Stocks’ Details

Iluka Resources Limited

Improvement in Sales: Iluka Resources Limited (ASX: ILU) is involved in the exploration, project development, mining operations, processing and marketing of mineral sands and rehabilitation. The market capitalisation of the company stood at ~$2.41 billion as on 8^th December 2020. On the back of its world-class assets at Eneabba and Wimmer, the company is currently developing an emerging position in rare earth elements space. On 2^nd November 2020, the company announced the execution of the demerger of Deterra Royalties Limited from Iluka. The number of Dettera shares on issue were 528,462,101, which commenced trading on ASX on 3^rd November 2020. During September 2020 quarter (Q3 FY20), the company recorded total mineral sands production of 246.5kt as compared to 299.7kt in September 2019 quarter. In addition, sales for the quarter stood at 170.1kt against 167.1kt of Q3 FY19. The company earned mineral sands revenue amounting to $210.2 million as compared to $252.9 million on PCP.

During 1H FY20, the company recorded EBITDA of $225 million against $274 million in 1H FY19 and NPAT for the period amounted to $113 million over $137 million in 1H FY19 in spite of challenging market conditions created by COVID-19.

Key Financials (Source: Company Reports)

Outlook: For 2H FY20, the company continues to maintain its focus on monitoring market conditions and optimise operational settings as required. In addition, the company would also be focused on disciplined capital allocation.

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

Price to Earnings Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: At the end of the 1H FY20, the company’s net cash improved to $62 million. The stock of ILU is trading towards its 52-week low level of $4.880, offering decent opportunities for accumulation. On a technical front, the stock has a support level of ~$4.872 and resistance level of ~$5.985. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as Fortescue Metals Group Ltd (ASX: FMG), South32 Ltd (ASX: S32), and Mineral Resources Ltd (ASX: MIN), to name a few. Hence, considering the business profitability despite challenging market conditions, improved cash position, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $5.750 per share, up by 0.524% on 8^th December 2020.

Regis Resources Limited

A Look at Q1 FY21: Regis Resources Limited (ASX: RRL) is engaged in the exploration of gold and other minerals. The market capitalisation of the company stood at ~$1.95 billion as on 8^th December 2020. For Q1 FY21, the company reported gold production of 81,567 oz as compared to 87,633 oz in Q1 FY20. RRL recorded sales of 60.9koz at an average price of A$2,256/oz and generated total revenue of A$137.5 million. In addition, the company wrapped up drilling at the Garden Well Underground Project, and as a result, the company is positive about robust high-grade mineralised zone beneath the pit. Work on the PFS is likely to be completed in December quarter.

During FY20, the company reported revenue of $757 million from the sale of 353,182oz at an average price of $2,200/oz. RRL noted net profit after tax amounting to $200 million, with a net profit after tax margin of 26%. This showcases the strength of the business, which may support the business moving forward.

Production Summary (Source: Company Reports)

Outlook: The company is expecting FY21 to be a strong year of growth as production continues to rise in line with the targeted 400,000oz pa from internal development options. For FY21, the company anticipates production in the range of 355,000 – 380,000oz at an AISC of between A$1,230 - 1,300/oz.

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

Price to Earnings Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: During Q1 FY21, the company reported cash flow from operations of $85 million. RRL closed the quarter with increased cash and bullion of $225 million. In the last one and three months, the stock of RRL has corrected 11.86% and 27.67%, respectively. As a result, the stock is trading towards its 52-week low level of $2.900. On a technical front, the stock has a support level of ~$3.509 and resistance level of ~$4.397. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a target price of low double-digit upside (in percentage terms). Hence, in light of the decent performance in Q1 FY21, increased cash and bullion, and decent outlook, we give a “Buy” recommendation on the stock at the current market price of $3.830 per share, up by 0.261% on 8^th December 2020.

Cooper Energy Limited

Decent Growth in Production: Cooper Energy Limited (ASX: COE) is focused on securing, finding, developing, producing, and selling hydrocarbons. The market capitalisation of the company stood at ~$601.85 million as on 8^th December 2020. For the quarter ended 30^th September 2020, the company recorded production of 0.67 million boe, reflecting a rise of 10% from the previous quarter. In addition, the company reported revenue of $24 million, which was in line with the prior quarter. The company added that the August Transition Agreement signed with APA has resulted in a successful single absorber trials, commitment to plant reconfiguration works as well as preparation for the commencement of the Sole gas supply agreements from December 2020.

