Category: Financial Markets
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.
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.
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.
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.
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.
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.