Tag: Commodities

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Commodities Trading Ideas & Charts

NiSource Kicks Off 2022 Regulatory Year With Constructive Rulings in Kentucky, Pennsylvania

Business Strategy and Outlook

After decades of deriving most of its income from natural gas distribution and midstream businesses, NiSource has transitioned to a more diversified earnings mix. About 60% of NiSource’s operating income comes from its six natural gas distribution utilities and 40% from its electric utility in Indiana following the 2015 separation from Columbia Pipeline Group. NiSource’s utilities have constructive regulatory frameworks that allow it to collect a cash return of and a cash return on the bulk of its capital investments within 18 months. 

In October 2020, NiSource sold its Columbia Gas of Massachusetts utility and received $1.1 billion of proceeds that it used to strengthen the balance sheet and prepare for its planned infrastructure investments. The sale came nearly two years after a natural gas explosion on NiSource’s Massachusetts system killed one person north of Boston. Insurance covered roughly half of the almost $2 billion of claims, penalties, and other expenses. Earnings are set to rebound quickly from their low in 2020 when COVID-19 pandemic costs, lower energy use, the Massachusetts utility sale, and a large equity issuance weighed on earnings. We expect modest customer growth combined with NiSource’s infrastructure growth investments to support 8% annual earnings growth and 6% annual dividend growth from 2021 to 2025.

Financial Strength

NiSource has issued a substantial amount of equity in the past few years in part to fund its large infrastructure growth projects and in part to cover liabilities arising from the Massachusetts gas explosion. This dilution and the sale of Columbia Gas of Massachusetts has kept earnings mostly flat since 2018.NiSource’s debt/capital topped 67% at year-end 2017, but huge equity infusions have brought that down to more sustainable levels in the mid-50% range. NiSource issued over $1 billion of common stock and $880 million of preferred stock in 2018 and 2019. The Massachusetts utility sale in 2020 raised $1.1 billion, and NiSource issued $862.5 million of convertible preferred equity units in early 2021. 

NiSource has grown its dividend nearly 40% since the 2015 Columbia Pipeline Group spin-off, but the growth has not been consistent. The company increased its dividend in mid-2016 by 6.5% and again by 6.1% in the first quarter of 2017, then by 11.4% in 2018. But the 2019 dividend increase was only 2.6% following the Boston gas explosion. NiSource is past the peak of its five-year capital spending plan and its equity needs shrink. 

Bulls Say’s 

  • The dividend to grow near 5% annually during the next few years before accelerating to keep pace with earnings in 2024 and beyond. 
  • NiSource should benefit from Indiana policymakers’ desire to cut the state’s carbon emissions by replacing coal generation with renewable energy, energy storage, and possibly hydrogen. 
  • New legislation has improved the regulatory framework in Indiana for NiSource’s electric and natural gas distribution utilities.

Company Profile 

NiSource is one of the nation’s largest natural gas distribution companies with approximately 3.5 million customers in Indiana, Kentucky, Maryland, Ohio, Pennsylvania, and Virginia. NiSource’s electric utility transmits and distributes electricity in northern Indiana to about 500,000 customers. The regulated electric utility also owns more than 3,000 megawatts of generation capacity, most of which is now coal-fired but is being replaced by natural gas and renewables.

(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

Total Energies Does Not Plan Quick Retreat From Oil and Gas Despite Planned Renewables Growth

Business Strategy and Outlook

Total Energies’ strategic plan aims to achieve net zero emissions by 2050 while delivering near-term financial performance in the event of a lower-oil-price environment. 

 Total has already started to move away from oil products with the conversion of its La Mede refinery to a renewable diesel producer. Conversion of the Grandpuits refinery to produce renewable diesel and bioplastics is set to follow. Together with coprocessing facilities at other refineries in Europe, the U.S., and Asia, Total expects to produce 100 thousand barrels a day of renewable diesel by 2030. Gross renewable generation capacity is expected to grow from about 10 gigawatts today to 35 GW by 2025 as Total invests a minimum of $3 billion per year or just over 20% of total spending from 2021. Current and planned capacity is primarily in solar, but Total is pushing further into floating offshore wind comprising 40% of planned growth, which should drive growth beyond 2025 and where it can leverage offshore capabilities from its oil and gas operations.

