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Commodities Trading Ideas & Charts

South32 continue to provide solid returns for the near term

Investment Thesis:

  • Prices of S32’s key commodities are expected to be in moderate to relatively flat range in comparison to FY21 realised prices
  • The company is expected to produce significant free cash flow over the next three years, which would be adequate to support growth and capital management
  • Substantial cash balance would provide flexibility and capital management 
  • Board to expand S32’s capital management program by $120m to $2bn, excluding $252m to be distributed to shareholders  
  • Regular dividends are being paid inspite of uncertainty and volatility   
  • Both Standard and Poor’s and Moody’s reaffirmed their respective BBB+ and Baa1 credit ratings

Key Risks:

  • Key commodity prices decrease
  • Global growth experiencing significant shock
  • Inflationary pressures leading to cost blowouts and production disruptions 
  • Capital management initiatives are not handled by company adequately 
  • Currencies witnessing adverse movements 
  • Acquisition which may negatively impact the value of the organisation

Key Highlights:

  • Despite ongoing challenges put forth by pandemic, record production has been observed in Worsley Alumina, Brazil Alumina and Australia Manganese 
  • Divestment of South Africa Energy Coal, the TEMCO manganese alloy smelter, and a portfolio of no-core precious metals royalties with the aim to reduce capital intensity and improve underlying operating margin
  • Declaration of 2H21 dividend of 3.5cps, fully franked, at a payout ratio of 46% of underlying earnings. An addition of special dividend of 2.0cps was also declared, bringing the total dividend to 6.4cps versus 3.2cps in FY20.
  • Strong operating performance and higher commodity prices drove a +153% increase in underlying earnings to $489m
  • Underlying EBITDA of $1,564m was up +32%
  • Margin of 26.4% up from 21.9% in FY20
  • Underlying EBIT of $844m was up +89% from $446m in FY20, driven mainly by higher prices in aluminium, silver, zinc, nickel partially offset by the lower prices of coal, manganese ore and alumina
  • Higher sales volume of $115m
  • Controllable costs of $238m; offset by change in exchanges which reduced earnings by $185m, and higher electricity costs of ($103m)
  • Allocation of $346m for an on-market share buy-back

Company Profile:

South32 (S32) is a globally diversified metals and mining company. S32’s strategy is to invest in high quality metals and mining operations where their distinctive capabilities and regional model enables them to extract sustainable performance. The regional model means their businesses are run by people from within the region. The company’s African operations are supported by a regional office in Johannesburg South Africa and Australian and South American operations by an office in Perth.

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

Cooper gas portfolio strategy aims to maximise long-term value while mitigating risks

Investment Thesis

  • Management provides strong FY22 guidance.
  • Sole will result in significant increases in production and free cash flow.
  • Sole’s volumes are mostly contracted out, providing greater certainty at a lower risk of price fluctuations. Sixty-one percent of COE’s 2P reserves (Proved and probable reserves) are undertake-or-pay contracts, with uncontracted gas primarily beginning in 2024.
  • Upside from CEO’s exploration activity Gippsland and Otway Basin.
  • Over 25 years Industry/Developing LNG Project with companies such as BG Group, Woodside petroleum and Santos Ltd which leads by CEO/MD David Maxwell with strong management team.
  • Favorable industry on the east coast gas market – with tight supply could lead to higher gas prices.
  • Recent De- Rating Considered as a Potential Merger & Acquisition activity.

Key Risks

  • Execution Risk – Drilling and exploration risk.
  • Commodity Price Risk – movement in oil & gas price will impact uncontracted volumes.
  • Regulatory Risk – such as changes in tax regimes will adversely impact profitability.
  • M&A Risk – value destructive acquisitions in order to add growth assets.
  • Financial Risk – potentially deeply discounted equity raising to fund operating & exploration activities should debt market tighten up due external macro factors.

FY21 Results Highlights

  • COE achieved record sales and revenue sales volume up +69 percent to 3.01 MMboe and revenue up to +69 percent to $132 million.
  • COE achieved record production of 2.63 MMboe up to +69 percent.
  • COE’s sole gas sales agreement was a significant milestone driving, 2H21 revenue and earnings.
  • Sound balanced sheet maintained with debt adjustments finalized.

Company Profile 

Cooper Energy Ltd (COE) is an oil & gas exploration company focusing on its activities in the Cooper Basin of South Australia. The Company’s exploration portfolio includes six tenements located throughout the Basin. Gas accounts for the major share of the Company’s sale revenue, production and reserves. COE’s portfolio includes: (1) gas production of approximately 7PJ p.a. from the Otway Basin, most of which comes from the Casino Henry gas project which it operates. (2) COE is developing the Sole gas field to supply 24 PJ of gas p.a. from 2019. (3) Oil production of approximately of 0.3 million barrels p.a. from low cost operations in the Cooper Basin. 

