Stocks’ Details

BHP Group Limited

Nickel Supply Agreement with Tesla: BHP Group Limited (ASX: BHP) is an explorer and producer of oil and gas. BHP also undertakes uranium, gold, copper, iron ore, coal, nickel mining in Australia, the USA, and Chile. On 22 July 2021, BHP declared an agreement with Tesla Inc. to supply nickel, develop a sustainable battery supply chain, and renewable energy storage solutions.

Highlights of Q4FY21 & FY21:

• Petroleum Production Up: BHP posted an increase of 6% QoQ in production to 27 MMboe for Q4FY21 (June 2021 quarter) driven by the improved uptime at Atlantis in Mexico and more seasonal demand in the Bass Strait in Australia.
• Higher Production in Q4FY21: The production for other commodities such as copper, metallurgical coal, energy coal and nickel also increased in the June 2021 quarter.
• Increased Average Realised Prices: BHP reported higher oil, natural gas, copper, iron ore, thermal coal, and nickel prices for FY21 versus FY20.
• Increase in Iron Ore Production: The company recorded 253.5 Mt of iron ore production in FY21 at its Western Australia operations, up by 2% YoY due to an improved supply chain.
• First Production Achieved: In Q4FY21, BHP met its first production at the South Flank project (iron ore) and Ruby project (oil & gas) in Tobago and Trinidad.

Revenue & NPAT Trend for FY16-FY20; (Analysis by Kalkine Group)

Key Risks:

• Foreign Exchange Rate Risk: The company faces the risk of dealing in multiple currencies, AUD, USD, and Chilean Peso (CLP). Therefore, any adverse movement in exchange rates may impair its earnings.  
• Commodity Prices Risk: BHP faces changes in various commodity prices of iron ore, nickel, coal, petroleum, and copper.

Outlook:

• FY22 Production Estimates: The company expects petroleum production between 99-106 MMboe in FY22. TPW estimates copper production in the range of 1,590 – 1,760 kt and iron ore between 249 – 259 Mt. BHP targets metallurgical coal production between 39-44 Mt and 85-95 kt nickel production.
• Unit Cost Estimates: BHP estimates US$11-12/boe of petroleum unit cost for FY21. The company expects the petroleum unit costs to be slightly better than the estimate.

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 BHP gave a positive return of 53.47% in the past nine months and a positive return of 43.38% in the past year. The stock is currently trading closer to its 52-weeks’ high price of $53.650. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price with a correction of high single-digit (in % terms). We believe that the company can trade at a slight premium than its peer median, considering the increase in the production of iron ore in FY21, higher average realised prices of oil, natural gas, and a few other commodities for FY21 and the recent nickel supply contract signed with Tesla. For this purpose, we have taken peers like Sandfire Resources Limited (ASX: SFR), Resolute Mining Limited (ASX: RSG), Regis Resources Limited (ASX: RRL), and others. Considering the high trading levels, decent returns in the past nine months and past year, and valuation, we suggest investors book profit and we give a ‘Sell’ rating on the stock at the current market price of $53.630, as of 27 July 2021, 1.18 PM (GMT+10), Sydney, Eastern Australia.  

BHP Daily Technical Chart, Data Source: REFINITIV  

Lynas Rare Earths Limited

Financial Highlights of Q4FY21: Lynas Rare Earths Limited (ASX: LYC) produces high-quality Rare Earths products, including Neodymium and Praseodymium (NdPr), Cerium (Ce), and others. LYC is focusing on developing a sustainable Rare Earths supply chain outside China.

• Rise in Revenue: LYC posted $185.9 million of revenue in Q4FY21 versus $110 million in Q3FY21. The sales growth resulted from continued demand for LYC’s NdPr products and robust pricing of $39.1/kg in the quarter.
• Higher Sales Receipts: The sales receipts rose to $192 million in Q4FY21 compared to $133 million in Q3FY21.
• Decrease in Production: The total REO production declined to 3778 tonnes in Q4FY2 due to the challenging COVID-19 environment in Malaysia and water supply shortages at the Gebeng Industrial Estate near Malaysia. However, NdPr production remained steady at 1393 tonnes.
• Increase in Cash Balance: The firm closed the quarter with a higher cash balance of $680.8 million versus $568.5 million in Q3FY21.

Revenue Trend from FY17-FY20; (Analysis by Kalkine Group)

Key Risks:

• COVID-19 Challenges: The company faces the third wave of COVID-19 in Malaysia and operates as per the Government mandated protocols and Enhanced Movement Control Orders (EMCO). LYC has restricted the staff on site to 40% of the total strength.
• Rare Earth Price Changes: The company faces changes in the prices of rare-earth metals, which may impact the company's earnings. Demand led and supply-side factors, the geopolitical climate could impact the Rare Earth prices.

