Category: Commodities

A commodity market is a physical or virtual marketplace for buying, selling, and trading raw or primary products. There are currently about 50 major commodity markets worldwide that facilitate trade in approximately 100 primary commodities. commodities can be invested in numerous ways. An investor can purchase stock in corporations whose business relies on commodities prices or purchase mutual funds, index funds, or exchange-traded funds (ETFs) that have a focus on commodities related companies.

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Commodities Trading Ideas & Charts

Magellan Is Buying Back Units More Aggressively Than Most Midstream Player

Business Strategy and Outlook

Magellan’s refined product pipelines are high-quality assets that have contributed to earnings stability as well as steady increases in distributions over time. As both supply and demand are remarkably steady over time, Magellan has been able to extract modest inflation-linked price increases. However, investment opportunities have been more limited in the refined products segment. As a result, Magellan has invested more than $5 billion largely elsewhere since 2010 and has built up a respectable but ultimately more volatile and lower-quality crude oil pipeline, which now contributes about a third of operating margin.While the competitive intensity of the new businesses is higher than the core refined product pipelines.

Magellan’s current growth capital program is expected to wind down in 2021 with only $80 million in planned expenditures given the difficult environment. In 2022, Morningstar analyst focus remains on capital allocation. Growth spending is expected to be minimal. With a newly expanded $1.5 billion unit buyback in place, the partnership has already bought back $750 million in units in 2020 and 2021. Asset sales have contributed with $271 million completed in 2021, and another $435 million awaiting regulatory approvals and expected to be completed in 2022. 

Magellan Midstream Sees Stronger Volume Recovery in 2021, Expands Buyback Program

Magellan’s capital spending program remains quite muted, as it plans to spend $80 million in 2021 and $20 million in 2022 on growth projects presently, it has devoted much more capital toward buybacks recently. The partnership bought back $391 million in units during the quarter, wrapping up its $750 million program initiated in 2020. The board has added another $750 million in buybacks and extended the program to 2024. With the stock trading below our fair value estimate, Morningstar analyst view both the historical repurchases and future program as good capital allocation and supportive of our Exemplary capital allocation rating.

Financial Strength

Magellan remains among the most prudent managers of capital in our MLP coverage. Three factors support this partnership’s exceptional level of financial health. First, the lack of general partner sponsorship keeps Magellan’s cost of equity lower than peers. Second, conservative leverage (far below its maximum ratio of 4 times debt/EBITDA) has kept its cost of debt low and provided considerable flexibility in financing growth projects. Third, ample distribution coverage has allowed management to fully fund its growth initiatives through retained distributable cash flow without needing to tap equity markets.

Magellan was one of the first MLPs to buy out its general partner interests in 2010. Better aligning interest of its holders, the deal also lowered the partnership’s cost of equity capital. Its stable, largely contracted sources of revenue and low leverage relative to peers also support among the lowest cost of debt in the industry. Combined, this cost of capital advantage and low leverage allows Magellan to more opportunistically engage in growth initiatives. Magellan has about $1 billion in liquidity compared and no debt maturities until 2025. The firm has flexed capital spending as needed to address any financial issues.

Bulls Say

  • Magellan has been highly discerning with regards to capital allocation and invested in a number of attractive projects at excellent prices. 
  • Magellan supplies more than 40% of the refined products to 7 of the 15 states it serves. 
  • Magellan only undertakes profitable butane blending opportunities when spreads warrant it, meaning this is a low-risk endeavour.

Company Profile

While Magellan’s capital spending program remains quite muted, as it plans to spend $80 million in 2021 and $20 million in 2022 on growth projects presently, it has devoted much more capital toward buybacks recently. The partnership bought back $391 million in units during the quarter, wrapping up its $750 million program initiated in 2020. The board has added another $750 million in buybacks and extended the program to 2024. With the stock trading below our fair value estimate, we view both the historical repurchases and future program as good capital allocation and supportive of our Exemplary capital allocation rating.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Shares

PG&E on path to test California wildfire insurance fund Income after Dixie fire report

Business Strategy and Outlook

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors. PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest $8 billion annually for the next five years, leading to 10% annual growth. After suspending its dividend in late 2017, PG&E should be positioned to reinstate it in 2024 based on the bankruptcy exit plan terms.