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

Lowering Our Fair Value Estimate for Fortescue Post the Massive Dividend

Business Strategy and Outlook 

Fortescue Metals is the world’s fourth-largest iron ore exporter. Margins are well below industry leaders BHP and Rio Tinto, and some way behind Vale, meaning Fortescue sits in the highest half of the cost curve. This is a primary driver of our no-moat rating. Lower margins primarily result from discounts from mining a lower-grade (57%- to 58%-grade) product compared with the benchmark, which is for 62%-grade iron ore. The lower grade is effectively a cost for customers, which results in a lower realised price versus the benchmark. In the five years ended June 2020, the company realised an approximate 26% discount, compared with the benchmark average for 62% iron ore fines.

Fortescue has done an admirable job of reducing cash costs materially versus peers. However, product discounts remain a competitive disadvantage. To this end, the company will add about 22 million tonnes a year of iron ore production from the 61%-owned Iron Bridge joint venture. Iron Bridge grades are much higher, around 67%, which should allow Fortescue to meet its goal to have most of its iron ore above 60%, assuming the company chooses to blend it with the existing products.

Financial Strength 

Our fair value estimate for no-moat rated Fortescue Metals to AUD 13 per share from AUD 15.10 per share previously. The shares have gone ex-entitlement to the final dividend, an unusually large AUD 2.11 per share or 14% of our previous fair value estimate. The latest financial results were astoundingly strong for the iron ore miners, Fortescue included. Rio Tinto generated an annualised return on invested capital from its iron ore operations of more than 100% in the first half of 2021.

Despite being a relatively high cost producer, once product discounts are considered, Fortescue’s annualised return on invested capital for that same half was nearly 70%. This is part of the reason the iron ore price has fallen in recent times, but the price at nearly USD 150 per tonne is still well above the price required for the iron ore majors to make a reasonable return.

Fortescue Metals Group’s balance sheet is strong, thanks to the elevated iron ore price and accelerated debt repayments. Net debt peaked near USD 10 billion in mid-2013, roughly coinciding with the start of expanded production. By the end of 2020, net debt had declined to USD 0.1 billion. The operating leverage in Fortescue, and the cyclical capital requirements, there is a reasonable argument that Fortescue should run with minimal or no debt on average through the cycle.

Bulls Say’s 

  • Fortescue provides strong leverage to the Chinese economy. If growth in steel consumption remains strong, it’s also likely iron ore prices and volumes will too.
  • Fortescue is the largest pure-play iron ore counter in the world and offers strong leverage to emerging world growth.
  • Fortescue has rapidly cut costs and significantly narrowed the cost disadvantage relative to industry leaders BHP, Vale, and Rio Tinto. If steel industry margins fall in future, it’s likely product discounts will narrow significantly relative to historical averages.

Company Profile 

Fortescue Metals Group is an Australia-based iron ore miner. It has grown from obscurity at the start of 2008 to become the world’s fourth-largest producer. Growth was fuelled by debt, now repaid. Expansion from 55 million tonnes in fiscal 2012 to about 180 million tonnes in 2020 means Fortescue supplies nearly 10% of global seaborne iron ore. However, with longer-term demand likely to decline, as China’s economy matures, we expect Fortescue’s future margins to be below historical averages.

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

Australian Pipeline to offer a whopping dividend of 6%

Investment Thesis

  • Difficult part to replicate is high quality assets.
  • Attractive and Growing distribution yield.
  • Highly credit worthy customers.
  • Currently, the US focuses on assessing international opportunities.
  • Growth through acquisitions.
  • Customers are diversified by sectors.
  • Largest owner of gas transmission pipelines in Australia.
  • Opportunity to grow its renewable business.
  • Management announced their ambition to achieve net zero operations emissions by 2050.

Key Risks

  • Negative market/investor sentiment toward “bond proxies.”
  • Pipeline regulators may make future regulatory changes.
  • The energy sector affects a large number of businesses.
  • Issues with infrastructure, such as explosions or ruptures.
  • COAG’s adverse decision examines transmission costs.
  • Contract terms on existing capacity are being shortened.