Financial Strength

Total remains one of the least leveraged global integrated firms with net debt to capital of 17.7% at the end of third-quarter 2021. Management aims to keep gearing below 20% and maintain an A credit rating. In 2021, Total expects net investments, including acquisitions and divestitures, close to $13 billion. Total committed to increasing the dividend by 5%-6% per year and repurchasing an incremental $5 billion worth of shares, but after suspending repurchases in 2020, abandoned any specific capital return targets. Instead, management has committed to supporting the dividend with oil prices as low as $40/bbl and will repurchase shares at higher oil prices when gearing is below 20%. As it is at that level now, management has resumed share repurchases starting in the fourth quarter of 2021. Going forward, Total plans to return up to 40% of additional cash flow if prices are above $60/bbl.

Bull Says

  • Despite reducing capital spending, Total expects to increase production 2% per year on average through 2025, led by growth in LNG projects. 
  • Already about 50% of Total’s production in 2020 and expected to grow, long-plateau production projects like LNG reduce decline rates and reinvestment necessary to maintain production levels.
  • Management has committed to supporting the dividend at $40/bbl. Combined with relatively low leverage, Total’s payout is one of the safer in the sector despite one of the highest yields.

Company Profile

TotalEnergies is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2020, it produced 1.5 million barrels of liquids and 7.2 billion cubic feet of natural gas per day. At year-end 2020, reserves stood at 12.3 billion barrels of oil equivalent, 43% of which are liquids. The company operates refineries with capacity of nearly 2.0 million barrels a day, primarily in Europe, distributes refined products in 65 countries, and manufactures commodity and specialty chemicals. It also holds a 19% interest in Russian oil company Novatek.

 (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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Newcrest focus on cost efficiency, capital discipline and optimisation

Business Strategy and Outlook

Newcrest accounts for less than 3% of global mine production and is a price taker. 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.

Operations are focused on the Asia-Pacific region, with production split roughly evenly between Australia and Papua New Guinea, or PNG, with a smaller contribution from the Americas. The company is a long-established low-cost producer, save a cost spike in 2013, which subsequently abated.

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. Excluding acquired Lihir ounces, gold equivalent reserves increased from 3.4 million ounces in 1992 to 78 million ounces in December 2017, while resources increased from 8.5 million ounces to 144 million ounces. Gold equivalent resources were added at less than AUD 20 per ounce. Reserves at the end of 2020 were 49 million ounces of gold and 6.8 million metric tons of copper.

Financial Strength 

The company’s balance sheet is sound. The company ended June 2021 with modest net cash of USD 0.2 billion. We expect net debt to grow to end fiscal 2022 to about USD 1.5 billion 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, we think the balance sheet is still sound. We forecast debt/EBITDA to peak slightly to around 0.7 in fiscal 2022 before declining gradually through the remainder of our 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. At the end of fiscal 2021, the company had USD 1.8 billion of cash and USD 1.6 billion of undrawn debt.

Bulls Say 

  • Gold companies can behave countercyclically. They provide a hedge to inflation risk and tend to 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’s reserves are massive and mine life is long, offering leverage to upwards movements in the gold price. 
  • 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 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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Higher Copper Price and Futures a Tailwind for Oz Minerals, but Shares Remain Overvalued

Business Strategy and Outlook

Oz Minerals is a midtier Australian miner, primarily exposed to copper and, to a lesser extent, gold. Prominent Hill and Carrapateena mine is fully owned by Oz Minerals Ltd.

Expected fiscal 2021 annual production at Prominent Hill of less than 70,000 tonnes of copper and 120,000 ounces of gold is globally small-scale. Barring a significant new discovery, life at Prominent Hill is likely to extend only incrementally with exploration. Cash costs have consistently been at competitive levels below USD 1.00 per pound since 2015, below the industry average. Prominent Hill output is likely to fall as the company processes stockpiles where grades are set to decline and eventually as those stockpiles exhaust around 2023-24. Regional exploration acreage around Prominent Hill is extensive and the company has focused on near mine areas with some success.

The Carrapateena mine, also in South Australia, produces about 70,000 tonnes of copper a year and is likely to expand to just over 110,000 a year from around 2028. Carrapateena comes with an approximate 20 year reserve life and a similar competitive position to Prominent Hill. 

Oz Minerals has targeted acquisition of advanced-stage exploration plays, development projects, or operatingmines. The company has built an encouraging pipeline of projects. Management developed Carrapateena to deliver a vastly more attractive project than initially planned. The acquisition of Brazil-based Avanco is a modest addition. Longer-term output hinges on successful acquisitions and/or exploration and development.

Higher Copper Price and Futures a Tailwind for Oz Minerals, but Shares Remain Overvalued

The fair value estimate as per Morningstar analyst remains at AUD 16.60 and the current near-record high copper price means the shares remain substantially overvalued.