Financial Strength

PG&E has substantially the same capital structure as it did entering bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post-bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms. The fire victims trust owned 22% and legacy shareholders retained about 26% ownership at the bankruptcy exit. The fire victims’ trust plans to sell its stake over time but had not sold any shares as of late 2021.

Bankruptcy settlements with fire victims, insurance companies, and municipalities totaled $25.5 billion, of which about $19 billion was paid in cash upon exit. PG&E entered bankruptcy after a sharp stock price drop in late 2018 made new equity prohibitively expensive and the company was unable to maintain its 52% required equity capitalization. It is estimated that PG&E will invest up to $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should eliminate any equity needs at least through 2023.

Bulls Say’s 

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting. 
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies. 
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liabilities

Company Profile 

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.4 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post-bankruptcy reorganization.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

NiSource Kicks Off 2022 Regulatory Year With Constructive Rulings in Kentucky, Pennsylvania

Business Strategy and Outlook

After decades of deriving most of its income from natural gas distribution and midstream businesses, NiSource has transitioned to a more diversified earnings mix. About 60% of NiSource’s operating income comes from its six natural gas distribution utilities and 40% from its electric utility in Indiana following the 2015 separation from Columbia Pipeline Group. NiSource’s utilities have constructive regulatory frameworks that allow it to collect a cash return of and a cash return on the bulk of its capital investments within 18 months. 

In October 2020, NiSource sold its Columbia Gas of Massachusetts utility and received $1.1 billion of proceeds that it used to strengthen the balance sheet and prepare for its planned infrastructure investments. The sale came nearly two years after a natural gas explosion on NiSource’s Massachusetts system killed one person north of Boston. Insurance covered roughly half of the almost $2 billion of claims, penalties, and other expenses. Earnings are set to rebound quickly from their low in 2020 when COVID-19 pandemic costs, lower energy use, the Massachusetts utility sale, and a large equity issuance weighed on earnings. We expect modest customer growth combined with NiSource’s infrastructure growth investments to support 8% annual earnings growth and 6% annual dividend growth from 2021 to 2025.

Financial Strength

NiSource has issued a substantial amount of equity in the past few years in part to fund its large infrastructure growth projects and in part to cover liabilities arising from the Massachusetts gas explosion. This dilution and the sale of Columbia Gas of Massachusetts has kept earnings mostly flat since 2018.NiSource’s debt/capital topped 67% at year-end 2017, but huge equity infusions have brought that down to more sustainable levels in the mid-50% range. NiSource issued over $1 billion of common stock and $880 million of preferred stock in 2018 and 2019. The Massachusetts utility sale in 2020 raised $1.1 billion, and NiSource issued $862.5 million of convertible preferred equity units in early 2021. 

NiSource has grown its dividend nearly 40% since the 2015 Columbia Pipeline Group spin-off, but the growth has not been consistent. The company increased its dividend in mid-2016 by 6.5% and again by 6.1% in the first quarter of 2017, then by 11.4% in 2018. But the 2019 dividend increase was only 2.6% following the Boston gas explosion. NiSource is past the peak of its five-year capital spending plan and its equity needs shrink. 

Bulls Say’s 

  • The dividend to grow near 5% annually during the next few years before accelerating to keep pace with earnings in 2024 and beyond. 
  • NiSource should benefit from Indiana policymakers’ desire to cut the state’s carbon emissions by replacing coal generation with renewable energy, energy storage, and possibly hydrogen. 
  • New legislation has improved the regulatory framework in Indiana for NiSource’s electric and natural gas distribution utilities.

