BHP Group Limited

BHP Details

Recent Updates: BHP Group Limited (ASX: BHP) is involved in the production of multiple commodities such as copper and uranium, copper smelter, copper refinery, and precious metals. It operates key segments of copper, petroleum, coal, and iron ore.

• On 21 January 2022, Mitsubishi UFJ Financial Group, Inc. became a substantial holder in BHP with ~4.63% fully paid voting shares, ~0.07% options, ~0.54% American Depository Receipts (ADRs), and ~543 shares in Brazilian Depository Receipts (BDRs).
• On the same date, The Goldman Sachs Group, Inc. (“GSGI”) also became an initial substantial shareholder with ~5.2351% voting shares in BHP.

The UK Court Approved BHP’s Unification:

• BHP confirmed of shareholders’ vote in favour of the company’s unification at the recently held shareholder meetings on 20 January 2022. On 25 January 2022, the UK Court released an order approving the Plc scheme of arrangement to unify the BHP companies. The Plc Scheme will come into effect on 28 January 2022 at 9:00 PM (GMT) when the UK Court order will be delivered to the UK Registrar of Companies.
• The BHP unification is expected to finish by 31 January 2022 (Melbourne time) after which BHP Group Limited will become the unified parent company. Upon the implementation of the Plc Scheme, the de-listing and cancellation of Plc will become effective on 31 January 2022 at 8:00am (GMT).
• The shares and ADSs of Plc will be swapped for the shares and ADSs of Limited on a 1:1.
• The new and the existing shares of Limited and the ADSs of Limited are anticipated to be admitted for trading on the LSE, JSE, ASX, and the NYSE (as applicable) on 31 January 2022.
• The company has released a detailed timetable for the shareholders on 8 December 2021.

Issuance of Shares: BHP proposes to issue ~2.112 billion fully paid shares at ~$45.395 on 31 January 2022 after the UK Court delivers the order to sanction the BHP Group Plc scheme of arrangement to the Registrar of Companies (UK) on 28 January 2022.

Q2FY22 Results: 

• The iron ore production increased by ~6% YoY and 4% QoQ in Q2FY22 reflecting robust supply chain performance, continuous ramp up of the South Flank operations, etc.
• The copper production fell by ~15% on a pcp basis to ~365.5 kt impacted by reduced volumes and the planned smelter maintenance campaign at the Olympic Dam.
• The nickel production went up by ~21% QoQ to 21.5 kt in Q2FY22 due to higher volumes resulting from the planned maintenance across the supply chain in Q1FY22.
• BHP approved the South Flank Autonomous Haulage Project in December 2021 (fleet automation of the Komatsu haul trucks) which is slated to start in the June 2022 quarter.
• BHP divested from its 33.3% stake in the Cerrejón JV in January 2022. It sold off its stake to Glencore for ~US$294 million.
• BHP is on track regarding the development of its two major potash projects - the Jansen mine shafts project (~98% completed) and the Jansen Stage 1 project (started contract awards).
• BHP entered a share sale contract with Stanmore Resources Limited to sell its ~80% stake in BHP Mitsui Coal Pty Limited (BMC), a JV for metallurgical coal in Queensland.

Key Metrics, Highlights; (Analysis by Kalkine Group)

Key Risks: BHP faces the COVID-19 impact on the availability of skilled labour, wet weather conditions impacting project operations, volatility in the commodity prices & production. 