FY21 Result Summary

  • Revenue (excluding pass-through) increased +0.7% year on year to $2,144.5m, boosted in part by a partial year contribution from the Orbost Gas Processing Plant.
  • Underlying EBITDA decreases -1.3% over pcp to $1,633million, due to increased investment in strategic development opportunities and capability, higher insurance and compliance cost and softer contract renewals in challenging market conditions.
  • NPAT (excluding significant items) was down -9.6% to $281.8m due to the lower EBITDA and higher depreciation costs from growing asset base. Reported NPAT was $3.7m, impacted by the $249.3m non-cash Orbost impairment charge and $148m in finance costs associated with bond note redemptions.
  • Total capex increased +3.3 percent year on year to $432.5 million (growth capex decreased -1.5 percent to $283.5 million and stay-in-business capex increased +23 percent to $134.6 million), with management expecting organic growth capex to exceed $1.3 billion over FY22-24, up from $1 billion in 1H21.
  • Free Cash Flow of $901.9 million was down -5.7 percent year on year, owing primarily to a one-time distribution and interest earned by APA from its investments in SEA Gas in FY20. Approximately, 6% dividend is offered by Australian Pipeline Trust Group.

Company Profile 

APA Group Limited (APA) is a natural gas infrastructure company. The Company owns and/or operates gas transmission and distribution assets whose pipelines span every state and territory in mainland Australia. APA Group also holds minority interests in energy infrastructure enterprises. APA derives its revenue through a mix of regulated revenue, long-term negotiated contracts, asset management fees and investment earnings.

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

Adbri’s stock price drops but building boom raises profits

Investment Thesis

  • Macro conditions remains uncertain in key regions.
  • Strong pipeline of infrastructure projects over the next 2 years is a positive but timing and execution is a risk. 
  • Solid balance sheet position provides some flexibility to the Company to pursue growth. 
  • Leading positions as a lime producer, concrete products producer and cement and clinker supplier.
  • Outlook for lime looks relatively positive with higher infrastructure projects and resource sector activity
  • Cost-out and vertical integration (cement) programs expected to deliver cost benefits that exceed cost headwinds of $10m in FY21.

Key Risks

We see the following key risks to our investment thesis:

  • Softer sales volume than expected.
  • Loss of market share to competitors or imports and pressure on pricing. 
  • Softer than expected pricing increases.
  • Higher than expected energy prices.
  • Execution risk in relation to Company’s cost-out and vertical integration strategies.
  • Deterioration of A$ relative to other currencies.
  • Unfavorable weather impacts. 

1H21 results summary

  • Revenue was up +7.4% over pcp to $752.3m with robust demand, particularly on the eastern seaboard, driving higher volumes across all products. Lime pricing declined in accordance with contractual arrangements, while average cement price increased marginally, and concrete and aggregate prices were stable overall. 
  • Underlying EBITDA increased +8.7% over pcp to $133.1m with margins improving +20bps to 17.7%, benefitting from disciplined implementation of cost efficiencies across the Group. 
  • Underlying NPAT of $55m was up +15.5% over pcp driven by improved demand for construction materials supported by increased residential housing activity and infrastructure spending. 
  • Operating cash flow of $76.8m declined -34% over pcp, largely due to the one-off benefit in the prior year of Covid-19 stimulus measures with the temporary deferral of GST and PAYG payments that boosted 1H20 cash flow by circa $30m (measures reversed in 2H20 following payment of the deferred liabilities and were not repeated in 1H21). 
  • Capex declined -8% over pcp to $67.6m and was split between stay-in-business capital of $51.8m and development capital of $15.8m. 

Company Description  

Adbri Ltd (ABC) is an Australia listed construction materials and liming producing company. ABC is Australia’s leading (1) lime producer in the minerals processing industry; (2) concrete products producer; and (3) cement and clinker importer. ABC is Australia’s number two cement and clinker supplier to the Australian construction industry and number four concrete and aggregates producer.

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

Fortescue Metals has established an industry-leading cost position

Investment Thesis

  • FMG’s price discount to the market benchmark Platts 62 percent CFR Index should continue to narrow as its sales mix shifts toward higher grade products.
  • Global stimulus policies, both fiscal and monetary, are beneficial to global growth and FMG’s products.
  • Capital management initiatives include increased dividends and potential share buybacks given the balance sheet’s strength.
  • Exceptional cash flow generation.
  • Management team for quality.
  • Continues to be on the lower end of the cost curve in comparison to peers; with a continued focus on C1 cost reductions, earnings should be supported.

Key Risks

  • Iron ore prices are falling.
  • Cost overruns/production disruptions
  • The cost-cutting strategy is ineffective.
  • The company does not carry out adequate capital management initiatives.
  • There is the possibility of regulatory changes.
  • Vale SA supply returns to the market sooner than expected.
  • Growth initiatives are being postponed.

