Category: Financial Markets

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Spark Directors Recommend Takeover Offer

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Australian regulated electricity distribution networks, and 15% of a major electricity transmission network. Citi Power and Powercor are two of five electricity distributors in Victoria, while SA Power Networks is the sole electricity distributor in South Australia. Trans Grid is the major electricity transmitter in New South Wales. 

The Victorian networks contribute just under half of EBITDA, with 40% from South Australia and the remainder coming from Trans Grid. Regulated tariffs account for 80%-90% of group revenue, with unregulated and semi regulated services accounting for the balance. Semi regulated services include public lighting and meter reading. Unregulated services include services on other owners’ networks, asset rentals, and facilities access. These operations are generally higher-margin and more volatile. 

Spark is a solid company, with investments in Australian electricity distribution networks generating highly secure cash flow under a transparent regulatory regime. This is a major headwind for earnings. Capital expenditure on upgrading and expanding networks adds to the regulated asset base and helps revenue growth in the long term. EBITDA margins were solid at 71% in 2020. The main determinant of margins is the favorability of regulatory decisions.

Financial Strength

Spark Infrastructure is in sound financial health. Spark carries a high debt load, as do other regulated utilities. This should be manageable because of highly secure revenue, except in a severe credit crisis. Credit metrics are likely to deteriorate because of regulatory pressure on returns but should, on balance, remain reasonable. Leverage, measured as net debt/regulated asset base, was 72% for VPN and 74% for SAPN in December 2020. This is above some peers; however, this metric understates these assets’ financial strength, given material unregulated revenue streams. Trans Grid is more heavily geared, with net debt/regulated and contracted asset base of 81%. 

Bull Says

  • Revenue is highly secure between regulatory resets, underpinned by regulated tariffs and defensive volume.
  • Lower interest rates and cost-saving programs are helping offset lower returns.
  • core assets have a debt-funding cost advantage because of a halo effect from majority owner Cheung Kong Infrastructure.

Company Profile

Spark Infrastructure Group (ASX: SKI) owns 49% interests in three electricity distribution companies: Powercor, servicing western suburbs of Melbourne; Citi Power, servicing Melbourne’s inner suburbs and central business district; and SA Power Networks, servicing South Australia. Powercor and Citi Power are collectively known as Victoria Power Networks. It also owns 15% of Trans Grid, the main electricity transmission network in New South Wales. The assets are heavily regulated, falling under the purview of the Australian Energy Regulator.

 (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

Record Profit for Newcrest Mining Sees it in Strong Financial Shape for New Developments

The improvement was principally driven by commodity prices, with the realised gold and copper prices up 17% and 42%, respectively. Production guidance for fiscal 2022 of about 1.9 million ounces of gold and 125,000 to 130,000 tonnes of copper was basically as we expected but cost guidance is a bit higher but not sufficiently to warrant a fair value estimate change and thus we retain its share fair value estimate at AUD 29.50 per share 

Newcrest is in very strong financial shape post the record profit. We also think the company has a decent suite of development projects with life extensions likely at Cadia and Lihir, and development of Havieron and Red Chris looking likely. Newcrest remains one of our better value picks among generally overvalued miners. Gold could get also a second wind from an investor flight to safety given the threat posed by the COVID-19 delta variant.

Newcrest remains busy on the exploration and development front. Approval of the next panel cave at Cadia was expected and we continue to think Newcrest is likely to mine there for multiple decades. New project activity remains focused primarily on exploration, development and feasibility studies at Havieron and Red Chris. The recent, and expected, extension to the Telfer open pit will provide an important bridge to production from Havieron, as well as allow Newcrest to continue to explore further potential for life extensions at Telfer itself. We continue to be encouraged by the exploration results at Red Chris with Newcrest focused on growing the higher-grade zone. Like with Cadia’s development, the high-grade zones help to underpin the initial large-scale underground mining effort and infrastructure expenditure, and subsequently open up the broader lower-grade mineralisation for profitable mining.

On the other hand, the tailwind from increased gold and copper prices in fiscal 2021 more than offset a 4% reduction in gold production. EBITDA increased 29% to USD 2.4 billion. Likewise, net operating cash flow after tax was strong, rising 56% to USD 2.3 billion. Newcrest has about USD 240 million net cash and the strong financial position was reflected in a more than doubling of the final dividend to USD 40 cents fully franked. The full year payout of USD 55 cents fully franked more than doubled last year’s USD 25 cent fully franked total.

