exploration, acquisition and joint venture opportunities.  The company has scheduled to conducts its Annual General Meeting on 29^th July 2020.

Key Risks: CY5 has limited exposure to credit risk, which arises from the default of counterparties on their contractual obligations. The company’s business is sensitive to liquidity risk influenced by the possibility that the Company might witness difficulty in settling its debts or otherwise meeting its obligations related to financial liabilities.

Stock Recommendation: The company closed the March 2020 quarter with a cash balance of $1.5 million. The stock of CY5 is trading at a price to book multiple of 2.8x as compared to the industry median (Metals & Mining) of 1.9x on TTM basis. The stock has moved up by 100% and 414.29% in the span of last one- and three-months, respectively. As a result, the stock of CY5 is inclined towards its 52-week high levels of $0.245. Hence, considering the above factors, low market capitalization, and price appreciation in the past few months, we advise investors to wait for better entry levels and, thus, have a  watch stance on the stock at the current market price of $0.190, down 5.556% on 17th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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