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

Downer’s Transformation to Urban Services Business Continues with More Mining Sold Down

In the past, Downer has also underperformed from an operational perspective, but the firm now appears to have learned some hard lessons. The company is pursuing a more capital-light business model for the future, with an emphasis on urban services. In late October 2014, Downer acquired Tenix, a major provider of long-term operations and maintenance services to the power, gas, water, industrial, and resources sectors in Australia and New Zealand. In April 2017, it bought facilities manager Spotless Group.

Key Considerations

  • In late fiscal 2014, Downer completed a high-profile state government rolling stock contract that had weighed on the company’s reputation for the past five years.
  • Based on AUD 36 billion of work-in-hand, Downer has over two and a half years of revenue life, close to the 2.5 year five-year historical average. This is courtesy of Spotless’ additions, many of which are considerably longer dated than mining and EC&M contracts.
  • A key concern in relation to future earnings relates to increased uncertainty surrounding the level and timing of new domestic infrastructure projects by the federal and state governments.

Company Profile

Downer operates engineering, construction, and maintenance; transport; technology and communications; utilities; mining; and rail units. But the future of Downer is focused on urban services, and mining and high-risk construction businesses are being sold down. The engineering, construction, and maintenance business has exposure to mining and energy projects through consulting services. The mining division provides contracted mining services, including mine planning, open-cut mining, underground mining, blasting, drilling, crushing, and haulage. The rail division services and maintains passenger rolling stock, including locomotives and wagons.

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

Con Ed four natural gas storage facilities with a combined Capacity

The principal asset of the joint venture is three natural gas pipelines with a total capacity of 3 billion cubic feet per day and four natural gas storage facilities with a combined capacity of 41 Bcf. The pipelines and storage facilities are all located in New York and Pennsylvania. The sale of the joint venture for $1.225 billion was in line with our estimate and has no impact on our fair value estimate or EPS estimates. We had already assumed Con Ed would divest its gas transmission investments, following comments in the 2020 10-K that it was considering strategic alternatives for its interest in Stagecoach. Stagecoach is the primary operating asset for the Con Edison Transmission segment, or CET, contributing $0.17 per share in 2020, or about 4% of consolidated EPS.

In March, we reduced our EPS estimates from 2021-2024 by $0.04 to $0.06 per share due in large part to the dilutive impact of our assumption that Con Ed would exit the gas transmission business. At that time, we also established a 2025 EPS estimate of $5.00, resulting in a 4.1% average annual EPS growth rate near the bottom of ConEd’s EPS growth target of 4%-6%. CET also has a projected 8.5% ownership interest in the proposed 300-mile Mountain Valley Pipeline. In 2019, exercised its option under the MVP joint venture agreement to cap its cash contributions at $530 million. In May, MVP announced a six-month delay in the projected startup and an increase in the estimated cost to $6.2 billion from the previous estimate of $5.8 billion to $6.0 billion.

We remain concerned the MVP will never be completed due in large part to the ongoing delays and increasing uncertainty with respect to obtaining necessary permits for waterbody and wetland crossings because of ongoing court challenges. Dominion Energy and Duke Energy elected to abandon The Atlantic Coast Pipeline, a project also moving Appalachian shale gas to Virginia and North Carolina, last year after running into similar challenges.

Company Profile

Con Ed is a holding company for Consolidated Edison Company of New York, or CECONY, and Orange & Rockland, or O&R. These utilities provide steam, natural gas, and electricity to customers in south eastern New York–including New York City–and small parts of New Jersey. The two utilities generate roughly 90% of Con Ed’s earnings. The other 10% of earnings comes from investments in renewable energy projects and gas and electric transmission. These investments have resulted in Con Ed becoming the second-largest owner of utility-scale PV solar capacity in the U.S.       

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

Cabot is the only natural gas producer to earn a narrow moat rating

Meats believes that the firm’s assets are ideally located in the northeast portion of the play fairway, which mainly yields dry gas with very little oil condensate or natural gas liquids content in the production stream. This geographic advantage not only allows the firm to keep costs low but also maintain very high daily production rates. These advantages have enabled the firm to be among the lowest-cost natural gas producers in the Appalachia region, and this competitive advantage enables it to consistently deliver very strong returns on invested capital. Meats do advise caution, however. The company has drilling opportunities in the Lower and Upper Marcellus. The opportunities in the Lower Marcellus are far more lucrative but are expected to last until the late 2020s. This means that the firm will eventually pivot to opportunities in the Upper Marcellus that are typically up to 30% less productive. Meats asserts that when the firm does pivot to the Upper Marcellus, it will be able to reuse existing roads and pad sites, and as there are no well configuration constraints in this undeveloped interval, it could enhance returns by drilling longer laterals. As a result, we expect well costs to decrease enough to offset the dip in flow rates, leaving potential returns unchanged.