Outlook:

• For LYC’s 2025 projects, the company has started the initial site works at the Kalgoorlie project. The company has submitted a final Environmental Review Document (ERD) to the Environment Protection Authority (EPA) for the project.
• LYC has also furnished extensive engineering and design work for the HRE (Heavy Rare Earths) processing facility to the US Defence Department. The department will evaluate the submission on its merits.

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 LYC gave a positive return of 147.70% in the past nine months and a positive return of 192.48% in the past year. The stock is currently trading closer to its 52-weeks’ weeks high price of $7.200. We have valued the stock using the Enterprise Value to EBITDA based illustrative relative valuation method and have arrived at a target price with a correction of a high single-digit (in % terms). We believe that the company can trade at a slight discount than its peer average, considering its lower ROE production for Q4FY21, the ongoing challenges in Malaysia due to COVID-19 and water supply shortages. For this purpose, we have taken peers like Pilbara Minerals Limited (ASX: PLS), Jupiter Mines Limited (ASX: JMS), IGO Limited (ASX: IGO). Considering the current trading levels, significant returns in the past nine months and past year, and valuation, we suggest investors book profit and give a ‘Sell’ rating on the stock at the current market price of $7.180, as on 27 July 2021, 10.20 AM (GMT+10), Sydney, Eastern Australia.

LYC Daily Technical Chart, Data Source: REFINITIV 

Syrah Resources Limited

Highlights of June 2021 Quarter: Syrah Resources Limited (ASX: SYR) produces and markets natural graphite products at the Balama Graphite project in Mozambique. SYR also operates a downstream Active Anode Material (AAM) facility in the US.

• Production Restart: SYR has thoroughly restarted the natural graphite production at the Balama project after the suspension of operations through 2020 due to COVID-19. SYR produced 29,000 tonnes of natural graphite in Q2FY21.
• Contracted All Finished Stock: SYR reported 15,000 tonnes of natural graphite sales in Q2FY21 and contracted ~20,000 tonnes of finished stock to customers.
• Vidalia Facility Expansion: In Q2FY21, SYR has produced a fully integrated natural graphite AAM from operations at its Vidalia facility in the USA. SYR is engaging with battery manufacturers and automotive OEMs for qualification. The targeted customers for the integrated Vidalia AAM will operate advanced testing programs in Q3FY21.
• Increased Customer Receipts: SYR received US$3.55 million of customer receipts in Q2FY21 versus US$1.62 million in Q1FY21. SYR held a higher cash balance of US$85.27 million in Q2FY21 versus US$78.01 million in Q1FY21.
  

Revenue & Net Loss from FY18-FY20; (Analysis by Kalkine Group)

Key Risks:

• Operational Risk: The company faces operational risk due to the suspension of Balama project activities in 2020. SYR may experience plant failures, procurement of equipment, and availability of skilled labour, etc.
• Counterparty Risk: The company has signed sales, distribution, and marketing agreements for the project to meet the expected production over time. However, changes in the global demand/ events such as COVID-19 may impact the business of SYR’s customers and their ability to honour contractual commitments.

Outlook:

• The company recorded US$537 per tonne of C1 cash costs (FOB Nacala) at an average production of ~10Kt per month. SYR is progressing well to meet US$430-460 per tonne of C1 cash costs (FOB Nacala) at a 15,000 tonnes per month production rate.
• The company aims to become a vertically integrated manufacturer of natural graphite AAM to cater to ex-Asia markets. SYR is progressing towards customer and financing commitments for the US facility expansion.

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 SYR gave a positive return of 206.52% in the past nine months and a positive return of 302.85% in the past year. The stock is currently trading closer to its 52-weeks’ high price of $1.430. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price with a correction of high single-digit (in % terms). We believe that the company can trade at a slight premium than its peer median, considering a higher production target (15Kt) at the Balama project, expanding customer engagement for testing the integrated natural graphite AAM in the US, demand growth for natural graphite end usages. For this purpose, we have taken peers like Galaxy Resources Limited (ASX: GXY), Western Areas Limited (ASX: WSA), Orocobre Limited (ASX: ORE) and others. Considering the high trading levels, significant returns in the past nine months and past year, valuation, we give a ‘Sell’ rating on the stock at the current market price of $1.410, as of 27 July 2021, 2.28 PM (GMT+10), Sydney, Eastern Australia.

SYR 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.

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