We expect Oz Minerals to continue to benefit from near term strength in copper prices. This augments an already strong balance sheet with net cash. It is expected that copper prices will remain elevated at an average of USD 3.70 per pound to the end of 2024 and  prices to wane longer-term to USD 2.50 per pound from 2025 as the strong economic growth and post COVID-19 stimulus abate.

Financial Strength 

The balance sheet is sound with modest net cash at the end of March 2021. Single-commodity miners should have a conservative balance sheet and is considered as appropriate as per the viewpoint of Morningstar analyst. Longer-term, Oz Minerals could again start to generate significant excess cash flow, though if the company decides to push ahead with some of the potential development projects it has, this cash could largely be put to work and the firm could carry modest net debt at some points through our 10-year forecast period. The company is likely to further invest in Carrapateena, potentially develop the West Musgrave nickel/copper mine and some of the copper/gold assets acquired with Avanco Resources, as well to build and advance the company’s project pipeline. If an acquisition is made, the balance sheet might temporarily be more highly geared, but it seems unlikely Oz Minerals would buy a large new mine while it has so many internal development options.

Bulls Say 

  • Oz Minerals brings leverage to copper, a key metal for the emerging economies of China and India. 
  • Carrapateena extends Oz Minerals’ production of copper at a low operating cost. Successful development increases the likelihood nearby deposits could become economically viable. 
  • Oz Minerals holds significant exploration acreage around Prominent Hill and Carrapateena, with potential for life extensions and new discoveries. Management has done a creditable job of building a large and diverse pipeline of development options at different stages of maturity.

Company Profile

Oz Minerals is a midtier copper/gold producer. Prominent Hill produced about 100,000 tonnes 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 tonnes 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 tonnes 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.

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Xcel Energy Inc: Aims to deliver 100% carbon-free electricity by 2050.

Business Strategy and Outlook

Xcel Energy’s regulated gas and electric utilities serve customers across eight states and own infrastructure that ranges from nuclear plants to wind farms, making the company a barometer for the entire utilities sector. That barometer is signalling a clean energy future ahead. Xcel took an early lead in renewable energy development, especially wind energy across its central U.S. service territories. The company now plans to invest $26 billion in 2022-26, much of it going to renewable energy projects and electric grid infrastructure to support clean energy.

Xcel could spend more than $1 billion per year on renewable energy and other clean energy initiatives as its focus shifts from wind to solar. Transmission to support renewable energy represents about one third of its investment plan. Politicians and regulators in Colorado, Minnesota, and New Mexico are pushing aggressive environmental targets, which could extend Xcel’s growth potential. Xcel aims to deliver 100% carbon-free electricity by 2050.

Xcel’s investment plan gives investors a transparent runway of 7% annual earnings and dividend growth potential. Xcel has more regulatory risk than its peers because of its large investment plan.

Financial Strength

Xcel Energy has a strong financial profile. Its key challenge is financing $26 billion of capital investment during the next five years with minimal equity dilution. Most of Xcel’s planned investments benefit from favourable rate regulation partially offsetting their financing risk. However, regulatory lag remains a key issue. Xcel’s strong balance sheet has helped it raise capital at attractive rates. 

Xcel’s consolidated debt/capital leverage ratio could creep toward 60% during its heavy spending in 2022-23, it is expected normal levels around 55%, which includes $1.7 billion of long-term parent debt.

Xcel has been issuing large amounts of new debt since 2019 at coupon rates around 100 basis points above U.S. Treasury yields. Xcel took care of its equity needs for at least the next three years with a forward sale that it executed in late 2020 to raise $720.9 million for 11.845 million shares ($61 per share). This followed a $459 million forward sale initiated in late 2018 at $49 per share. We think these were good moves with the stock trading far above our fair value estimate when the deals priced. After five years of $0.08 per share annualized dividend increases, the board raised the dividend by $0.10 in 2019 and in 2020 and by $0.11 to $1.83 for 2021.

Bulls Say’s

  • Xcel has raised its dividend every year since 2003, including a 6% increase for 2021 to $1.83 per share. We expect similar dividend growth going forward. 
  • Renewable energy portfolio standards in Minnesota and Colorado are a key source of support for wind and solar projects.
  • The geography of Xcel’s service territories gives it among the best wind and solar resources in the U.S. and a foundation for growth

Company Profile 

Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with one third of its electricity sales coming from renewable energy.

(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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FMG reported a solid FY21 result reflecting the highest ever annual shipments

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.