Cabot is the only natural gas producer to earn a narrow moat rating. The main reason for this rating is the firm’s low operating and development costs in the Marcellus Shale, which puts Cabot at the lower end of the U.S. natural gas cost curve.

ESG is an important factor to consider when looking at exploration and production companies. This is due to the downside risk ESG factors possess for such companies due to reputational and regulatory risks. Meats does not think that these issues threaten the company’s economic moat due to the 5%-10% spread between projected returns and Cabot’s cost of capital that provides a comfortable margin of safety. The most significant ESG exposure for Cabot is greenhouse gas emissions. While greenhouse gas emissions are unavoidable for oil and natural gas producers, Cabot has taken steps to reduce greenhouse gas emissions intensity in 2020 while also reporting zero flaring in the year. It is also worth noting that while consumers get more skeptical of fossil fuels, much of this aversion is directed toward coal. Natural gas, on the other hand, is less carbon-intense than coal but does not have the intermittency issues that plague wind and solar generators.

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 Accelerated Investment Should Lead to Growth

From the Best Ideas report:

“Natural gas utility share prices have lagged the Morningstar US Utilities Index as the economy recovers from COVID-19, due in part to environmental con-cerns about the long-term use of natural gas. However, we believe the electrification of building space and water heating has significant technical and economic obstacles and the market’s misperception of the future of nature gas results in an attractive price for NiSource shares.

“The fully regulated company derives about 60% of its operating income from its six natural gas distribution utilities and the remaining 40% from its electric utility business in Indiana. NiSource has accelerated the pace of gas pipeline restoration investment following a tragic natural gas explosion in 2018, and this will reduce risk and cut methane emissions. Its electric utility will close its last coal-fired power plant in 2028 and replace the capacity with wind, solar, and energy storage.

As a result of favorable regulation and renewable energy investments, we expect NiSource to step up its capital expenditures to almost $12 billion over the next five years, almost 40% higher than the pre-vious five years. The accelerated investment should result in better than 7% EPS growth, strong dividend growth, an improved ESG profile, and reduced risk for investors.”

NiSource Inc. is one of the largest fully regulated utility companies in the United States, serving approximately 3.5 million natural gas customers and 500,000 electric customers across seven states through its local Columbia Gas and NIPSCO brands

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

Oil Market Update: Recovery progressing nicely.

Meanwhile, vaccination rates continue to rise in much of the developed world, where a nearly normal summer seems to be in the works. As such, our forecast for a full recovery in demand in 2022 looks safe.

At the same time, supply remains constrained. OPEC has reiterated its plan to bring back volumes in a measured way, which should allow for a resumption of Iranian volumes if a deal is reached to do so. In the United States, public companies have not shown a willingness to increase spending, meaning volume growth will remain tepid. The combined effect is a continued drawdown in inventories over the next 18 months. The market seems to agree, having pushed Brent prices back to $70/barrel. As supply typically lags demand, prices could be headed higher.

  • We have slightly lowered our 2021 demand forecast to account for India, but 2022 demand remains unchanged and above 2019 levels. In 2023, we expect record-high global oil demand of 101.7 million barrels a day.
  • At its June 1 meeting, OPEC+ reaffirmed planned supply additions of 350 thousand b/d in May, 350 mb/d in June, and 450 mb/d in July as it remains cautiously optimistic for a rear-end 2021 recovery.
  • The U.S. rig count increased in May to 372, twice the number in mid-August last year, but even with West Texas Intermediate crude prices approaching $70/bbl, further additions will be limited.

OPEC Wary of Pandemic Setbacks but Goes Ahead With Planned Increases

OPEC+ reaffirmed that it will proceed with the easing of production cuts that it proposed the meeting prior. The cartel will go forth with its planned additions of 350 mb/d in May, 350 mb/d in June, and 450 mb/d in July, while acknowledging pandemic-driven headwinds in many parts of the world. Members declined to adjudicate on production policy past July, but further upticks are likely (the group meets again on the first of the month). Despite vaccination shortages and mounting coronavirus cases throughout much of Asia and Latin America, OPEC remains cautiously optimistic for a rear-end 2021 recovery; its total oil estimate is unchanged from last month.

