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

Core Laboratories NV delivering unrivalled levels of returns on capital over the past two decades

Business Strategy and Outlook

It is long relied that long believed that Core Laboratories is one of the highest-quality oilfields-service companies. For one, with a wide moat rating, Core Lab possesses the strongest moat across experts’ entire oilfield-service coverage. The company’s foundational core analysis business in the reservoir description segment, in particular, has been virtually unchallenged over the past three decades. The business passes the Warren Buffett quality test, whereby even an “idiot” could likely run the business with some profitability. 

Yet, Core Lab has long been managed with the utmost skill, in analysts’ view. The 1998 acquisition of Owen Oil Tools and subsequent repositioning of the business to offer high-quality solutions for fast-growing U.S. shale markets was a stroke of brilliance. The combination of top-notch management plus a strong underlying business has delivered unrivalled levels of returns on capital over the past two decades.

Financial Strength

Core Laboratories is in good financial health overall, following a small liquidity scare in 2021, when the company was forced to issue equity to cure breaching of a debt covenant. Now, the company has no debt maturing until September 2023, with most debt not maturing until 2026 or later. Net debt stood at about 2.7 times adjusted EBITDA as of year-end 2021 and should fall below 2 times by end 2023.

Bulls Say’s

  • Core Lab has generally bested all oilfield-services peers in returning cash to shareholders. 
  • The company will benefit as U.S. shale operators shift to using more advanced core analysis to inform the development of their resources. 
  • Core Lab will benefit as the world’s oilfields become increasingly mature, as it has specialized in understanding how mature reservoirs change over time.

Company Profile 

Core Laboratories is an oil-services company that helps oil and gas companies better understand how to improve production levels and economics with core and reservoir analysis. Additionally, the company sells a number of products helping its customers to maximize production levels from their oil and gas assets. The company operates in more than 50 countries and has more than 5,000 employees. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Commodities Trading Ideas & Charts

TC Energy Reports Solid Q1 With Healthy Progress on Key Initiatives

Business Strategy & Outlook

TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. Both firms offer a 5%-7% growth profile and a utilitylike 95%-98% of earnings that are highly regulated or contracted, with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas. However, anticipate that any major new pipeline project for either firm will face substantial stakeholder challenges from a legal, regulatory, or community perspective, raising the risks and costs.

The most critical differences between Enbridge and TC Energy arise from their approaches to energy transition. Canadian carbon emissions taxes are expected to increase to CAD 170 a ton by 2030

from CAD 40 today, meaning it is critical that TC Energy, with its natural gas exposure, follow Enbridge’s approach to rapidly reduce its carbon emission profile and continue to pursue projects like the Alberta Carbon Grid, which will be able to transport more than 20 million tons of carbon dioxide. These taxes potentially increase costs for Canadian pipes compared with U.S. pipes but also make

hydrogen a viable alternative to gas-powered electricity generation by 2030 in Canada, presenting an emerging threat. TC Energy recently introduced targets to reduce its Scope 1 and 2 intensity

by 30% by 2030 and reach net zero by 2050, which is a start.

In addition, Enbridge’s backlog is more diversified across its businesses already, and it already has a more material renewables business, including hydrogen, renewable natural gas, and wind efforts. While the renewables business lacks an economic moat today, it is an important area of investment for TC Energy that it needs to pursue. The renewables investments can compete for capital across the rest of the portfolio, generating reasonable returns on capital, allowing the overall enterprise to adapt to the markets as they evolve. This shift is especially the case as a CAD 170 per ton carbon tax in Canada opens the door for potentially sizable investments to reduce carbon emissions.