FY21 Results Highlights : Relative to the pcp: 

  • Underlying EBITDA of US$16.4bn, was up +96% as Underlying EBITDA margin increased to 73% (from 65% in the pcp). 
  •  NPAT of US$10.3bn, was up +117% and represents a return on equity of 66%. EPS was US$3.35 (A$4.48). 
  • FMG achieved net cashflow from operating activities of US$12.6bn and free cashflow of US$9.0bn after investing US$3.6bn in capex. 
  • Fully franked final dividend of A$2.11 per share, increasing total dividends declared in FY21 to A$3.58 per share, equating to A$11.0bn and an 80% payout of NPAT. 
  •  FMG had cash on hand of US$6.9bn and net cash of US$2.7bn at year-end. Balance sheet remains strong with 19% gross gearing (below 30 to 40% target). Gross debt to EBITDA of 0.3x, was lower than 0.6x in FY20 and remains below target of 1-2x. 
  •  FMG revised its target to achieve carbon neutrality by 2030 (ten years earlier than previous target).

Operational performance highlights. Relative to pcp: 

  • Ore mined of 226.9m tonnes, was up +11%. 
  • FMG shipped a record 182.2m tonnes, up +2%; and sold 181.1mt, up 2%. 
  •  Average revenue of US$135.32/dmt, was up +72%. 
  •  FMG saw C1 cost of US$13.93/wmt, increase +8% but remains industry leading.

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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Another Extreme Texas Winter could Freeze Vistra’s Buyback Plan

Business Strategy and Outlook 

Vistra Energy’s emergence from the Energy Future Holdings bankruptcy in 2016 has been a success for the most part. Despite Vistra’s sensitivity to volatile commodity prices and legacy fossil fuel generation, it has produced solid returns. The only significant bump in the road has been winter storm Uri that hit Texas in February 2021, causing more than $2 billion of losses.

Vistra’s clean post bankruptcy balance sheet allowed it to acquire Dynegy in 2018 for $2.27 billion, more than tripling the size of its generation fleet and introducing Vistra to power markets outside Texas, notably the Midwest and Northeast. The rock-bottom price Vistra paid and cost synergies have made the deal value-accretive. Vistra produces substantial free cash flow before growth given minimal core investment needs. Management is expanding the retail energy business to hedge its wholesale generation market exposure and is investing in clean energy projects like utility-scale solar and batteries.

Financial Strength

After the setback from the Texas winter storm losses in February 2021, Vistra’s quest to earn investment-grade credit ratings and reach 2.5 net debt/EBITDA stalled. However, it remains in a solid financial position with plenty of liquidity. Management has shifted its focus toward returning capital to shareholders through stock buybacks and dividends rather than earning investment-grade credit ratings immediately. Vistra’s $1 billion preferred issuance in late 2021 with an 8% dividend floor all but ensures it will take several more years to earn investment-grade ratings. 

The board authorized a $2 billion share repurchase plan in late 2021, replacing a largely unused $1.5 billion plan from 2020. The combination of stock buybacks and $300 million annual allocation to the dividend means the dividend could top $1.00 per share by 2025, up from $0.50 when the board initiated the dividend in 2019 and surpassing management’s initial 6%-8% annual growth target. Vistra exited bankruptcy in 2016 with just $4.5 billion of medium-term debt. Consolidated debt grew to $11 billion after the 2018 Dynegy acquisition before Vistra began reducing its leverage.

Bulls Say’s

  • Vistra’s debt reduction in 2019-20 gives it financial flexibility to repurchase stock, raise the dividend, and invest in growth projects in 2022 and beyond. 
  • Vistra’s gas fleet benefits from historically low gas prices in most of the regions where it operates, allowing for higher operating margins. 
  • The retail-wholesale integrated business model reduces risk and market transaction costs, allowing Vistra to be a low-cost provider, especially in its primary Texas market.

Company Profile 

Vistra Energy emerged from the Energy Future Holdings bankruptcy as a stand-alone entity in 2016. Vistra is one of the largest power producers and retail energy providers in the U.S. It owns and operates 38 gigawatts of nuclear, coal, and natural gas generation in its wholesale generation segment after acquiring Dynegy in 2018. Its retail electricity segment serves 5 million customers in 20 states. Vistra’s retail business serves almost one third of all Texas electricity consumers

(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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Rio Tinto focus to build a strong balance sheet, tightly control investments and return cash to shareholders

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. 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.

Rio Tinto has a large portfolio of long-lived assets with low operating costs.The invested capital base was inflated by substantial procyclical investment during the height of the China boom, the rot setting in by overpaying for Alcan, and 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 that the bloated invested capital base doesn’t permit returns in excess of the cost of capital. The firm’s assets are large, however, and despite being overcapitalised, generally have low operating costs.