Company Profile 

NiSource is one of the nation’s largest natural gas distribution companies with approximately 3.5 million customers in Indiana, Kentucky, Maryland, Ohio, Pennsylvania, and Virginia. NiSource’s electric utility transmits and distributes electricity in northern Indiana to about 500,000 customers. The regulated electric utility also owns more than 3,000 megawatts of generation capacity, most of which is now coal-fired but is being replaced by natural gas and renewables.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Total Energies Does Not Plan Quick Retreat From Oil and Gas Despite Planned Renewables Growth

Business Strategy and Outlook

Total Energies’ strategic plan aims to achieve net zero emissions by 2050 while delivering near-term financial performance in the event of a lower-oil-price environment. 

 Total has already started to move away from oil products with the conversion of its La Mede refinery to a renewable diesel producer. Conversion of the Grandpuits refinery to produce renewable diesel and bioplastics is set to follow. Together with coprocessing facilities at other refineries in Europe, the U.S., and Asia, Total expects to produce 100 thousand barrels a day of renewable diesel by 2030. Gross renewable generation capacity is expected to grow from about 10 gigawatts today to 35 GW by 2025 as Total invests a minimum of $3 billion per year or just over 20% of total spending from 2021. Current and planned capacity is primarily in solar, but Total is pushing further into floating offshore wind comprising 40% of planned growth, which should drive growth beyond 2025 and where it can leverage offshore capabilities from its oil and gas operations.

Financial Strength

Total remains one of the least leveraged global integrated firms with net debt to capital of 17.7% at the end of third-quarter 2021. Management aims to keep gearing below 20% and maintain an A credit rating. In 2021, Total expects net investments, including acquisitions and divestitures, close to $13 billion. Total committed to increasing the dividend by 5%-6% per year and repurchasing an incremental $5 billion worth of shares, but after suspending repurchases in 2020, abandoned any specific capital return targets. Instead, management has committed to supporting the dividend with oil prices as low as $40/bbl and will repurchase shares at higher oil prices when gearing is below 20%. As it is at that level now, management has resumed share repurchases starting in the fourth quarter of 2021. Going forward, Total plans to return up to 40% of additional cash flow if prices are above $60/bbl.

Bull Says

  • Despite reducing capital spending, Total expects to increase production 2% per year on average through 2025, led by growth in LNG projects. 
  • Already about 50% of Total’s production in 2020 and expected to grow, long-plateau production projects like LNG reduce decline rates and reinvestment necessary to maintain production levels.
  • Management has committed to supporting the dividend at $40/bbl. Combined with relatively low leverage, Total’s payout is one of the safer in the sector despite one of the highest yields.

Company Profile

TotalEnergies is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2020, it produced 1.5 million barrels of liquids and 7.2 billion cubic feet of natural gas per day. At year-end 2020, reserves stood at 12.3 billion barrels of oil equivalent, 43% of which are liquids. The company operates refineries with capacity of nearly 2.0 million barrels a day, primarily in Europe, distributes refined products in 65 countries, and manufactures commodity and specialty chemicals. It also holds a 19% interest in Russian oil company Novatek.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Newcrest focus on cost efficiency, capital discipline and optimisation

Business Strategy and Outlook

Newcrest accounts for less than 3% of global mine production and is a price taker. Returns have improved post the expensive acquisition of Lihir, but are likely to remain below the company’s cost of capital for the foreseeable future.

Operations are focused on the Asia-Pacific region, with production split roughly evenly between Australia and Papua New Guinea, or PNG, with a smaller contribution from the Americas. The company is a long-established low-cost producer, save a cost spike in 2013, which subsequently abated.

Current management was installed in 2014 and brought a focus on cost efficiency, capital discipline and optimisation. Under Sandeep Biswas,Newcrest has been a much more reliable producer and has delivered incremental improvements at its operations, boosting throughput and lowering unit costs, particularly at Lihir and Cadia. Newcrest has a solid exploration record. Excluding acquired Lihir ounces, gold equivalent reserves increased from 3.4 million ounces in 1992 to 78 million ounces in December 2017, while resources increased from 8.5 million ounces to 144 million ounces. Gold equivalent resources were added at less than AUD 20 per ounce. Reserves at the end of 2020 were 49 million ounces of gold and 6.8 million metric tons of copper.