Financial Strengths

TC Energy carries significantly higher leverage than the typical U.S. midstream firm, with current debt/EBITDA well over 5 times. Its long-term target is in the high 4s, again materially higher than peers which are generally targeting leverage of 3-4 times. Still, the high degree of leverage is

supported by the highly protected nature of its earnings stream. As capital spending declines over the next few years to around CAD 4.7 billion, the TC Energy to currently reach the 4s in the latter half of the decade. Lower capital spending would move this date forward materially. Beyond

the high leverage, TC Energy is also unusual in that it will continue to rely on the capital markets to meet about 20% of its expected capital expenditures over the next few years, meaning that some projects on a regular basis will depend on the health of the capital markets. Midstream peers are

largely transitioning to generating free cash flow after distributions or dividends, and in some cases,  the shift to be permanent. TC Energy has outlined plans to spend about CAD 5 billion annually on a continued basis. About CAD 1.5 billion-CAD 2 billion is maintenance spending on its pipelines, and 85% of this is recoverable due to being invested in the rate base. Bruce Power and the U.S. and Canadian natural gas pipelines will consume about CAD 1 billion each annually. ESG-related opportunities such as using renewable power

to power its own operations or seeking carbon capture efforts would be on top of this spending. TC’s dividend growth remains prized by its investors, and 3% growth going forward is easily supportable under the firm’s 60/40 framework.

Bulls Say

  • TC Energy has strong growth opportunities in Mexican natural gas as well as liquefied natural gas.
  • The company offers virtually identical growth prospects and a protected earnings profile to Enbridge but allows investors to bet more heavily on natural gas.
  • The Canadian regulatory structure allows for greater recovery of costs due to project cancelations or

producers failing compared with the U.S.

Company Description

TC Energy operates natural gas, oil, and power generation assets in Canada and the United States. The firm operates more than 60,000 miles of oil and gas pipelines, more than 650 billion cubic feet of natural gas storage, and about 4,200 megawatts of electric power.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Commodities Trading Ideas & Charts

FVEs Raised for Miners on Higher Commodity Prices Driven by Economic Recovery and Supply Constraints

Business Strategy & Outlook

Oz Minerals is a copper-focused mining company that also produces gold. Both its Prominent Hill and Carrapateena mines in South Australia are in the lowest quartile of the cost curve, and are expanding via a hoisting shaft and block cave mining, respectively. These expansions extend mine lives while increasing planned copper and gold production to around 150,000 tonnes and 190,000 ounces per year, respectively, and keeping each mine in the lowest quartile of the cost curve. The company is advancing various other projects in Brazil to add to its currently-producing Pedra Branca mine, however output is relatively modest. OZ Minerals is also likely to expand into nickel production via

its West Musgrave nickel-copper project in Western Australia. An investment decision on West Musgrave is expected in 2022.

Financial Strengths

Oz Minerals’ balance sheet is strong with net cash of just over AUD 200 million at the end of 2021. The company faces significant capital expenditure on the expansions at Prominent Hill and Carrapateena and the potential development of West Musgrave, which introduces cash

outflow obligations akin to having some financial leverage. However, given the strong outlook for earnings and cash flows, and based on assumed copper and gold prices, the Oz Minerals is able to fund its likely capital expenditure requirements from operating cash flows and modest net debt of less than AUD 1 billion at its peak, expected in 2025. At end 2021, Oz Minerals had an AUD 480 million undrawn corporate facility. The expect peak net debt to correspond with peak capital expenditure on construction of block caving at Carrapateena and on developing the West Musgrave project. Additional growth options include some of the copper/gold assets acquired with Avanco Resources. Given the plethora of internal development options, it seems relatively unlikely Oz Minerals would buy a large operating mine.

Bulls Say

  • Oz Minerals brings leverage to copper, a key metal for the emerging economies of China and India.
  • The Prominent Hill and Carrapateena expansions are set to materially increase copper production in coming years.
  • If developed, West Musgrave provides modest commodity diversification and exposure to battery metals.

