Deterra Royalties Limited

DRR Details

December 2021 Quarterly Update: Deterra Royalties Limited (ASX: DRR) manages a portfolio of current royalties and growth by providing finance to resource firms in exchange for royalties. The portfolio runs across bulk commodities, batteries, and base metals consisting of Mining Area C (MAC) in the Pilbara region, Yoongarillup/ Yalyalup project in Western Australia, etc. BHP Group Limited (ASX: BHP) recently released its December 2021 quarterly report, which contained the following highlights:  

• The Mining Area C (MAC) royalty area delivered 27.0 million wet metric tonnes (Mwmt) iron ore production on a 100% basis, depicting a ~21% QoQ increase in the December 2021 quarter (Q2FY22).
• The company is planning to ramp up the production at the South Flank mine to its full capacity and operate MAC as the largest operating iron ore hub globally. As per BHP’s latest report, the iron ore system achieved a peak rate of 45 Mwmt per year in 1HFY22 generating record lump sales.

Q1FY22 (30 September 2021) Results:

• DRR received ~$59.7 million royalty receipts during Q1FY22 out of which ~$59.6 million revenue royalties were from the MAC area and ~$0.1 million from the two mineral sands operations in Western Australia.
• The iron ore revenue royalties from the MAC area grew from ~$52.8 million in Q4FY21 (June quarter) versus ~$59.6 million in Q1FY22, up by 12.9% QoQ due to the growing sales volumes at the South Flank mine negating the decline in iron ore prices.
• The MAC area iron ore production stood at ~22.3 Mwmt in Q1FY22, reflecting a ~19% rise over Q4FY21.

Growth in Key Metrics, Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces changes in the iron ore price and forex rate movements, largest royalty exposure to MAC operations. It faces cyber security and IT risks, supply chain changes, reliance on other parties for contractual obligations, and royalties.  

Outlook:

• DRR expects to more than double the production volume to 145 mwmt per year at the MAC area during the next three years as the South Flank mine operates at its 100% capacity. As a result, it expects an increase in revenue royalties from MAC and additional capacity payments.
• DRR plans to release the 1HFY22 results on 22 February

Valuation Methodology: EV/EBITDA 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 DRR gave a positive return of ~7.05% in the past three months and a negative return of ~9.57% in the past six months. The stock is currently trading above the 52-weeks’ average price level band of $3.520 - $4.880. The stock of DRR has a support level of ~$3.85 and a resistance level of ~$5.15. The stock has been valued using the Enterprise Value to EBITDA 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 premium than its peers’ median EV/EBITDA multiple, considering it has been trading at a premium on NTM basis, an increase in MAC production reported by BHP, and a considerable decline in the debt-to-equity ratio, and. For this purpose of valuation, a few peers like Pilbara Minerals Limited (ASX: PLS), BCI Minerals Limited (ASX: BCI), Mincor Resources NL (ASX: MCR) 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 $4.325, as of 25 January 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

DRR Daily Technical Chart, Data Source: REFINITIV

Copper Mountain Mining Corporation Limited

C6C Details

Positive Results Indicate Resource Expansion: Copper Mountain Mining Corporation Limited (ASX: C6C) is a producer of base and precious metals (copper and gold). On 20 January 2022, C6C declared positive results from the extended drilling (10 holes) at the open pit of New Ingerbelle. C6C has extended the mineralization at the New Ingerbelle along strike & at depth to expand the size of the deposit. It expects to considerably increase the Mineral Resource and Mineral Reserve estimate at its Copper Mountain Mine project and plans to declare the updated estimate from the ongoing drill program and an expanded mine life plan by mid-2022.

Executed Price Protection Contracts: Recently, C6C signed a series of zero-cost collar option contracts covering ~3.3 million pounds of copper (Cu) every month through 2022, for ~39.6 million Cu pounds. The average ceiling price is set at ~US$4.91 per pound and the monthly floor price is set at ~US$4.00 per pound for the Cu options. The program has been started to protect from the fall in copper prices and margins as C6C continues to invest and advance on its projects in 2022.

Q3FY21 (September 30, 2021), Highlights:

• The revenue increased to ~CDN$137.17 million in Q3FY21 compared to ~CDN$94.99 million in Q3FY20.
• The copper production grew to ~3 million pounds of copper equivalent in Q3FY21 versus 23.80 million in Q3FY20.
• C6C garnered ~CDN$90.86 million of net cash flows from operations during the quarter as compared to ~CDN$38.59 million in September 2020 quarter.
• The company exited Q3FY21 with ~CDN$183.33 million of cash and cash equivalents as of 30 September 2021 versus ~CDN$53.57 million as of 30 September 2020.

