Fortescue Metals Group Ltd

FMG Details

Increase in Licensed Throughput of Herb Elliott Port: Fortescue Metals Group Ltd (ASX: FMG) is a metal and mining company, mainly involved in the mining, processing, and transporting of iron ore. On 4 September 2020, S&P Dow Jones Indices announced that FMG has been added S&P/ASX 20 Index, effective at the Open on September 21, 2020. In another update, the company announced that it has obtained the necessary approval to increase the material handling capacity of its Herb Elliott Port facility from 175 million tonnes per annum (mtpa) to 210mtpa on a staged basis. This approval supports the company’s FY21 iron ore shipments guidance of 175mt to 180mt as it will allow the company to use the capacity of FMG’s existing port infrastructure.

Signed a Deed of Agreement with PNG Government: Recently, the company’s wholly-owned subsidiary, Fortescue Future Industries Pty Ltd, signed a Deed of Agreement with the Papua New Guinea (PNG) Government to investigate the feasibility of potential projects for the development of PNG’s hydropower resources. After completing the feasibility studies and approvals, the individual projects will be developed by Fortescue Future Industries.

FY20 Results Highlights: For the year ended 30 June 2020, the company reported Underlying EBITDA of ~US$8.4 billion, up by 38% on the previous year. Further, the company’s reported Net profit after tax (NPAT) of US$4.7 billion and EPS of US$1.54, went up 49%, each respectively, on FY19, demonstrating the continued ability of the company’s operations to generate strong cash flows through the successful execution of its integrated operations and marketing strategy. For FY20, the company declared US$3.7 billion in dividends, representing a payout ratio of 77% of full-year NPAT. It is worth noting that, over the last five years, the company has witnessed significant improvement in its top line as well as the bottom line, as demonstrated in the below graphs.

Financial Metrics (Source: Company reports)

FY21 Guidance:  For FY21, the company expects its total iron ore shipments to be between 175 - 180mt. The capital expenditure for FY21 is expected to be in the range of US$3.0 - US$3.4 billion.

Key Risks: The company is exposed to various climate-related risks which include a change in precipitation pattern, rising sea levels and storm surge inundation. The company is exposed to commodity price risk, as its iron ore sales are predominantly subject to prevailing market prices.

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

Price to Earnings Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Over the last six months, the stock of FMG has provided a return of 83.46%, and in the last three months, the stock has provided a return of 20%. On the technical analysis front, the stock has a support level of ~A$13.5 and a resistance level of ~A$19.30. For FY20, the company’s current ratio stood at 2.25x, higher than the industry median of 1.76x, demonstrating that the stock is well equipped to pay its short-term obligations. We have valued the stock using the price to earnings multiple based illustrative valuation method and have arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers like South32 Ltd (ASX: S32), Champion Iron Ltd (ASX: CIA), Mineral Resources Ltd (ASX: MIN), to name few. Considering the company’s decent FY20 production, FY21 guidance, recent increase in licensed throughput of Herb Elliott Port, we give a “Hold” recommendation on the stock at the current market price of $17.520, down by 3.418% on 4 September 2020.

FMG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Silver Lake Resources Limited

SLR Details

Resignation of Additional Company Secretary: Silver Lake Resources Limited (ASX: SLR) is a metal and mining company mainly involved in the production of gold and exploration of tenements in the Mount Monger goldfields of Western Australia. On 4 September 2020, the company announced that its additional company Secretary, Liz Hough, has resigned from his post to commence parental leave. Mr. David Berg will continue to work as the Company Secretary.

FY20 Result Highlights: For the year ended 30 June 2020 or FY20, the company reported total gold production of 273,071 ounces gold equivalent, up 64% on the previous year. Further, the company reported a 54% increase in gold sales to 263,362 ounces gold equivalent at a realised price of A$2,132/oz. As a result of increased sales, the company’s EBITDA grew by 224% to ~$260.1 million. During the year, the company invested $23 million in exploration activities focused on Mineral Resource to Ore Reserve conversion and advancing the pipeline of prospective opportunities within proven mineralised corridors. At the end of FY20, the company had a cash balance of $269.4 million with no debt in its balance sheet.

FY20 Key Results (Source: Company Reports)

FY21 Guidance: For FY21, the company expects its group sales to be in the range of 240,000 to 250,000 ounces gold and 1,100 tonnes copper. The AISC for FY21 is expected to be between A$1,400 to A$1,500 per ounce.

Key Risks:  As a gold producing company, SLR is exposed to the risks related to the fluctuations in the gold prices. Further, the company is also exposed to the Australian dollar currency risk on gold sales, which are denominated in US dollars.

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

Price to Earnings Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of SLR has provided a return of 40.95% in the last six months. The stock is currently inclined towards its 52 weeks high price of $2.75. On the technical analysis front, the stock has a support level of ~A$1.86 and a resistance level of ~A$2.6. We have valued the stock using the price to earnings multiple based illustrative valuation method and have arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers like Perseus Mining Ltd (ASX: PRU), Ramelius Resources Ltd (ASX: RMS), and Red 5 Ltd (ASX: RED), to name few. Considering the company’s decent performance in FY20, its significant investment in exploration activities and a decent balance sheet, along with FY21 guidance, we give a “Hold” recommendation on the stock at the market price of $2.22, down by 1.333% on 4 September 2020.

SLR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer  

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.