Company Description

Oz Minerals is a mid-tier miner that produced 125,000 tonnes of copper and 240,000 ounces of gold in 2021. Production is mainly from the Carrapateena and Prominent Hill mines in South Australia, with Brazil a minor contributor. It is increasing production at its Australian mines while also pursuing

incremental production in Brazil, targeting annual production of 220,000 tons of copper and 400,000 ounces of gold later this decade. Carrapateena and Prominent Hill’s cash costs will likely remain in the lowest quartile of the cost curve once expanded, while the Brazilian operations are smaller

and relatively higher cost. The West Musgrave nickel project in Western Australia is likely to be approved in 2022, which will add an average of 26,000 tons of nickel for its 20-year-plus life. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Rio Tinto’s Long Term Growth Weighed Down By Over-Investment During China Boom

Business Strategy and Outlook

Rio Tinto is one of the world’s biggest miners, along with BHP Billiton, Brazil’s Vale, and U.K.-based Anglo American. Above-average assets relative to peers mean Rio Tinto is one of few miners profitable through the commodity cycle. Most revenue comes from operations located in the relatively safe havens of Australia, North America, and Europe, though the company has operations spanning six continents. By customer, Rio Tinto’s largest customer by far is China. 

Rio Tinto has a large portfolio of long-lived assets with low operating costs. Operations include aluminium, copper, diamonds, gold, iron ore and industrial minerals. The invested capital base was inflated by substantial procyclical investment during the height of the China boom, including overpaying for Alcan, and the subsequent iron ore expansion; the combination of these factors means midcycle returns are likely to remain below the cost of capital. 

The recent focus has been to run a strong balance sheet, tightly control investments and return cash to shareholders. The company’s major expansion projects are Amrun bauxite, the Oyu Tolgoi underground mine, and the expansion of the Pilbara iron ore system’s capacity from 330 million tonnes in 2019 to 360 million tonnes. Those projects are expected to complete in the next few years. Otherwise, the focus is on incremental expansions through productivity and debottlenecking initiatives. These will be small but capital-efficient and should modestly improve unit costs. As a commodity producer, Rio Tinto is a price-taker. The lack of pricing power reflects in cyclical commodity prices. Rio Tinto lacks a moat, given the bloated invested capital base dilutes returns on invested capital. The firm’s assets are large, however, and despite being overcapitalised, generally have low operating costs.

Financial Strength

Rio Tinto’s balance sheet is strong with net cash of more than USD 3 billion at end June 2021. Net debt/EBITDA is forecasted to remain at close to zero through the forecast period, in the absence of a large acquisition, which is not anticipated. The strong balance sheet may allow the company to make targeted investments or acquisitions through the downturn, important flexibility. But it appears management is favouring distributions  to shareholders. The progressive dividend policy was canned in 2016, providing important flexibility to increase or reduce dividends as free cash flow allows. Barring a major spending spree, which appears unlikely, that strong balance sheet is projected  to continue in the future.

Bulls Say’s

  • Rio Tinto is one of the direct beneficiaries of China’s strong appetite for natural resources. 
  • The company’s operations are generally well run, large-scale, low-operating-cost assets. Mine life is generally long, and some assets, such as iron ore, have incremental expansion options. 
  • Capital allocation is has improved following the missteps of the China boom with management generally preferring to return cash to shareholders than to make material expansions or acquisitions.

Company Profile 

Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Iron ore is the dominant commodity, with significantly lesser contributions from aluminium, copper, diamonds, gold, and industrial minerals. The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights. 

(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

Rio Tinto’s Long Term Growth Weighed Down By Over-Investment During China Boom

Business Strategy and Outlook

Rio Tinto is one of the world’s biggest miners, along with BHP Billiton, Brazil’s Vale, and U.K.-based Anglo American. Above-average assets relative to peers mean Rio Tinto is one of few miners profitable through the commodity cycle. Most revenue comes from operations located in the relatively safe havens of Australia, North America, and Europe, though the company has operations spanning six continents. By customer, Rio Tinto’s largest customer by far is China. 

Rio Tinto has a large portfolio of long-lived assets with low operating costs. Operations include aluminium, copper, diamonds, gold, iron ore and industrial minerals. The invested capital base was inflated by substantial procyclical investment during the height of the China boom, including overpaying for Alcan, and the subsequent iron ore expansion; the combination of these factors means midcycle returns are likely to remain below the cost of capital. 