Morningstar analyst have lowered the fair value estimate for Rio Tinto to USD 66.00 per ADR from USD 69.00 per ADR previously. The cut mainly reflects lower near-term iron ore price forecasts, with higher copper and aluminium prices prices a partial offset.

Financial Strength

Rio Tinto’s balance sheet is strong with net debt standing of less than USD 2 billion at end 2020. Net debt/adjusted EBITDA for 2021 is very comfortable at 0.1. 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. 

Bulls Say 

  • 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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Fortescue has grown rapidly; Product discounts remain a competitive disadvantage

Business Strategy and Outlook

Fortescue Metals is the world’s fourth-largest iron ore exporter. Margins are well below industry leaders. 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. 

Fortescue has grown rapidly due to highly favourable iron ore prices, aggressive management, and historically low corporate interest rates. Fortescue has expanded its capacity unprecedented and built two thirds of its capacity at the peak of the capital cycle baked in a higher capital base than peers. This means returns are likely to lag those of the industry leaders, which benefit from building capacity at times when the capital cost per unit of output was, on average, much lower.

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.

Morningstar analyst lowered fair value estimate for 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 the previous fair value estimate. 

Financial Strength

Fortescue Metals Group’s balance sheet is strong, due 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. Net debt/EBITDA is comfortable and likely to remain so for the foreseeable future. It is expected that given 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 

  • 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. O
  • 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.

(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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Alliant Energy’s Renewable Energy Growth accelerates Advancement

Business Strategy and Outlook

Alliant Energy investing nearly $7 billion in 2021-25 estimates company to achieve the midpoint of management’s 5% -7% target. Management estimates another $7 billion – $9 billion of capital investment opportunities in 2025-29.

Interstate Power and Light continues to build out renewable energy in the state. In addition to its 1,300 megawatts of wind generation in Iowa, for which the company earns a premium return on equity, the subsidiary now aims to install 400 MW of solar generation in the state. We continue to believe Iowa offers ample renewable energy investment opportunities–both wind and solar–to support the subsidiary’s Clean Energy Blueprint, which plans to eliminate all coal generation by 2040 and achieve net-zero carbon dioxide emissions by 2050.

At Wisconsin Power and Light, renewable energy is also a focus as the company begins replacing retiring coal generation. WPL plans nearly 1,100 MW of solar energy investments with battery storage. WPL has similar clean energy goals to Iowa, seeking to reduce carbon emissions by 50% by 2030, eliminate coal from its coal generation fleet by 2040, and achieve net-zero carbon emissions from its generation fleet by 2050. Across both subsidiaries, renewable energy investments account for over 20% of rate base.

Alliant benefits from operating in two of the most constructive regulatory jurisdictions. To maintain earned returns near allowed returns during this period of high investment, management has worked to reduced regulatory lag, received above-average allowed returns across its subsidiaries, and aims to continue to reduce operating costs for the near term.

Financial Strength

It is estimated a capital of $7 billion to be planned spending between 2021 and 2025, Alliant will be a frequent debt issuer. The company will issue equity to maintain its allowed capital ratios. The company has manageable long-term debt maturities, and it is anticipated that it will be able to refinance its debt as it comes due. It is expected that total debt/EBITDA to remain around 5.0 times. Even with its large capital expenditure program, Alliant maintains a strong balance sheet and an investment-grade credit rating. The total debt/capital is projected to remain below 55% through forecast. Interest coverage should remain around 5 times throughout. Alliant has ample liquidity with cash on hand and sufficient borrowing capacity available under its revolving credit facilities. Alliant’s dividend is well covered with its regulated utilities’ earnings and expect the dividend pay-out ratio to remain between 60% and 70%.

Bulls Say’s

  • Alliant’s earnings growth prospects are robust, supported by renewable energy projects that have regulatory support. 
  • Regulators in Iowa and Wisconsin are embracing renewable energy, providing additional growth opportunities with favourable ratemaking. 
  • The company operates in constructive jurisdictions, supporting returns and capital projects.

Company Profile 

Alliant Energy is the parent of two regulated utilities, Interstate Power and Light and Wisconsin Power and Light, serving nearly 1 million electricity and natural gas customers and approximately 400,000 natural gas-only customers. Both subsidiaries engage in the generation and distribution of electricity and the distribution and transportation of natural gas. Alliant also owns a 16% interest in American Transmission Co. 

(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.