Key Financials (Source: Company Reports)

Guidance: During FY21, the company is expecting to witness robust growth production, revenue and cash generation, which would be supported by the beginning of term gas supply from Sole. For FY21, the company expects to spend $36-$41 million for development and $7-$9 million for exploration.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As on 30^th September 2020, the cash balance of the company stood at $133.6 million as compared to $131.6 million as on 30^th June 2020. On a technical front, the stock has a support level of ~$0.336 and resistance level of ~$0.391. We have valued the stock using the price to cash flow multiple based illustrative relative valuation and have arrived at a target price of low double-digit (in percentage terms). For the purpose, we have taken peers such as Senex Energy Ltd (ASX: SXY), Energy Resources of Australia Ltd (ASX: ERA), and Oil Search Ltd (ASX: OSH), to name a few. Thus, considering the decent growth in production, expected operational and financial growth from term gas supply from Sole and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.365 per share, down by 1.352% on 8^th December 2020. 

BHP Group Limited

Rise in Coal Equivalent Production: BHP Group Limited (ASX: BHP) is engaged in the exploration, production and processing of minerals. The market capitalisation of the company stood at $124.87 billion as on 8^th December 2020. Recently, the company announced the appointment of Stefanie Wilkinson on the role of Company Secretary of BHP Group Limited and BHP Group Plc, which will be effective from 1^st March 2021. The company stated that its major projects under development in petroleum, copper and iron ore are progressing well. For the quarter ended 30^th September 2020 (Q1 FY21), the company recorded petroleum production of 27 mmboe, reflecting a fall of 9% over Q1 FY20. In addition, BHP witnessed a rise of 2% in copper equivalent production after achieving strong performance in metallurgical coal and iron ore, with record production at Jimblebar. During FY20, the company reported underlying EBITDA amounting to US$22.1 billion, reflecting a fall of 5% over pcp at an underlying EBITDA margin of 53%. The company reported free cash flow of US$8.1 bn during FY20.

Production Summary (Source: Company Reports)

Guidance: For FY21, the company expects petroleum production in the range of 95 – 102 mmboe and Copper production in the ambit of 1,480 – 1,645 kt. In addition, the company is optimistic about its outlook for long-term global economic growth and commodity demand.

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

Price to Earnings Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: During FY20, the company declared fully franked final dividend US 55 cents and recorded ROCE of 17%. In the last one and three months, the stock of BHP has provided returns of 21.92% and 12.99%, respectively. On a technical front, the stock has a support level of ~$35.045 and resistance level of ~$42.808. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a target price of low double-digit (in percentage terms). For the purpose, we have taken peers such as Fortescue Metals Group Ltd (ASX: FMG), South32 Ltd (ASX: S32), and Sandfire Resources Ltd (ASX: SFR), to name a few. Therefore, considering the decent production, optimism for the long-term outlook, returns in the past period, we give a “Hold” rating on the stock at the current market price of $42.250 per share, down by 0.331% on 8^th December 2020.

Fortescue Metals Group Ltd

Record Iron Ore Shipments: Fortescue Metals Group Ltd (ASX: FMG) is engaged in the mining, processing, and transporting of iron ore. The market capitalisation of the company stood at $65.85 billion as on 8^th December 2020. The commenced FY21 with record iron ore shipments of 44.3 million tonnes in Q1 FY21, reflecting a rise of 5% over Q1 FY20. In addition, FMG reported an improvement of 2% in C1 costs to US$12.74/wet metric tonne (wmt) over Q1 FY20. Moreover, the demand for its products has supported in delivering average revenue of US$106/dmt, indicating 89% of the average Platts 62% CFR Index. During the quarter, the company reported a strip ratio of 1.3 and is likely to reach average around 1.5 in the current five-year mine plan.

Key Metrics (Source: Company Reports)

Guidance: The company expects to report iron ore shipments in the range of 175 - 180mt and C1 costs in the ambit of US$13.00 - US$13.50/wmt for FY21. In addition, the company anticipates capital expenditure of between US$3.0 - US$3.4 billion.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company closed Q1 FY21 with a net cash position of US$1.0 billion as compared to net debt of US$0.3 billion as on 30 June 2020. This was supported by strong free cashflow generation in Q1 FY21. On a technical front, the stock has a support level of ~$15.597 and resistance level of ~$21.577. We have valued the stock using the price to cash flow multiple based illustrative relative valuation and have arrived at a target price of high single-digit (in percentage terms). For the purpose, we have taken peers such as Iluka Resources Ltd (ASX: ILU), South32 Ltd (ASX: S32), and BlueScope Steel Ltd (ASX: BSL), to name a few. Thus, considering the record iron ore shipment, improved cash position, guidance for upcoming year, we give a “Hold” rating on the stock at the current market price of $21.460 per share, up by 0.327% on 8^th December 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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