The recent focus has been to run a strong balance sheet, tightly control investments and return cash to shareholders. The company’s major expansion projects are Amrun bauxite, the Oyu Tolgoi underground mine, and the expansion of the Pilbara iron ore system’s capacity from 330 million tonnes in 2019 to 360 million tonnes. Those projects are expected to complete in the next few years. Otherwise, the focus is on incremental expansions through productivity and debottlenecking initiatives. These will be small but capital-efficient and should modestly improve unit costs. As a commodity producer, Rio Tinto is a price-taker. The lack of pricing power reflects in cyclical commodity prices. Rio Tinto lacks a moat, given the bloated invested capital base dilutes returns on invested capital. The firm’s assets are large, however, and despite being overcapitalised, generally have low operating costs.

Financial Strength

Rio Tinto’s balance sheet is strong with net cash of more than USD 3 billion at end June 2021. Net debt/EBITDA is forecasted to remain at close to zero through the forecast period, in the absence of a large acquisition, which is not anticipated. The strong balance sheet may allow the company to make targeted investments or acquisitions through the downturn, important flexibility. But it appears management is favouring distributions  to shareholders. The progressive dividend policy was canned in 2016, providing important flexibility to increase or reduce dividends as free cash flow allows. Barring a major spending spree, which appears unlikely, that strong balance sheet is projected  to continue in the future.

Bulls Say’s

  • Rio Tinto is one of the direct beneficiaries of China’s strong appetite for natural resources. 
  • The company’s operations are generally well run, large-scale, low-operating-cost assets. Mine life is generally long, and some assets, such as iron ore, have incremental expansion options. 
  • Capital allocation is has improved following the missteps of the China boom with management generally preferring to return cash to shareholders than to make material expansions or acquisitions.

Company Profile 

Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Iron ore is the dominant commodity, with significantly lesser contributions from aluminium, copper, diamonds, gold, and industrial minerals. The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights. 

(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 Instigates Meaningful Improvement to Production With Potential For Growth Prospects

Business Strategy and Outlook

Newcrest Mining is a gold-copper miner with mines in Australia, Papua New Guinea, Canada, and its minority-owned mines in Ecuador. It is estimated that the company will produce more than 1.8 million ounces of gold and around 120,000 tonnes of copper in fiscal 2022, with the acquisition of Brucejack resulting in gold production increasing to average more than 2 million ounces per year for the next decade. Around 80% of its estimated mid cycle revenue is from gold with most of the remainder from copper. Copper’s contribution is likely to rise over time as Newcrest’s various developments commence production.

Newcrest has no moat despite a history of low-cost production, save a cost spike around 2013, and long mine lives. 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. Newcrest accounts for less than 2% of global mine production and is a price taker. Gold is increasingly the plaything of investors and subject to swings in sentiment. In 2001, gold consumption for jewellery and technology accounted for 91% of global demand, but in 2021 this had fallen to 50% as a result of increased investor demand and weaker gold consumption. There is also uncertainty around exploration success and the cost to buy or develop new mines, which are an important part of Newcrest’s future value.

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, with successful discoveries expanding reserves at Cadia and Telfer in particular in recent decades. Reserves at the end of 2021 were 54 million ounces of gold and 7.9 million tonnes of copper, representing more than two decades of reserves at current production rates.

Financial Strength

The company’s balance sheet is in reasonable shape. Newcrest ended December 2021 with modest net debt of USD 0.5 billion. Net debt is expected to grow to about USD 1.6 billion at end fiscal 2022 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, the balance sheet is considered still sound. Net debt/EBITDA is forecasted to peak at around 0.8 times in fiscal 2022 before declining gradually throughout the remainder of the 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. Newcrest has significant liquidity. As at the end of December 2021, the company had USD 1.2 billion of cash and USD 2.0 billion of undrawn debt.