Outlook:

• BHP continues the review of its lower grade thermal coal and metallurgical coal assets. It expects to complete the sale transaction of BMC by the mid of CY22.
• BHP expects the FY22 copper production towards the low end of the provided guidance range of 1,590 – 1,760 kt, depicting production estimate for Pampa Norte.
• For metallurgical coal, the guidance has been lowered to 38 – 41 kt instead of 39 – 44 kt stated before due to COVID-19 issued and wet weather impact.
• It expects the unit costs for Queensland Coal to increase to ~US$85 -$94 per tonne due to lower expected volumes for FY22.
• The proposed merger of BHP’s petroleum business with WPL (Woodside Petroleum Limited) is expected in the June 2022 quarter post the fulfilment of approvals and precedent conditions for the merger.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of BHP gave a positive return of ~10.52% in the past month and a positive return of ~23.36% in the past three months. The stock is currently trading above the 52-weeks’ average price level band of $35.560 - $54.550. The stock of BHP has a support level of ~$41.50 and a resistance level of ~$55.19. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price with a correction of a high single-digit (in % terms). The company might trade at a slight discount than its peers’ average P/E-multiple, considering its lower production guidance for metallurgical coal, wet weather impacts on production, higher unit costs expected for Queensland coal, and the ongoing COVID-19 risks. For this purpose of valuation, a few peers like Rio Tinto Limited (ASX: RIO), Sandfire Resources Limited (ASX: SFR), Woodside Petroleum Limited (ASX: WPL), and others have been considered. Considering the current trading levels, decent returns in the past months, the indicative downside in valuation, and associated key business risks, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $46.460, as of 27 January 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

BHP Daily Technical Chart, Data Source: REFINITIV  

Mount Gibson Iron Limited

MGX Details

Results of Q2FY22 (Ended 31 December 2021): Mount Gibson Iron Limited (ASX: MGX) is a producer of iron ore products operating the two key segments of Mid-West (the Shine iron ore project – SIOP operations) and Koolan Island.

• Ore Sales: MGX reported ~3 million wet metric tonnes (Mwmt) of iron ore sales in Q2FY22 including ~0.2 Mwmt from the Shine project in the Mid-West and ~0.1 Mwmt from Koolan Island operations. The iron ore sales delivered in Q2FY22 were limited due to the ongoing operational investment programs at the Koolan Island to set the foundation for rising high grade sales.
• The sales during the six months ended on 31 December 2021 (1HFY22), amounted to ~0.7 Mwmt, consisting of ~0.4 Mwmt from the Koolan Island segment and ~0.3 Mwmt from the Shine project operations.
• Lower Negative Cash Outgoings: The operating cash outflows during Q2FY22 amounted to ~$89 million compared to $111 million in Q1FY22. The outflows reflect the capital investments undertaken for the waste stripping programs at the Koolan Island and the suspension of production at the Shine project.
• MGX held ~$142 million of cash and investments as of 31 December 2021 compared to ~$250 million as of 30 September 2021 due to limited ore sales, continued investment program, the cash portion of the final dividend, etc.
• The company has no bank debt and has an unutilised ~$100 million revolving credit facility with HSBC bank.

Iron Ore Sales, Highlight; (Analysis by Kalkine Group)

Key Risks: The company risks volatility in the iron ore prices and production, major capex investments for project improvements, regulatory concerns, and COVID-19 related labour shortage & supply challenges.

Outlook:

• The iron ore sales for FY22 are expected to be around ~2.0 Mwmt, including ~1.7 Mwmt from the Koolan Island operations.
• MGX expects a considerable financial and operational improvement in June 2022 due to the high-grade of ore production and decline in the waste to ore stripping ratio driving lower unit costs.
• The company expects an improved outlook for high grade ore feedstocks and market conditions to underpin and help unlocking the value of ongoing project investments at the Koolan Island.
• The financial results for 1HFY22 are planned to be released on 23 February 2022.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of MGX gave a negative return of ~8.43% in the past three months and a negative return of ~57.30% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.350 - $1.010. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ average P/E multiple, considering the impact of capital investments on Q2FY22 production & sales, decline in current ratio, continued COVID-19 impact on the skilled labour availability. For this purpose of valuation, a few peers like BHP Group Limited (ASX: BHP), Newcrest Mining Limited (ASX: NCM), Vulcan Steel Limited (ASX: VSL), and others have been considered. Considering the low trading levels, low debt levels, expected operational improvements, production and cashflow generation prospects from the Koolan Island project investments, decent outlook, an indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.380, as of 27 January 2022, 1:55 PM (GMT+10), Sydney, Eastern Australia.