During April, the producers participating in the cuts produced 21.1 mmb/d, almost exactly in line with the combined target. These producers have held volumes flat for three straight months now, but the cartel expects to gradually ramp up output in the summer. De facto head Saudi Arabia is also expected to bump up its own production after enduring self-imposed incremental cuts. Overall, conformity with agreed production ceilings has been strong since the pandemic began, but it remains to be seen if OPEC members can be trusted to accelerate production at the agreed rate; historically, the cartel has struggled with producers willing to sacrifice group targets for their own benefit. We forecast an incremental 2.2 mmb/d and 4.2 mmb/d, respectively, in 2021 and 2022 from OPEC, Russia, and Kazakhstan combined.

Iran seem to be edging closer to a resolution as negotiations in Vienna motor onward and are optimistic that an agreement can be reached by August. If so, Iranian production, which has steadily increased in the past six months, could see the floodgates burst open. However, this sentiment was tempered by the International Atomic Energy Agency, which chastised the country in a June 1 report for failing to explain undeclared nuclear material at multiple locations. Iranian output fell over 1.5 mmb/d when the current sanctions came into effect, so an agreement could materially boost supply in the region. We’d argue, though, that the rest of OPEC would be willing to make sacrifices to accommodate these volumes (despite Iran-Saudi tensions). Otherwise, the cartel’s progress reducing inventories since the peak of the pandemic would be quickly undone, and the market would be thrown back into oversupply.

Source:Morningstar

Disclaimer

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

Mineral Resources – Meets Expectations

Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital. We expect a well-supplied lithium market in the longer term, coupled with weaker demand growth for steel, particularly from China, to drive lower prices and reduce the pool of available contracting work. Despite this, we think Mineral Resources can drive EPS growth on volume.

Key Considerations

  • Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital.
  • We think the business model is demonstrably sustainable, centring on Mining Services around Australian bulk commodities.
  • Mineral Resources will selectively own and develop its own mining operations, though with the aim of subsequent sell down while retaining core processing and screening rights.
  • Mineral Resources grew strongly since listing in 2006. The chairman and managing director have been with the business for over a decade and have meaningful shareholdings.
  • Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth.
  • Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
  • Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.
  • Mineral Resources’ profits are exposed to volatile iron ore price. We expect future iron ore prices to be much less favourable than the decade-long boom to 2014.
  • Investments developing lithium bear fruit now in a booming market, but a strong third-party supply response into a small market risks hollowing out returns.
  • Mineral Resources has poor geographic diversification, with a high dependence on capital activity in Western Australia. Mineral Resources is highly dependent on likely Chinese demand for iron ore.

 (Source: Morningstar)

Disclaimer

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

Iluka Resources Ltd – Exposed to Mineral Sands

The long life Sierra Rutile operation is the key source of rutile but lacks a cost advantage. It may come in time as the company expands and builds scale economies. The new Cataby mine bolsters zircon output and maintains feedstock for the production of synthetic rutile. Iluka’s 20% ownership of Deterra Royalties brings exposure to the high-returning iron ore royalty over BHP’s Mining Area C. It is the sole moat-worthy asset but comprises less than 10% of our fair value estimate.

Key Considerations

  • Iluka’s shares are undervalued with demand set to recover from coronavirus-inspired lows. Disruption to other suppliers is likely to see prices remain resilient despite lower demand.
  • As a large producer of both zircon and high-grade titanium dioxide products (rutile and synthetic rutile), Iluka has some ability to flex output to meet either weak demand and strong demand.
  • Reserve life is moderate at around 10 years but Iluka has a sizable resource base which covers at least 25 years of production at 2018 rates. We expect resources to convert to reserves as Iluka clears feasibility and technical hurdles.
  • Iluka is an industry leader with relatively high grade zircon and rutile deposits. Supply can be withheld to defend prices and margins in times of weak demand.
  • Management has improved company fortunes with a strong focus on returns on capital. Demand for zircon is likely to be bolstered by new applications such as chemicals and digitally printed tiles.
  • Iluka has some diversification. The revenue mix is approximately half from zircon and half from highgrade titanium products. Geographically, revenue is split between North America, Europe, China and the rest of Asia.
  • Mineral sands markets are relatively small. Sales volumes can go through periods of significant demand weakness, such as in 2008-09 and 2012-16.
  • The largest single source of demand for zircon is China, accounting for nearly half. China could throttle back on fixed-asset investment-driven growth, which may see subdued zircon sales volumes and prices. OThe Jacinth Ambrosia deposit is very high-grade, with a large component of high-value zircon. Reserve life is less than 10 years and it will be nearly impossible to replicate the returns and competitive position once depleted.