Bulls Say’s

  • The shares are considered to be undervalued. Newcrest is well managed and has a suite of low-cost, long-life mines, which is not reflected in investor sentiment, as investors have failed to recognise. 
  • Gold can provide a hedge to inflation risk and 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 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 mainly in Australia and Papua New Guinea. The company also owns a 32% stake in the Fruta Del Norte gold mine in Ecuador, while the acquisition of Brucejack in 2022 adds to its 70% stake in the Red Chris mine in Canada. The company is likely to produce around 2 million ounces of gold per year over the next decade, making it one of the larger global gold producers but still only accounting for less than 2% of total supply. Cash costs are below the industry average and amongst the lowest of the global gold miners, underpinned by improvements at Lihir and Cadia. Organic growth options include its Havieron prospect, the Red Chris underground mine, and the high-grade Wafi-Golpu copper-gold prospect in PNG.

(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

BHP Unlikely To Sustainably Generate Excess Aggregate Returns From Its Portfolio

Business Strategy and Outlook

BHP is the world’s largest publicly traded mining conglomerate and positioned at the centre of the China boom. The company correctly values a strong balance sheet to provide some stability through the inevitable cycles and derives some modest benefit from commodity and geographic diversification, relative to its mining peers. Most revenue comes from assets in the relative safe havens of Australia, North America, and Europe. 

BHP produces a range of commodities from oil and gas to nickel, and it is a major producer of iron ore, copper and metallurgical coal. Exposure to conventional oil and gas is likely to end with the proposed spin off and subsequent merger with Woodside. The onshore U.S. shale assets were divested in 2018. Much of the company’s operations are in Australia, particularly the low cost iron ore business. Many of BHP’s assets are located close to key Asian markets, particularly iron ore and metallurgical coal, which provides a modest freight cost advantage relative to peers. Commodity demand is tied to global economic growth, China in particular. China is BHP’s largest customer, accounting for more than 65% of total sales in fiscal 2021. With demand for most products likely to soften with the end of the China boom, and BHP’s fiscal 2021-22 earnings back near the fiscal 2011-12 peak, earnings are anticipated to materially decline, with iron ore the likely key driver.

The good times saw significant capital expenditure, notably on iron ore and onshore U.S. shale gas and oil. Overinvestment in the boom diluted returns to the point where long-term excess returns are now deemed unlikely. Structurally lower earnings with the demise of the China boom peaks means mid cycle returns on adjusted invested capital are expected, after adding back the impairments and write-downs, to be close to the cost of capital. Ignoring the cumulative impairments and write-downs, returns are forecasted to modestly excess the cost of capital by mid cycle.

Financial Strength

BHP is in a strong financial position. With ongoing debt repayment, modest near-term capital requirements and the fortuitous bounce in commodity prices since 2016, BHP’s financial position is strong. For the five years ended fiscal 2026, net debt/EBITDA is expected to remain below 0.5 and EBIT/net interest to average more than 30. Net debt at end-June 2021 was about USD 4 billion, below BHP’s net debt target range of USD 12 billion to USD 17 billion.Given the limited capital expenditure requirements, with only modest commitments to new expenditure in the lower demand growth environment, BHP’s balance sheet is expected remain strong with excess cash flow to be returned to shareholders. Share buybacks and special dividends are possible, depending on the level of commodity prices, given the relatively modest outlook for capital expenditure. The likelihood of special dividends and buybacks would decline if BHP chose to pursue acquisitions.

Bulls Say 

  • BHP is a beneficiary of continued global economic growth and demand for the commodities it produces. 
  • The company’s cash flow base is diversified and is less susceptible to the vagaries of the market than single-commodity producers. 
  • BHP’s iron ore assets are industry-leading. The company remains well placed to continue low-cost production and increase output with minimal expenditure and an efficiency focus.

