Poseidon Nickel Limited

POS Details

Key Positives:

Lower Debt to Equity Ratio (0.01x in H1FY22 Vs Industry Median of 0.17x), Higher Current Ratio (3.83x in H1FY22 Vs Industry Median of 2.14x)

Key Negatives:

Negative ROE (-8.3% in H1FY22 Vs Industry Median of +9.5%), Negative ROIC (-4.6% in H1FY22)

Key Investment Risks:

Regulatory Risk, Volatility in Commodity Price, COVID-19 Risk, Competition Risk, etc.

Quick Look back: Poseidon Nickel Limited (ASX: POS) is a nickel sulfide exploration and development company operating in Western Australia. The company owns Windarra, Black Swan, and the Lake Johnston Nickel Projects.

• POS announced the appointment of Warren Hallam, on 1^st June 2022, as the Non-Executive Director.
• POS reported cash and current investments of $16.8 million as of 31st March 2022. Over the March 2022 Quarter, net cash outflow from operating and investing activities totaled $5.2 million, including $4.1 million of evaluation and exploration costs.
• Over the next quarter, with the continuation of the feasibility study, the expected cost will be $5.3 million.
• Nickel and Cobalt shows an expected four-fold increase in demand while Copper and Zinc is expected to surge by 2 fold till 2050.

Commodity forecast by POS, (Source: Analysis by Kalkine Group)

Key Risks: The company face risk from volatility in commodity price, regulatory concerns, exploration risk, and ESG factors.

Outlook:

• Federal Government announced that Pure Battery Technologies (PBT), in partnership with POS, had been aided with a $119.6 million grant under the Modern Manufacturing Initiative. The MOU signed will lead to the development a battery-active cathode material (pCAM) refinery hub in Kalgoorlie.
• The company aims to start the production of both Black Swan and Lake Johnston. If the company can achieve this, it can accomplish its corporate objective of producing circa 15,000 tonnes per annum of nickel in concentrate.

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 POS is currently trading near its 52-week low of $0.050, providing a decent opportunity for accumulation. The stock has been corrected by ~19.99% in the past month. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering the exploration risk, COVID-19 disruptions in China, and volatility in commodity prices. For valuation, peers such as Mineral Resources Ltd (ASX: MIN), Nickel Industries Ltd (ASX: NIC), Pilbara Minerals Ltd (ASX: PLS), and others have been considered. Given the commencement of the new project, increase in production, current trading levels, expected upside in valuation, and associated key business risks, we recommend a ‘Speculative Buy’ rating on this stock at the closing market price of $0.052, down by ~8.771% as of 14^th June 2022.

Markets are trading in a highly volatile zone currently due to certain macroeconomic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

POS Daily Technical Chart, Data Source: REFINITIV 

Hot Chili Limited

HCH Details

Key Positives:

Higher Current Ratio (2.40x in H1FY22 Vs 2.14x of Industry Median), Low Debt to Equity Ratio (0.03x in H1FY22 Vs 0.17x of Industry Median)

Key Negatives:

Negative ROE (-3.2% in H1FY22), Negative ROIC (3.2% in H1FY22)

Key Investment Risks:

Price Risk, ESG Risk, Exploration Risk, COVID-19 Risk, Regulatory Risk, etc.

Recent Development: HCH (ASX: HCH) is a specialty Mining and Metal company that operates in copper-gold exploration and development. 

• HCH has discovered a significant extension to the high-grade Valentina copper deposit (that comprise 17 meters visual estimate of interesting copper mineralization from 22 meters depth), which is part of the company’s Costa Fuego senior copper project in Chile.
• The company has planned eight drill holes at Valentina, while on the other hand ten drill holes have been completed. The drill from VALMET-002 is expected to release in the coming weeks.
• After completion of drilling at Valentina and San Antonio, the future drill is planned to test several large growth targets, including Santiago Z and extensional porphyry targets along strike from Cortadera.

Conversion of Notes Update, (Source: Analysis by Kalkine Group)

Key Risks: The company faces the market price risk, like decline in copper and gold prices can have a significant impact on its financials. Another risk can be the difference between the estimated findings and the actual findings. The company might also face regulatory and ESG risks.

Outlook:

• The company reports A$24 million in cash to fully fund growth and development objectives till mid-2023. Additionally, it expects an expected cash inflow from VAT recovery in 2022 at around A$4.5 million.
• Q1 2022, the explorational drill program is underway with three drill rigs operating.
• Q1 2022, HCH has executed an off-take agreement where 60% off-take for the first eight years of production at benchmark terms.
• Q3 2022, port access definitive agreement.
• Q1 2023, the pre-feasibility test will be completed.

Stock Recommendation: The stock of HCH is currently trading near its 52-week low of $0.970, providing a decent opportunity for accumulation. The stock has been corrected by ~18.33% in the past month. On the TTM basis, the stock of HCH is trading at a price-to-book value multiple of ~0.6x versus the industry (Basic Materials) median of ~1.9x and thus seems undervalued at current trading levels. Considering the current trading levels, recent resources discovery, expected cash inflows in FY22, explorational drill program underway, upside potential at Cortadera, valuation on the TTM basis, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $1.000, down by ~6.542%, as of 14^th June 2022.

Markets are trading in a highly volatile zone currently due to certain macroeconomic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

HCH Daily Technical Chart, Data Source: REFINITIV 

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 for 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.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and a 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 price.

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