Operational Performance Highlights 

  • Ore Mined of 226.9m tones, was up by 11 percent.
  • FMG shipped a record 182.2m tones, up +2 percent and sold 181.1m tones up by 2 percent.
  • The average revenue of US$135.32/dmt was increased by +72 percent.
  • FMG saw C1 cost of US$13.93/wmt, increase by 8 percent but remains industry leading.
  • Iron ore Shipment is 180 to 185m tone.
  • C1 cost of US$15.00 to US$15.50/wmt.
  • Capex (excluding FFI) of US$2.8 – US$3.2 billion (down from US$3,633 billion in FY21), including: US$1.1 billion in sustaining capital; US$200 million in hub development; US$250 – US$300 million in operational development; US$180 million in exploration and studies; and US$1.1 – US$1.4 billion in major projects (Iron Bridge and PEC). 

Company Profile 

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

General Advice Warning

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

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Commodities Trading Ideas & Charts

Entergy’s Service Area Significantly Affected by Hurricane Ida

narrow moat ratings after Category 4 Hurricane Ida impacted significant portions of Entergy’s service area, including the New Orleans area. On Aug. 29, Entergy disclosed that Hurricane Ida caused all eight transmission lines that provide power to New Orleans to fail. This subsequently caused a load imbalance causing all generation to cease operations. 

While it is too early to estimate any financial impact from Hurricane Ida, the storm has drawn comparisons to Hurricane Katrina, the last Category 4 hurricane to impact the area. The combination of damage from Hurricane Katrina and Hurricane Rita, which struck the region shortly after Katrina, led to $1.5 billion total restoration costs for the repair of Entergy’s electric and gas facilities. This excluded lost revenue due to customer outages and Entergy’s inability to recover fixed costs through base rates.

Near-term liquidity constraints following Katrina and Rita led Entergy’s subsidiary, Entergy New Orleans, to file voluntary Chapter 11 bankruptcy. The subsidiary exited bankruptcy in May 2007 and eventually recovered most of the restoration costs through insurance proceeds and regulatory approval of storm restoration cost securitization, which was authorized by state law.

Company’s Future outlook

Entergy’s last traded price was 111.69 USD, whereas its fair value estimate is 110.00 USD, which makes it an overvalued stock. Entergy New Orleans contributed $49 million of Entergy’s $1.1 billion consolidated net income in 2020.  It is estimated that every $250 million of disallowed restoration costs reduces fair value estimate $1 per share. Entergy New Orleans had roughly $1 billion in total rate base at year-end 2020, representing approximately 3.5% of Entergy’s $28 billion rate base. Hurricane Ida increases Entergy’s regulatory risk as regulators likely will scrutinize the company’s storm response and restoration costs. 

Company Profile

Entergy is an integrated utility with approximately 22 gig watts of regulated utility-owned power generation capacity. It has shrunk its merchant generation business and plans to retire its remaining operating merchant nuclear unit in Michigan in 2022. Its five regulated integrated utilities generate and distribute electricity to about 3 million customers in Arkansas, Louisiana, Mississippi, and Texas.

(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

Worley Delivers as-Expected Fiscal Second-Half Recovery. No Change to AUD 12.00 FVE.

Worley shares are hovering at just over AUD 11.00 and are currently only somewhat undervalued. Worley’s last traded price was 11.06 AUD, whereas its fair value estimate is 12 AUD, which makes it an undervalued stock. Worley paid out a final dividend of AUD 25 cents bringing the full fiscal year to better than expected AUD 50 cents, in line with fiscal 2020 thanks to a higher 94% payout ratio.

Underlying EBITDA fell 25% to AUD 649 million, marginally ahead of the expectations. And net operating cash flow fell by 24% to AUD 533 million. The robust cash performance facilitated a 10% reduction in net debt to AUD 1.24 billion. Worley is comfortably leveraged at 18% and 1.9 net debt/EBITDA at end fiscal 2021, that solid outcome delivered in a COVID-19-impacted period. The debt Worley does have is a hangover from its AUD 4.6 billion ECR takeover. 

Worley’s business has stabilized over the second half of fiscal 2021 including the work backlog increasing by 6% to AUD 14.3 billion at end June 2021 versus AUD 13.5 billion at end December 2020. Underlying fiscal second half EBITDA of AUD 386 million was nearly 50% ahead of the fiscal first half. And second-half EBITDA margin of 9.0% bettered the first half’s 5.9% by a considerable gap.

Company’s Future Outlook

It is forecasted AUD 45 cents for the full year, the higher payout sending a strong signal of the board’s confidence in the outlook. The full-year payout equates to an unfranked 4.5% yield at the current share price. Worley is expecting an improved fiscal 2022. However, different sectors and regions will recover at different rates. The company is starting to see activity levels increase with key awards in the early phases.