 (Source: Morningstar)

Disclaimer

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

Worley Ltd

Worley says its strategic transformation is accelerating as it increasingly supports customers moving to a low-carbon future. While traditional business continues to be an important part of Worley’s activities, sustainability is providing a higher rate of future growth and margin. The company says its work backlog at end of March 2021 had increased to AUD 14.1 billion, from AUD 13.5 billion at December 2020’s end, with activity levels on long-term projects returning and key project awards in both sustainability and traditional services. Sustain ability focused work comprises 29% of current aggregated revenue, but a considerably higher 45% of the factored sales pipeline (upcoming work). In the half to December, Worley delivered AUD 1.2 billion in sustainability revenue at more favourable margin.

Worley characterises the global market size for sustainable design to 2035 as approximating USD 4.5 trillion per year, of which its addressable share is estimated at 10%-20%. And for decarbonisation investment, its addressable share is estimated at 3% to 15% of a total USD 1.5 trillion annual spend. It’s a big market for a company with current annual revenue approximating just AUD 10 billion.

And despite having a similar risk profile to other services– not lump sum turn-key–sustainability activities have more favourable gross margins. This reflects their technically complex nature involving technology integration and modification to existing facilities, with often challenging logistics requiring expertise in scaling-up. This provides opportunities to embed automation and digital solutions. Worley is accelerating its digital technology to create high value solutions and drive margin improvement including in artificial intelligence and machine learning.

At around AUD 10.70, Worely shares are up 75% on March 2020 lows, and are currently only somewhat undervalued, in 3-star territory. Our fair value estimate equates to an unchanged fiscal 2025 EV/EBITDA of 7.2, a P/E of 15.4, and dividend yield of 4.9%. We still assume a five-year EBITDA CAGR of 9.5% to AUD 1.15 billion. Our 9.2% midcycle EBITDA margin assumption betters the five-year historical average to June 2020 of 7.2%. In addition to the historical period including COVID-19 imposts, improvement reflects both cost-outs and higher assumed sustainability margins.

Worley achieved run rate cost synergies from the ECR acquisition of AUD 190 million in April 2021, already factored in our base-case valuation. We mention this completed program simply in recognition of form–the program being completed on time and at considerably greater magnitude than the original target of AUD 130 million. Future cost-outs are to come solely from operational savings targeted at a total AUD 350 million by June 2022. Worley said it had banked approximately 70% of these on an annualised basis at the December 2020 mark. We estimate this leaves around 1.0% of EBITDA margin improvement left from this source. The balance of our forecast margin improvement can be expected to come via the return of volumes post-COVID over which fixed costs can be disbursed, and via higher margins from growing sustainability activities.

At end December 2020, Worley’s net debt excluding operating leases stood at AUD 1.2 billion, (ND/(ND+E)) 18.4% and annualised net debt/EBITDA of 2.4. Net debt/ EBITDA was somewhat elevated, reflective of the AUD 4.6 billion ECR takeover. We estimate current net debt little changed, but project sub-1.0 net debt/EBITDA by as soon as fiscal 2022 and an unleveraged balance sheet by fiscal 2025, all else equal. This includes assumption of a 75% payout ratio for a prospective plus 6.0% unfranked yield from fiscal 2023.

Source:Morningstar

Disclaimer

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

Fletcher Building materials businesses possess many strong brands

Commodities - Oil, Gold, Silver, Copper, Corn, Coal, Wheat and Coffee Beans isolated on white background. 3D render

At the group level, however, returns are below the cost of capital, as the firm has made poor acquisitions in adjacent segments and new geographies and suffered execution issues in the construction division. This has overwhelmed the positive impact of an unprecedented building cycle in Australia and New Zealand which peaked in 2018. Following the substantial losses sustained in its construction segment, Fletcher has taken corrective action–divesting its global Formica business and backing away from commercial construction projects which led to significant losses. But we’d like to have seen a more comprehensive restructure, involving a marked reduction in the group’s level of diversification. We’d advocate for Fletcher to re-focus the group’s attention on its businesses which are well positioned competitively. The potential for management to create value for shareholders is maximised when it’s free from the distraction that comes with the ownership of a plethora of disparate businesses.