MGX Daily Technical Chart, Data Source: REFINITIV  

Tribune Resources Limited

TBR Details

Q2FY22 Update on the EKJV Project: Tribune Resources Limited (ASX: TBR) is involved in mining, development, and production activities at the EKJV (East Kundana Joint Venture) tenements. The project portfolio includes gold projects in Ghana (Japa) and the Philippines (Diwalwal).

• In a recent report on the exploration activity of the EKJV tenements, ~15 diamond holes were drilled for ~2,763 metres during the quarter.
• The exploration activity was primarily focused on the Nugget and Pode prospects at the Hornet-Rubicon-Pegasus project. Gold mineralisation was intercepted at the hole RUBDT21041 and the hole HORRT21087 at Rubicon and Hornet targeting Nugget prospect. The drilling of five (5) holes at Pegasus also identified notable intercepts. The drilling of ~9 holes at the Nugget structure intercepted at target depths increases the mineralisation presence along strike and down-dip.
• Eleven (11) diamond holes drilled at the Pode prospect and related satellite structures identified significant intercepts in Q2FY22.
• ~13 holes were drilled at Startrek, and gold mineralisation was intercepted between the Mary Fault zone and the hole STKDT21018. The JV plans to continue the geological work on the Startrek and Mary Fault Zone in Q3FY22 to expand the mineralised horizon as it waits for the pending assay results.

September 2021 (Q1FY22) Quarter Results:  

• TBR’s EKJV Share: The EKJV reported 138,407 tonnes of ore processed with ~93.92% gold recovery in Q1FY22. TBR’s share (~75%) of gold production in the EKJV rose from ~11,897 oz in the June quarter to ~12,736 oz in Q1FY22. Though the production from the Rubicon-Hornet-Pegasus underground mine for Q1FY22 stood ~6,737 oz below the JV managers’ production estimate.
• Diwalwal Project, Philippines: TBR undertook the drilling of Balite Vein for the resource definition program at the project. Though the drilling was terminated, however, significant intersections were reported in Q1FY22.
• Net Operating Cashfows Up: The net operating cashflows increased to ~$7.51 million in Q1FY22 versus ~$1.03 million in Q4FY21 (June 2021 quarter).
• Update on the Seven Mile Hill JV (~50% Interest): TBR conducted a drilling program on ~39 holes for ~4,254 metres on the northern tenements of the project which has reported no results so far. In another exploration program started at White Lake, in the south-eastern part of the project, six (~6) holes were drilled for 1,049 metres. TBR plans to continue drilling in this area.
  

Key Financials, Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces exploration risks, correct resource estimation challenges, regulatory obstacles, COVID-19 led labour supply concerns.

Outlook:

• TBR will continue the exploration activity down-dip at the Nugget prospect in Q3FY22. It plans to follow up on the positive results returned from the Startrek exploration and along the Mary Fault zone.
• For the EKJV project, TBR expects a similar production outlook in Q2FY22.
• TBR plans to conduct an infill and extensional drilling of the defined Adiembra resource and report an updated estimation in Q2FY22.

Stock Recommendation: The stock of TBR gave a negative return of ~8.53% in the past three months and a negative return of ~13.40% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $4.490 - $6.480. On a TTM basis, the stock of TBR is trading at a price to book value multiple of 0.9x lower than the industry (Metals & Mining) median of 2.5x, thus seems undervalued. Considering the current trading levels, low debt levels, significant exploration potential at the Nugget and Pode prospects, valuation on a TTM basis, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $4.500, as of 27 January 2022, 2:30 PM (GMT+10), Sydney, Eastern Australia.

TBR Daily Technical Chart, Data Source: REFINITIV 

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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.

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