Company Profile

Worley is a leading global provider of professional services, such as engineering, procurement, and construction management, to the oil, gas, mining, power, and infrastructure sectors. Purchase of Jacobs ECR in April 2019 reduced revenue contribution from hydrocarbons to just over 50%, from a prior 75%-80% position. Metals and mining contributes 23% and infrastructure and chemicals the balance. Worley has a global presence with about 59,000 staff in more than 50 countries. It has a strong presence in many developing economies, including Africa.

(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

South32 Profits Rebound due to Stronger Commodity Prices in FY21

with adjusted net profit after tax up about 150% to USD 489 million. Adjusted EBIT nearly doubled to USD 844 million from USD 446 million, thanks to higher commodity prices, and was in line with the expectations. The company did a creditable job at offsetting inflationary pressures, primarily through cost reductions and efficiencies. 

Dividends surprised on the upside, with South32 declaring a USD 3.5 cent final and USD 2.0 cent special, bringing the full year payout to USD 6.9 cents fully franked, ahead of our USD 6.0 cent forecast. Given South32 possessed about USD 400 million net cash at the end of June, the cash returned to shareholders seems to be worthy use of funds.. In addition, the outlook for commodity prices is probably looking better for the company in fiscal 2022.

Metallurgical coal has been one of the strongest performers of late, the price doubling in less than six months. At the divisional level, Cannington had a much better year, reflecting strong production and higher prices, with EBIT more than tripling to USD 350 million.

Company’s Future Outlook

South32 has increased the size of its ongoing on market share buyback by USD 120 million, with about USD 250 million remaining to be returned.  Along with share repurchases, South32 continues to make incremental portfolio improvements. A more focused and streamlined portfolio should reduce South32’s expenditure requirements and allow capital to be directed to higher returning opportunities. Like many diversified mining peers, South32 is positioning itself for a carbon constrained world and expects the majority of its commodities to do better under that constraint, notably aluminium for light-weighting and nickel for batteries.  The recent rebound in the coking coal price may provide an opportunity, which could be a good option.

Company Profile

South32 was born of the demerger of noncore assets from BHP in 2015. South32 comprises BHP’s former aluminium and manganese businesses and the South African energy coal and New South Wales metallurgical coal businesses. It also owns the Cannington silver/lead/zinc mine in northwest Queensland and the Cerro Matoso nickel mine in Colombia. Cannington silver mine and manganese operations deliver high returns but have relatively short reserve life. The company acquired Arizona Mining, which brings with it the high-grade and likely low-cost Hermosa deposit in the U.S.

(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

Oil Search Delivers Robust First-Half Cash Flows

The PNG oil and gas producer reported first-half 2021 underlying net profit after tax, up 460% to USD 139 million. Lower-than-expected operating costs were the driver of outperformance. 

Net operating cash flow increased 52% to USD 308 million. This allowed group net debt to fall USD 254 million in the first half to USD 2.10 billion, excluding operating leases. Leverage (ND/(ND+E)) was 27% with annualized first-half net debt/EBITDA still somewhat elevated at 2.3, though likely to improve given stronger second-half LNG prices.

Oil Search declared an interim USD 3.30 cent dividend, up from zero in the previous corresponding period and ahead Oil Search maintained all 2021 guidance including production of 25.5-28.5 mmboe, unit production costs of USD 10.50-11.50 per boe, and investment expenditure of USD 250 million-350 million. The current AUD 6.10 Santos share price implies an Oil Search value of AUD 3.83 and Oil Search shares trade close to that mark. 

Company’s Future Outlook

Oil Search shareholders will hope to achieve the ultimate value potential through Santos shares. It is forecasted a 70% increase in group production to 46 mmboe by late this decade, capturing PNG LNG expansion and the Papua LNG projects, but not yet inclusive of Alaska North Slope’s oil, pending Pikka front-end engineering and design, or FEED, outcome. This, regardless, drives an 11.8% 10-year group EBITDA CAGR to USD 1.85 billion by 2030, from a coronavirus-affected 2020 launch year.

Company Profile

Oil Search was founded in 1929 and operates all of Papua New Guinea’s oilfields. The PNG government holds a 10% interest. Oil Search had successfully run PNG oil fields since assuming operatorship from ExxonMobil in 2003. However, the tyranny of distance saw the large and high-quality gas fields largely stranded until 2014. The PNG LNG project is the first step to monetize those vast gas resources, again under the direction of ExxonMobil. First-stage construction is complete, with potential for expansion from two trains to five.

(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.