IGO Limited

IGO Details

IGO Limited (ASX: IGO) is an exploration and mining company primarily focused on discovering, developing, and operating metals critical to enabling clean energy. The company has a market capitalization of ~$5.61 billion as of 10^th June 2021.

Q3FY21 Performance – For the Third Quarter Ended 31 March 2021 

For the quarter ended 31 March 2021, the revenue and other income of the company declined by 21% QoQ to A$185.7 million mainly on account of lower metal volumes sold. Underlying EBITDA was reported at A$92.7 million with EBITDA margin at 50% for Q3FY21 and 52% year to date (YTD). Net profit after tax for the quarter came at A$41.9 million as against A$8.8 million in Q2FY21. The higher profit includes A$23.5 million of foreign exchange gains against A$38.9 million foreign exchange losses in Q2FY21. Thus, adjusted profit after tax for the quarter stood at A$25.6 million against A$38.6 million in Q2FY21.

Financial Snapshot (Source: Company Reports) 

Recent Update

As per the release dated 31 May 2021, the company completed the transaction to divest its 30% interest in the Tropicana Gold Mine to Regis Resources Limited. Net proceeds from the divestment totalled A$889 million that includes A$903 million of sale consideration less A$14 million of Completion Adjustments.

Key Risks

The company is exposed to unfavourable price fluctuations in base metals and precious metals that could impact the financials of the company. Hence, it mitigates its exposure to commodity prices through a financial risk management policy in which a percentage of planned usage can be hedged. Further, the company is exposed to exchange rate risk on sales denominated in United States dollars (USD) whilst its Australian dollar (AUD) functional currency is the currency of payment.

Outlook

The company delivered another strong quarter of operating performance wherein Nova continued to drive strong outcomes with metal production in line with the guidance while cash costs continued to benefit from strong by-products pricing. However, at Tropicana, higher waste movements and lower milled grade resulted in lower quarter gold production and higher costs. Besides, Tropicana business is not aligned with the company’s focus on commodities critical to clean energy, and, hence, the company announced the divestment of its 30% stake in the Tropicana Gold Mine to Regis Resource Limited.

As per the management, the Nova nickel production in Q4FY21 is expected to be at or greater than the top end of pro-rata estimates and FY21 production is expected to be at the higher end of guidance. Cash costs are anticipated to continue to benefit from favourable by-product credit pricing and cash costs for FY21 are expected to be above original guidance at A$1.80 – A$2.10/lb (as against original guidance of A$2.40 to A$2.80/lb).

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

Technical Overview:

Weekly Chart –

Source: REFINITIV

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock made a new high of $7.97 in the previous week and then caught under selling pressure. For the ongoing week, it has given a softer close while remaining in bullish trend. The technical indicator RSI with a reading around 63 suggests strong bullish momentum for the stock.

Going forward, the stock may have resistance around the previous high of $7.97 whereas support could be around the 23.6% retracement level of $6.85.

Stock Recommendation

We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and target price reflects that the stock price might witness a correction of low double-digit (in percentage terms). We believe that the stock might trade at a slight discount as compared to its peer average EV/Sales (NTM trading multiple) considering fall in margins in H1FY21 (EBITDA margin fell to 49.8% in H1FY21 vs 53.8% in H1FY20, and Net margin fell to 11.7% in H1FY21 vs 21.1% in H1FY20) and divestment of 30% interest in the Tropicana Gold Mine to Regis Resources Limited for A$903 million.

For the purposes of valuation, we have taken peers such as Pilbara Minerals Ltd (PLS.AX), Syrah Resources Ltd (SYR.AX), South32 Ltd (S32.AX), to name a few.

The stock rose by ~70.8% in 9 months. It has made a 52-week low and high of $4.029 and $7.960, respectively. Considering the movement of the stock price, we advise the market players to liquidate the stock.

Hence, we give a “Sell” recommendation on the stock at the current market price of $7.440 per share, up by 0.404% on 10^th June 2021.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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