Financial Strength 

The company’s balance sheet is sound. The company ended June 2021 with modest net cash of USD 0.2 billion. We expect net debt to grow to end fiscal 2022 to about USD 1.5 billion with the acquisition of Pretium Resources and elevated capital expenditure at Cadia, Lihir and with the development of Havieron and Red Chris. However, despite the increase, we think the balance sheet is still sound. We forecast debt/EBITDA to peak slightly to around 0.7 in fiscal 2022 before declining gradually through the remainder of our forecast period.Newcrest has long-dated corporate bonds totaling USD 1.65 billion. The bonds mature in fiscal 2030, 2042, and 2050 with maturities of USD 650 million, USD 500 million, and USD 500 million, respectively. At the end of fiscal 2021, the company had USD 1.8 billion of cash and USD 1.6 billion of undrawn debt.

Bulls Say 

  • Gold companies can behave countercyclically. They provide a hedge to inflation risk and tend to offer some benefit in times of market uncertainty. Gold can gain from continued money printing and/or if there is a flight to safety. 
  • Newcrest’s reserves are massive and mine life is long, offering leverage to upwards movements in the gold price. 
  • Newcrest owns several world-scale deposits in Cadia, Telfer, Lihir, and Wafi-Golpu. Large deposits typically bring significant exploration upside and expansion options.

Company Profile

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are predominantly in Australia and Papua New Guinea, with a smaller mine in Canada. Cash costs are below the industry average, underpinned by improvements at Lihir and Cadia. Newcrest is one of the larger global gold producers but accounts for less than 3% of total supply. Gold mining is relatively fragmented.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Higher Copper Price and Futures a Tailwind for Oz Minerals, but Shares Remain Overvalued

Business Strategy and Outlook

Oz Minerals is a midtier Australian miner, primarily exposed to copper and, to a lesser extent, gold. Prominent Hill and Carrapateena mine is fully owned by Oz Minerals Ltd.

Expected fiscal 2021 annual production at Prominent Hill of less than 70,000 tonnes of copper and 120,000 ounces of gold is globally small-scale. Barring a significant new discovery, life at Prominent Hill is likely to extend only incrementally with exploration. Cash costs have consistently been at competitive levels below USD 1.00 per pound since 2015, below the industry average. Prominent Hill output is likely to fall as the company processes stockpiles where grades are set to decline and eventually as those stockpiles exhaust around 2023-24. Regional exploration acreage around Prominent Hill is extensive and the company has focused on near mine areas with some success.

The Carrapateena mine, also in South Australia, produces about 70,000 tonnes of copper a year and is likely to expand to just over 110,000 a year from around 2028. Carrapateena comes with an approximate 20 year reserve life and a similar competitive position to Prominent Hill. 

Oz Minerals has targeted acquisition of advanced-stage exploration plays, development projects, or operatingmines. The company has built an encouraging pipeline of projects. Management developed Carrapateena to deliver a vastly more attractive project than initially planned. The acquisition of Brazil-based Avanco is a modest addition. Longer-term output hinges on successful acquisitions and/or exploration and development.

Higher Copper Price and Futures a Tailwind for Oz Minerals, but Shares Remain Overvalued

The fair value estimate as per Morningstar analyst remains at AUD 16.60 and the current near-record high copper price means the shares remain substantially overvalued.

We expect Oz Minerals to continue to benefit from near term strength in copper prices. This augments an already strong balance sheet with net cash. It is expected that copper prices will remain elevated at an average of USD 3.70 per pound to the end of 2024 and  prices to wane longer-term to USD 2.50 per pound from 2025 as the strong economic growth and post COVID-19 stimulus abate.