Company Profile 

BHP is a leading global diversified miner supplying iron ore, copper, oil, gas, and metallurgical. The merger of BHP Limited (now BHP Ltd.) and Billiton PLC (now BHP PLC) created the present-day BHP. Shareholders in each company have equivalent economic and voting rights in BHP as a whole and in 2022 voted to reunify the dual listed structure. Major assets include Pilbara iron ore, Queensland coking coal, Escondida copper and conventional petroleum assets, principally in Australia and the Gulf of Mexico. Onshore U.S. oil and gas assets were sold in 2018 and the remaining Petroleum assets are likely to be spun off and merged with Woodside.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

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Categories
Commodities Trading Ideas & Charts

Rolls-Royce Holdings reflects Strong Liquidity Position of £7.1bn, including £2.6bn in cash and £4.5bn in undrawn committed facilities

Investment Thesis:

  • Very high barriers to entry and Covid-19 is likely to improve industry structure (consolidation)
  • Consumer pent up demand for travel will return with a vaccine. 
  • Liquidity concerns have been addressed with the GBP5bn recapitalization program.  
  • Ongoing focus on R&D and innovation, which will drive further efficiencies.
  • Cost efficiency program to drive savings to support earnings. 

Key Risks:

  • Covid-19 impacts are deeper and more protracted than expected.
  • The Company fails to hit its near-term guidance. 
  • Defense and Power Systems fails to deliver organic growth. 
  • Economic downturn leading to reduced demand from airlines.  
  • Brexit uncertainty. 
  • Adverse currency movements outside hedging strategies. 
  • Regulatory / litigation risks. 

Key Highlights:

  • Revenue growth of low-to-mid single-digit, supported by a strong order book cover in both Defence and Power Systems and a continuation of gradual improvement in Civil Aerospace, along with an expected increase in spare engine sales, with long-term revenue growth driven by technology and innovation opportunities and rising global demand for sustainable power.
  • Operating profit margin to be broadly unchanged as underlying operational improvement is balanced with increased engineering spend to develop sustainable growth opportunities, with a gradual shift in spend towards New Markets, Defence and Power Systems, with an aim to spend ~75% of R&D investment on lower carbon growth opportunities in the medium term.
  • FCF to be modestly positive, representing a substantial improvement on pcp, despite the concession slips.
  • Balance sheet repair commenced with £2bn in proceeds from disposals (ITP Aero is progressing well and expected to complete in 1H22) together with strong underlying FCF generation to be used to reduce net debt (including leases was up +44.4% over pcp to £5.2bn and excluding leases was up +126.7% over pcp to £3.4bn) with the aim of returning to an investment grade credit profile in the medium term.
  • Strong liquidity position of £7.1bn, including £2.6bn in cash (post payment of €750m bond and the £300m Covid Corporate Financing Facility commercial paper) and £4.5bn in undrawn committed facilities.
  • No dividend payment for the year as some of loan facilities place restrictions and conditions on payments to shareholders, however, the Board will start recommending shareholder payments from FY23.
  • The restructuring program delivered £1.3bn run-rate savings target a year ahead of schedule, reducing the size of Civil Aerospace business by around a third and removing more than 9,000 roles from continuing operations, with focus now on ensuring the benefits are sustained.

Company Description:

Rolls Royce Holdings plc (RR) manufactures aero, marine and industrial gas turbines for civil and military aircraft. The Company designs, constructs, and installs power generation, transmission and distribution systems and equipment for the marine propulsion, oil and gas pumping and defense markets. The Company operates three main segments: (1) Civil Aerospace; (2) Defence Aerospace; and (3) Power Systems.

(Source: Banyantree)

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

Pioneer Has No Plans to Deviate Away From Winning Variable Dividend Strategy

Business Strategy and Outlook

Pioneer Natural Resources is one of the largest Permian Basin oil and gas producers overall, and is the largest pure play. It has about 800,000 net acres in the play, all of which is located on the Midland Basin side where it believes it can get the best returns.That gives Pioneer an extensive runway of low-cost drilling opportunities primarily targeting the Wolfcamp A, Wolfcamp B, and Spraberry reservoirs. Like other Permian operators, Pioneer’s production is weighted toward liquids—over 80% of its output is crude oil and natural gas liquids, boosting unit revenue. By focusing on the most productive parts of the Permian, it is able to keep its unit costs well below the peer average. Getting into the basin early also means the firm also enjoys relatively low royalty rates, giving it a further advantage over many of its competitors. Pioneer has expanded fairly rapidly, with annual production growth averaging 10%-15% over the last decade or so. But the company is now prioritizing generous shareholder distributions ahead of further volume expansion. The current plan calls for no more than 5% annual growth while reinvesting much less than 100% of operating cash flows. The remaining surplus will be used to preserve Pioneer’s very impressive balance sheet, and to return cash to shareholders via a part-variable dividend.