The company operates across seven divisions: building products, distribution, steel, concrete, construction, residential and development, and Australia. We forecast improving EBIT margins across most divisions, with the most pronounced improvement in building products and Australia, but aren’t confident ROICs can sustainably remain above cost of capital. Nonetheless, strong brands, dominant market share in key categories, and control of distribution should help to sustain pricing and margins in the building products division, which generates around 6% of group revenue and 20% of adjusted EBIT. We see steady growth in revenue and slight margin expansion, resulting in mid-single-digit EBIT growth over the long term.

Financial Strength

With the balance sheet awash with liquidity, Fletcher also announced a NZD 300 million share buyback. With the cyclical revival of residential construction activity in New Zealand and Australia, we think the return of cash to shareholders is well-timed. With the buyback to commence in June 2021, we anticipate the lion’s portion of share repurchases will occur in fiscal 2022. Upon conclusion of the share buyback, we forecast leverage–defined as net debt/EBITDA including IFRS 16 lease liabilities–of 1.4 times at fiscal 2022 year-end, near the midpoint of Fletcher’s through-the-cycle leverage target of 1-2 times and up from 1 times at fiscal 2021 year-end. As such, significant debt covenant headroom exists relative to Fletcher’s leverage covenant, which is calibrated at 3.25 times net debt/EBITDA. While further capital expenditure will be allocated to Fletcher’s new plasterboard facility–with total project spending of an estimated NZD 400 million—other nonessential capital outlays have been pared back in order to minimise cash outflows in fiscal 2021. Management anticipates NZD 230 million in capital expenditure in fiscal 2021. We forecast full-year dividends of NZD 0.27 per share, reflecting a 70% payout of net income–near the top end of Fletcher’s targeted 50%-75% payout ratio.

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

Downer EDI Ltd

But the fair value impact of the earnings declines is countered by boosted cash levels from the asset sales. It should be noted the company still provides no earnings guidance for fiscal 2021 given uncertainty around coronavirus.

Our unchanged fair value equates to a fiscal 2025 EV/ EBITDA of 6.2, P/E of 14.5, and dividend yield of 4.1% on a reinstated 60% payout. We now assume a 5-year EBITDA CAGR of 5.9% to AUD 945 million by fiscal 2025, and a midcycle EBITDA margin of 7.4%. The margin forecast is above the 5-year historical average nearer 6.5% and first half fiscal 2021’s 6.0%. This anticipates a recovery from Spotless Group which recorded a 6.4% margin in first-half fiscal 2021, down from levels nearer 8.0% prior to fiscal 2020.

At around AUD 5.60, Downer shares have more than doubled from sub-AUD 2.60 March 2020 lows, and are now only somewhat undervalued. Downer is exiting mining in pursuit of more capital-light and government-backed revenue business models in urban services including in operating, maintaining, servicing, and supply. If mining cools as per our thesis, Downer could be viewed in a more favourable light by a market currently enamoured with mining.

Downer finished December 2021 with net debt of AUD 1.1 billion excluding operating leases–improved on June 2020’s AUD 1.5 billion–gearing ND/(ND+E) at a comfortable 28%, down from 36% six months prior. We now estimate net debt at around AUD 550 million, following the latest round of asset sales, ND/(ND+E) at just 15%. This would have net debt/EBITDA at a conservative sub 1.0. But Downer says its optimal capital structure is net debt at 2-2.5 times EBITDA, meaning capital returns and acquisitions could feature.

In the June half to date, Downer has undertaken combined asset sales of AUD 605 million, of which proceeds of AUD 476 million have so far been received. This includes sale of Open Cut Mining West for over AUD 200 million, sale of Downer Blasting Services for AUD 62 million, sale of plant and equipment to Byrnecut at Carrrapateena mine for AUD 70 million, sale of 70% of laundries for AUD 155 million, and sale of the Otraco tyre management business to Bridgestone Corporation for AUD 79 million.

Remaining noncore assets on the block including Mining Open Cut East and hospitality with the sale process underway. Downer currently has AUD 36.2 billion of work-in-hand, equivalent to a healthy three years of revenue at current rates. The most recently announced is a AUD 900 million eight-year contract to operate and maintain Sydney Northern Beaches buses through Downer’s 49% participation in the Keolis Downer joint venture.

Profile

Downer operates engineering, construction, and maintenance; transport; technology and communications; utilities; mining; and rail units. But the future of Downer is focused on urban services, and mining and high-risk construction businesses are being sold down. The engineering, construction, and maintenance business has exposure to mining and energy projects through consulting services. The mining division provides contracted mining services, including mine planning, open-cut mining, underground mining, blasting, drilling, crushing, and haulage. The rail division services and maintains passenger rolling stock, including locomotives and wagons.

Source:Morningstar

Disclaimer

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.