Financial Strength 

The balance sheet is sound with modest net cash at the end of March 2021. Single-commodity miners should have a conservative balance sheet and is considered as appropriate as per the viewpoint of Morningstar analyst. Longer-term, Oz Minerals could again start to generate significant excess cash flow, though if the company decides to push ahead with some of the potential development projects it has, this cash could largely be put to work and the firm could carry modest net debt at some points through our 10-year forecast period. The company is likely to further invest in Carrapateena, potentially develop the West Musgrave nickel/copper mine and some of the copper/gold assets acquired with Avanco Resources, as well to build and advance the company’s project pipeline. If an acquisition is made, the balance sheet might temporarily be more highly geared, but it seems unlikely Oz Minerals would buy a large new mine while it has so many internal development options.

Bulls Say 

  • Oz Minerals brings leverage to copper, a key metal for the emerging economies of China and India. 
  • Carrapateena extends Oz Minerals’ production of copper at a low operating cost. Successful development increases the likelihood nearby deposits could become economically viable. 
  • Oz Minerals holds significant exploration acreage around Prominent Hill and Carrapateena, with potential for life extensions and new discoveries. Management has done a creditable job of building a large and diverse pipeline of development options at different stages of maturity.

Company Profile

Oz Minerals is a midtier copper/gold producer. Prominent Hill produced about 100,000 tonnes of copper in 2020 with cash costs well below the industry average. The mine is a very small contributor to total global refined output of about 24 million tonnes in 2020. Finite reserves are a challenge, but management has extended life at Prominent Hill, albeit at a lower production rate. Life extension comes with development of the nearby Carrapateena mine, which started in 2020. Carrapateena should initially ramp up to produce at about 70,000 tonnes a year before expanding to just over 110,000 a year from around 2028. The acquisition of Brazil-based Avanco Resources adds volumes but the scale is smaller than the Australian assets, costs are higher and growth is likely to be incremental.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Xcel Energy Inc: Aims to deliver 100% carbon-free electricity by 2050.

Business Strategy and Outlook

Xcel Energy’s regulated gas and electric utilities serve customers across eight states and own infrastructure that ranges from nuclear plants to wind farms, making the company a barometer for the entire utilities sector. That barometer is signalling a clean energy future ahead. Xcel took an early lead in renewable energy development, especially wind energy across its central U.S. service territories. The company now plans to invest $26 billion in 2022-26, much of it going to renewable energy projects and electric grid infrastructure to support clean energy.

Xcel could spend more than $1 billion per year on renewable energy and other clean energy initiatives as its focus shifts from wind to solar. Transmission to support renewable energy represents about one third of its investment plan. Politicians and regulators in Colorado, Minnesota, and New Mexico are pushing aggressive environmental targets, which could extend Xcel’s growth potential. Xcel aims to deliver 100% carbon-free electricity by 2050.

Xcel’s investment plan gives investors a transparent runway of 7% annual earnings and dividend growth potential. Xcel has more regulatory risk than its peers because of its large investment plan.

Financial Strength

Xcel Energy has a strong financial profile. Its key challenge is financing $26 billion of capital investment during the next five years with minimal equity dilution. Most of Xcel’s planned investments benefit from favourable rate regulation partially offsetting their financing risk. However, regulatory lag remains a key issue. Xcel’s strong balance sheet has helped it raise capital at attractive rates. 

Xcel’s consolidated debt/capital leverage ratio could creep toward 60% during its heavy spending in 2022-23, it is expected normal levels around 55%, which includes $1.7 billion of long-term parent debt.

Xcel has been issuing large amounts of new debt since 2019 at coupon rates around 100 basis points above U.S. Treasury yields. Xcel took care of its equity needs for at least the next three years with a forward sale that it executed in late 2020 to raise $720.9 million for 11.845 million shares ($61 per share). This followed a $459 million forward sale initiated in late 2018 at $49 per share. We think these were good moves with the stock trading far above our fair value estimate when the deals priced. After five years of $0.08 per share annualized dividend increases, the board raised the dividend by $0.10 in 2019 and in 2020 and by $0.11 to $1.83 for 2021.