Growth across Key Metrics, Highlights; (Analysis by Kalkine Group)

Key Risks: C6C faces volatility in the metal prices and production, correct mineral ore estimation, adverse forex rate changes, and exploration risk.  

Outlook:

• C6C has revised the copper (Cu) production guidance to 90 to 100 million pounds (versus 85095 million Cu pounds stated previously) for FY21. The AIC guidance is estimated at the top end of the US$1.80 - US$2.00 per pound owing to inflationary pressures of the fuel and steel costs in operations.
• The management plans to publish the FY21 results before the markets open on 14 February 2022 and host a conference call at 7:30 AM to discuss the Q4FY21 and FY21 results.
• The company expects considerable exploration upside on its projects in Australia and British Columbia and plans to continue drilling in 2022.
• The successful commissioning of the ball mill 3 at the Copper Mountain Mine project is expected to enhance the recovery performance and grow the plant milling capacity to ~45K tonnes per day from ~40K tonnes per day.

Valuation Methodology: EV/Sales 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 C6C gave a positive return of ~12.22% in the past month and a positive return of ~58.43% in the past year. The stock is currently trading above the 52-weeks’ average price level band of $1.900 - $5.420. The stock of C6C has a support level of ~$3.760 and a resistance level of ~$5.000. The stock has been valued using the Enterprise Value to Sales 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 premium than its peers’ average EV/Sales multiple, considering the decent Q3FY21 results, upgraded guidance for copper production, and exploration upside expected on the projects. For this purpose of valuation, a few peers like Sandfire Resources Limited (ASX: SFR), Rio Tinto Limited (ASX: RIO), 29Metals Limited (ASX: 29M) have been considered. Considering the current trading levels, decent returns in the past months, and indicative downside in valuation, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $4.200, as of 25 January 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

C6C Daily Technical Chart, Data Source: REFINITIV  

Energy Resources of Australia Limited

ERA Details

Recent Updates: Energy Resources of Australia Limited (ASX: ERA) is a miner, explorer, and producer of uranium oxide. It operates the Ranger uranium mine and owns two undeveloped uranium resources - Jabiluka and Ranger 3 Deeps. On 17 January 2022, Director, Justin Carey, acquired 11 RT Shares (Indirect interest in Rio Tinto Limited (RIO’s shares)) at $109.80 per RT share and 11 matching RT share rights. Adding these shares, the Director now holds ~147 RT shares and ~130 matching RT share rights.

December 2021 (Q4FY21) Quarter Highlights:

• In October 2021, Mr. Paul Arnold resigned as the CEO and MD and Mr. Brad Welsh was appointed as the acting CEO.
• In FY21, ERA reported ~1.37 million pounds of completed contract sales and achieved ~1.50 million pounds of uranium oxide sales in the spot market. It plans to sell the remaining inventories into the spot market in 2022.
• In Q4FY21, ERA progressed on the rehabilitation activities of the Ranger Project Area. It completed water treatment and the wall & floor cleaning work at the TSF (Tailings Storage Facility). ERA finished the initial phase of revegetation planting at Pit 1. Upon the award of the Pit 3 wicking contract, ERA is progressing on the wicking and capping activities of Pit 3.
• In association with Jabiru Kabolkmakmen Ltd (JKL), ERA transferred the first tranche of refurbished properties to third parties in Q4FY21.
• The production operations at the Ranger uranium mine continued to be ceased as per the Ranger Authority on 8 January 2021.

Key Financials, Highlights; (Analysis by Kalkine Group)

Key Risks: ERA faces the COVID-19 uncertainty and protocols on the business operations, government restrictions on the projects. It needs funds for the major Ranger project rehabilitation program and smooth running of business operations.

Outlook:

• At the Ranger project area, ERA expects to seek the final stakeholder notification and regulatory approvals to utilise the TSF as a Water Storage Facility in Q1FY22. The final planting for Pit 1 is expected to be done in January 2022.
• The ongoing exercise of re-estimating costs and time schedule on the Ranger Project is massive and complex. ERA has collaborated with a global engineering company to help in finalising the process which is anticipated to continue in Q1FY22. The company is committed to rehabilitating the Ranger Project Area as per the environmental requirements.
• ERA will continue with the rectifications of the transferred properties in 2022.

Stock Recommendation: The stock of ERA gave a positive return of ~1.53% in the past month and a negative return of ~21.42% in the past three months. The stock is currently trading lower than its 52-weeks’ average price level band of $0.180 - $0.580. On a TTM basis, the stock of ERA is trading at a price to book value multiple of 6.1x lower than the industry (Uranium) average of 6.4x, thus seems undervalued. Considering the current trading levels, nil debt levels, plan to rectify the properties, progress on the Ranger mine rehabilitation program, valuation on a TTM basis, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $0.330, down by ~1.493%, as of 25 January 2022.

ERA 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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