The increasing shareholder returns are an appropriate use of funds given the windfall cash flows from higher gold and copper prices. We expect net operating cash flows to likely more than cover Newcrest’s likely capital expenditure requirements for the next few years. However, we expect future dividends to decline from the fiscal 2021 payout to average nearly USD 40 cents a share to fiscal 2026. The forecast reflects our expectation for earnings to fall with forecast declines in gold and copper prices from 2021’s elevated levels. We expect dividends to remain a secondary consideration for Newcrest, with the primary focus on value creation through efficient operation of the mines, exploration and developments.

Company profile

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

(Source: Morningstar)

General Advice Warning

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

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Outstripped coal prices yields a promising Fiscal 2022 for New Hope

The near-term outlook for New Hope is bright, with the global economic recovery and tight supply conditions providing support to the spot price for seaborne thermal coal (ex-Newcastle). The full-year fiscal 2022 EBITDA was expected to be AUD 676 million despite the ramp-down of production at the New Acland mine. With approval of Stage 3 of the New Acland mine yet to be secured, minimal contribution to coal sales is expected from New Acland in fiscal 2022 as Stage 2 production ramps down. Necessary Stage 3 approvals from the Queensland Government remain delayed by a legal challenge mounted by the Oakey Coal Action Alliance (OCAA) who oppose the ongoing mining at the site.

Financial Strength:

The last traded price of New Hope was 1.92 AUD. The PE ratio of New Hope during 2020 was 13.1, which makes it an undervalued stock. Moreover, it is trading 28% lower than its expected fair value (2.70 AUD). During 2020, EV/ EBITDA of 4.9 shows that the company is in good financial health. 

With realised coal prices exceeding the market expectations in New Hope’s final quarter of fiscal 2021, New Hope’s full-year fiscal 2021 result announcement eclipsed the analyst’s forecast by 6%. The late fiscal 2021 rally in thermal coal price witnessed the full-year fiscal 2021 EBITDA of New Hope rise 26% year on year to AUD 372 million.

Company Profile:

New Hope Corporation is an Australian pure-play thermal coal miner. Its two operating assets–the 100%-owned New Acland coal mine and its 80% interest in the Bengalla coal mine–produce a cumulative 12 million metric tons of salable thermal coal annually. The vast majority of New Hope’s production is sold into seaborne thermal coal export markets. Reserves at New Acland and Bengalla are sufficient to support multi-decade mine lives. New Hope’s undeveloped coal resources are extensive and include exploration status coal resources in excess of 1 billion metric tons in Queensland’s Surat basin.

(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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Despite higher costs, Oz Minerals’ prominent Hill Shaft Expansion was approved

was more than triple the AUD 80 million profit from first-half 2020. Adjusted net profit was AUD 256 million versus AUD 56 million a year ago, modestly below our AUD 267 million forecast.

 The first-half profit benefited from an AUD 18 million pretax impairment reversal relating to the value of the company’s ore stockpiles at Prominent Hill. Adjusted EBITDA nearly doubled to AUD 561 million. Operating cash flow generation of AUD 460 million in the half was strong and allowed the company to fund all of its capital initiatives, as well as repay all debt. 

Shares remain overvalued, a function of the elevated copper price, in turn a function of both supply challenges and transitory stimulus. Of late, the copper price has started to retreat and has fallen to around USD 4 per pound from record levels of nearly USD 5 per pound in May 2021. Oz Minerals remains very busy on the development front. 

Company’s Future Outlook

It lowers fair value estimate for Oz Minerals by 5% to AUD 15.70 per share. The reduction primarily reflects an approximate one-third increase in the expected capital expenditure to develop the Prominent Hill shaft to around AUD 600 million. The capital cost inflation reflects inflation in commodities and service costs, as well as some scope changes. In the rest of the year, the company expects to update development studies for the West Musgrave nickel/copper project–including an updated estimate of reserves and resources–and the Carajas East, Carajas West, and Centro Gold projects in Brazil. The pipeline remains rich, continues to build and advance, and Oz Minerals is in a strong financial position to execute. At the end of June 2021, the company had no debt and AUD 134 million cash.

Company’s Future Outlook

We also think the company should be able to fund annual dividends averaging over AUD 0.50 per share per year. Dividends are not the main game for Oz Minerals and the company is clearly focused on growth, but we think it’s positive that excess cash is being returned to shareholders. To this end, the company declared an AUD 0.08 per share interim and AUD 0.08 per share special dividend in the half, double last year’s interim dividend.

Company Profile

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

 (Source: Morningstar)

General Advice Warning

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