Bulls Say’s

  • Xcel has raised its dividend every year since 2003, including a 6% increase for 2021 to $1.83 per share. We expect similar dividend growth going forward. 
  • Renewable energy portfolio standards in Minnesota and Colorado are a key source of support for wind and solar projects.
  • The geography of Xcel’s service territories gives it among the best wind and solar resources in the U.S. and a foundation for growth

Company Profile 

Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with one third of its electricity sales coming from renewable energy.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Financial Markets

Northern Star Resources reported strong result realised by gold price and production growth

Investment Thesis 

  •  Leveraged to changes in the USD. 
  • Solid assets with reserve/resource. 
  • New acquisitions provide upside (resource and operational improvement). 
  •  Strong management team with significant mining expertise. 
  • Strong balance sheet 
  •  Company has a good track record on shareholder return

Key Risks

  •  Deterioration in global gold supply & demand equation. 
  • Deterioration in gold prices. 
  •  Production issues, delay or unscheduled mine shutdown. 
  •  Adverse movements in AUD/USD

FY21 Results Highlights

  • Solid first half results with gold sales coming in at the top end of Company’s guidance and management noting that they remain on track to meet full year guidance. Relative to the pcp, revenue was up +34% to $1.1bn, with average gold price realized up +17% (AUD terms) and gold sold (ounces) up +21% over the period. Operating earnings (EBITDA) were up +47% to $472.2m and underlying NPAT of $194.4m was up +63%. 
  •  Company declared an interim dividend of 9.5cps (fully franked), which was in line with payout policy of 6% of revenue. 
  •  Underlying free cash flow was strong, up +94% to $225.7m. 
  •  Strong balance sheet, with $672m in liquidity available, consisting of cash, bullion and investments of $372m and $300m in undrawn facilities. 
  •  NST currently has approx. 10% of annualised production hedged over the next 3 years (350kozs at $2,128/oz). NST has been focusing on reducing its hedge book so that it can potentially participate in higher gold prices. 
  • FY21 guidance was unchanged on what was provided at the FY20 results

Company Description

Northern Star Resources Limited (Northern Star) is a gold production and exploration company with a Mineral Resource base of 10.2 million ounces and Ore Reserves of 3.5 million ounces, located in highly prospective regions of Western Australia and the Northern Territory. NST is the third largest gold producer in Australia. The Company also recently acquired a gold mine in Alaska.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

FMG reported a solid FY21 result reflecting the highest ever annual shipments

Investment Thesis 

  • Improving sales mix towards higher grade products should continue to narrow the price discount FMG achieves to the market benchmark Platts 62% CFR Index. 
  •  Global stimulus measures – fiscal and monetary policies – are positive for global growth and FMG’s products. 
  •  Capital management initiatives – increasing dividends, potential share buybacks given the strength of the balance sheet. 
  •  Strong cash flow generation. 
  • Quality management team. 
  •  Continues to be on the lower end of the cost curve relative to peers; with ongoing focus on C1 cost reductions should be supportive of earnings.

Key Risks

  • Decline in iron ore prices
  •   Cost blowouts/ production disruptions. 
  • Cost out strategy fails to yield results. 
  • Company fails to deliver on adequate capital management initiatives. 
  •  Potential for regulatory changes. 
  • Vale SA supply comes back on market sooner than expected. 
  • Growth projects delayed.