Financial Strength

Pioneer’s leverage ratios were uncharacteristically high for much of 2021, owing to two substantial acquisitions (Parsley and DoublePoint). But the firm has been generating substantial free cash since then, and the subsequent divestiture of the Delaware Basin assets that were bundled with these acquisitions improved the firm’s balance sheet even further (with proceeds exceeding $3 billion). As a result, the firm now has one of the strongest balance sheets in the segment, with very low leverage ratios and at strip prices, the firm will reach zero net debt by the end of 2022.After the last reporting period, net debt/EBITDA was around 0.4 times and debt/capital is 23%. Management has mentioned a leverage ratio cap of 0.75 times, but really wants absolute debt to be as low as possible, or zero, so it can capitalize in cyclical downturns by aggressively buying back stock without worrying about the impact on the balance sheet.The firm has around $3 billion in maturities due between now and 2025, all of which can be comfortably funded from cash on hand or from operating cash flows (without compromising the firm’s ability to pay the fixed and variable components of its dividend). It has ample liquidity in reserve, too, with another $1.5 billion available on its undrawn credit facility.

Bulls Say  

  • Pioneer’s low-cost Permian Basin activities are likely to generate substantial free cash flows in the years to come, assuming mid cycle prices ($55/bbl for WTI). 
  • The firm intends to target a 10% total return for shareholders via its base dividend, a variable dividend with a payout of up to 75% of free cash flows, and 5% annual production growth. 
  • Pioneer has a rock-solid balance sheet and is able to generate free cash flows even during periods of very weak commodity prices.

Company Profile

Headquartered in Irving, Texas, Pioneer Natural Resources is an independent oil and gas exploration and production company focusing on the Permian Basin in Texas. At year-end 2021, Pioneer’s proven reserves were 2.2 billion barrels of oil equivalent with net production for the year of 612 mboe per day. Oil and natural gas liquids represented 68% of production

(Source: Morningstar)

  • Relative to the pcp: (1) 

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

Fortescue Metals (FMG) delivered robust 1H22 results along with Capital Management Initiatives

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. 

1H22 Results Highlights   Relative to the pcp: 

  • FMG delivered record half year iron ore shipments of 93.1m tonnes (mt), up +3%. Revenue of US$8.1bn declined -13% per cent on 1H21. Average revenue of US$96/dry metric tonne (dmt) represented a 70% realisation of the average Platts 62% CFR Index (1H22: US$114/dmt, 90% realisation). C1 cost of US$15.28/wet metric tonne (wmt) was up +20% due to price escalation of key input costs, including diesel, other consumables and labour rates, the integration of Eliwana as well as mine plan driven cost escalation. 
  • Underlying EBITDA of US$4.8bn, with an Underlying EBITDA margin of 59% (-28% lower versus 1H21: US$6.6bn, 71% margin). 
  • NPAT of US$2.8bn was -32% lower than pcp. EPS of US$0.90 (A$1.24) was -32% weaker. 
  • Net cashflow from operating activities of US$2.1bn after payment of the FY21 final tax instalment of US$915m. 
  • Capex of US$1.5bn, inclusive of US$589m investment in the Iron Bridge growth project and the Pilbara Energy Connect decarbonisation project. 
  • The Board declared a fully franked interim dividend of A$0.86 per share, down -41% relative to the pcp. It equates to 70% 1H22 NPAT, and is consistent with FMG’s capital allocation framework and stated intent to target the top end of the dividend policy to payout 50 to 80% of full year NPAT. 
  • FMG retained a strong balance sheet with net debt of US$1.7bn at 31 December 2021, inclusive of cash on hand of US$2.9bn. FMG’s credit metrics remain strong with gross debt to last 12 months EBITDA of 0.3x and gross gearing of 23% as at 31 December 2021.

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.

 (Source: Banyantree)

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.