FY21 Results Highlights : Relative to the pcp: 

  • Underlying EBITDA of US$16.4bn, was up +96% as Underlying EBITDA margin increased to 73% (from 65% in the pcp). 
  •  NPAT of US$10.3bn, was up +117% and represents a return on equity of 66%. EPS was US$3.35 (A$4.48). 
  • FMG achieved net cashflow from operating activities of US$12.6bn and free cashflow of US$9.0bn after investing US$3.6bn in capex. 
  • Fully franked final dividend of A$2.11 per share, increasing total dividends declared in FY21 to A$3.58 per share, equating to A$11.0bn and an 80% payout of NPAT. 
  •  FMG had cash on hand of US$6.9bn and net cash of US$2.7bn at year-end. Balance sheet remains strong with 19% gross gearing (below 30 to 40% target). Gross debt to EBITDA of 0.3x, was lower than 0.6x in FY20 and remains below target of 1-2x. 
  •  FMG revised its target to achieve carbon neutrality by 2030 (ten years earlier than previous target).

Operational performance highlights. Relative to pcp: 

  • Ore mined of 226.9m tonnes, was up +11%. 
  • FMG shipped a record 182.2m tonnes, up +2%; and sold 181.1mt, up 2%. 
  •  Average revenue of US$135.32/dmt, was up +72%. 
  •  FMG saw C1 cost of US$13.93/wmt, increase +8% but remains industry leading.

Company Profile

Fortescue Metals Group Ltd (FMG) engages in the exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally. It owns and operates the Chichester Hub that consists of the Cloudbreak and Christmas Creek mines located in the Chichester Ranges in the Pilbara, Western Australia; and the Solomon Hub comprising the Firetail and Kings Valley mines located in the Hamersley Ranges in the Pilbara, Western Australia. The Company was founded in 2003 and is based in East Perth, Australia.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Financial Markets

BHP free cash flow reflects higher on iron ore and copper prices & strong operational performance

Investment Thesis

  • Based on our blended valuation (consisting of DCF, PE-multiple & EV/EBITDA multiple), BHP is trading at fair value but on an attractive dividend yield.
  • Commodities prices especially iron ore prices deteriorate on lower demand from China. 
  • Focus on returning excess free cash flow to shareholders in the absence of growth opportunities (hence the solid dividend yield). 
  • Quality assets with competitive cost structure and leading market position. 
  • Growth in China outperforms market expectations. 
  • Management’s preference for oil and copper in the medium to long-term. 
  • Solid balance sheet position.
  • Ongoing focus on productivity gains.

Key Risks

  • Poor execution of corporate strategy. 
  • Prolonged impact on demand if coronavirus is not contained. 
  • Deterioration in global macro-economic conditions. 
  • Deterioration in global iron ore/oil supply & demand equation. 
  • Deterioration in commodities’ prices. 
  • Production delay or unscheduled site shutdown. 
  • Movements in AUD/USD.

FY21 Results Highlights

  • Profit from operations of US$25.9bn, up +80%; Underlying EBITDA of US$37.4bn (at a record margin of 64%); was driven by record volumes at Western Australia Iron Ore (WAIO), Goonyella and Olympic Dam, and Escondida maintained average concentrator throughput at record levels.
  • Attributable profit of US$11.3bn.
  • Underlying attributable profit of US$17.1bn, up +88%.
  • Strong free cash flow of US$19.4bn, reflects higher iron ore and copper prices, and a strong operational performance.
  • Capital and exploration expenditure at US$7.1bn was down -7% and within guidance; with BHP delivering first production at four major development projects, ahead of schedule and on budget, as well as BHP acquired an additional 28% working interest in Shenzi in November 2020.
  • Net debt at US$4.1bn, compares favourably to US$12.0bn in FY20.
  • The Board declared a final dividend of US$2.00 per share (which includes an additional amount of US$0.91 per share) and is above the 50% minimum payout policy. This equates to total dividends of US$3.01 per share, which equates to 89% payout ratio.
  • Underlying return on capital employed strengthened to 32.5%.
  • BHP reported a total income statement charge of US$1.2bn (after tax) for the Samarco dam failure in FY21 (recognising it as an exceptional item).

Company Profile 

BHP Group Limited (BHP) is a diversified global mining company, with dual listing on the London Stock Exchange and Australia Stock Exchange. The company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate. The company also has petroleum exploration, production and refining.

(Source: BanyanTree)

General Advice Warning

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