Tag: Commodities

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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)

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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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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)

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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)

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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)

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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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Steel and Scrap Metal Markets: a Sunny F.Y. 22 Outlook for Sims

Steel prices remain elevated as a result of robust demand from the automotive and construction sectors amid the global economic recovery from the corona virus shock of 2020. 

Both ferrous and non-ferrous scrap metal prices have improved substantially from their COVID-19-induced lows of April 2020. In turn, rising scrap prices drove continued improvement in Sims’ scrap volumes in the second half of fiscal 2021. The initial outbreak of the pandemic also weighed on scrap market volumes and prices in early fiscal 2021. 

Sims’ balance sheet remains well positioned amid the rough and tumble of scrap metal markets. Rising scrap prices and intake volumes drove working capital to its highest level in a decade. Nonetheless, Sims finished the year with an AUD8 million net cash position.

Company’s Future Outlook

With the conductive conditions expected to hold in steel and scrap metal markets into fiscal 2022, the company raise fiscal 2022 EBIT estimate by a sizable 145% to AUD 625 million. However, with appreciably lower scrap prices, and correspondingly lower operating margins anticipated longer-term, no change to AUD 11.50 per share FVE. It is expected that the scrap volumes to grow at a robust 20% in fiscal 2022 amid the current cyclical upswing. It is anticipated that Sims’ working capital balance to increase further during fiscal 2022—as a result of rising scrap volumes and buoyant scrap prices.

Company Profile

Sims Limited (ASX: SGM) was created from the 2008 merger of two leading metal-recycling companies: Australia’s Sims Group and America’s Metal Management. The company is the world’s largest publicly traded metal and electronics recycler, with roughly half of its revenue generated in North America and the balance split between Australasia and Europe.

 (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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Santos Limited (ASX: STO)

  • Offers a number of core assets within its portfolio (no single asset risk).
  • On-going focus on cost reduction and positioning of the business for lower oil price environment.
  • Potential M&A activity – the Company has been the subject of several takeover offers.
  • Ramp up to GLNG.
  • Strong balance sheet position.
  • Strategic shareholders (potential corporate activity).

Key Risks

  • Supply and demand imbalance in global oil/gas markets.
  • Lower oil / LNG prices.
  • Not meeting cost-out targets (e.g. reducing breakeven oil cash price).
  • Production disruptions (not meeting GLNG ramp up targets).
  • Strategic investors sell down their stake or block any potential M& A activity.

1H21 Results Highlights

Relative to the pcp and in US$: Production of 47.3mmboe was up +23%. Sales volume of 53.8mmboe was up +15%. Product sales revenue of $2,040m was up +22%. EBITDAX of $1,231 was up +24%. Underlying profit of $317m is up +50%. STO achieved a net profit of $354m versus a loss of -$289m in FY20. Free cash flow of $572m was up +33%. The Board declared an interim dividend of 5.5cps (versus 2.1 in FY20) and equates to 20% of first half free cash flow, in-line with STO’s sustainable dividend policy which targets a range of 10% to 30% payout of free cash flow. Reported NPAT of $354m includes net gains on asset sales and is significantly higher than the PCP due to impairments included in the previous half-year result.

Company Description  

Santos Limited (STO) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naptha and liquid petroleum gas. STO conducts major onshore and offshore petroleum exploration and production activities in Australia, Papua New Guinea, Indonesia, and Vietnam. The company also transports crude oil by pipeline.  

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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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Beach Energy Ltd (ASX: BPT) Updates

solar power panels in clean energy generating station
  • The share price has de-rated from a recent high by ~18% (which is valid), provides a buying opportunity in our view. 
  • The acquisition of Lattice Energy provides a stable mix of producing assets. 
  • The Company is currently on a 5-year capital expenditure program. The execution and delivery of this program could see upside risks to consensus estimates. 
  • Favorable industry conditions on the east coast gas market over the long-term –i.e. tight supply could lead to higher gas prices.
  • Strong balance sheet 
  • Potential M&A activity. 

Key Risks

  • Execution risk – Drilling and exploration risk. Unable to resolve the issue at Western Flank, leading to long-term downgrades to key estimates for the project.
  • Commodity price risk – movement in oil & gas price will impact unconstructed / re-contracting volumes. 
  • Regulatory risk – such as changes in tax regimes which adversely impact profitability. 
  • M&A risk – value destructive acquisition in order to add growth assets.
  • Financial risk – potentially deeply discounted equity rising to fund operating & exploration activities should debt markets tighten up due external macro factors. 
  • Currency risk 

FY21 Results Highlights

NPAT of $317m impacted by $117m non-cash, pre-tax impairment Underlying NPAT of $363m. Underlying EBITDAX of $1,010m and underlying EBITDA of $953m, underpinned by favourable arbitral outcome for the carbon liability associated with a Kupe GSA. BPT retained a strong balance sheet with net debt of $48m, net gearing of 1.5% and liquidity of $402m at 30 June 2021. Management highlighted BPT is in net cash position as of 13 August 2021. The Board declared a final dividend of 1.0 cps, fully franked

Company Description

Beach Energy Ltd (BPT) is an oil & natural gas exploration and production company. BPT has both onshore and offshore operations in five basins (Perth, Cooper, Victoria, and Tasmania & NZ) across Australia and New Zealand. The Company is a key supplier of gas into the Australian east coast gas market. The Company also owns strategic oil and gas infrastructure (Moomba processing facility & Otway Gas Plan

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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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Air Product’s Fiscal Q3 Results & Unveils Updated Capital Deployment Plan

public industrial gas companies have consistently delivered lucrative returns because of their economic moats. Demand for industrial gases is strongly correlated to industrial production. As such, organic revenue growth will largely depend on global economic conditions. Since Seifi Ghasemi was appointed CEO in 2014, new management has launched several initiatives that drastically improved Air Products’ profitability, raising EBITDA margins by over 1,500 basis points.  Air Products is poised for rapid growth over the next few years due to its 10-year capital allocation plan. The industrial gas firm aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027 and has already either spent or committed roughly $18 billion of that amount.

Financial Strength 

Management has indicated that maintaining an investment-grade credit rating is a priority. The company has used proceeds from its divestments of noncore operations (including the spin-off of its electronic materials division as Versum Materials in 2016 and the sale of its specialty additives business to Evonik in 2017) to reduce debt and fuel investment.The company held roughly $8 billion of gross debt as of Dec. 31, 2020, compared with $6.2 billion in cash and short-term investments. Liquidity includes an undrawn $2.5 billion multicurrency revolving credit facility, which is also used to support a commercial paper program. 

Narrow-moat rated Air Products reported mixed fiscal third quarter results, as its sales of $2,605 million beat the FactSet consensus estimate of $2,498 million, but adjusted EPS of $2.31 fell $0.05 short of expectations. The industrial gas firm also lowered the top end of its full-year fiscal 2021 adjusted EPS guidance range by a nickel, from $8.95-$9.10 to $8.95-$9.05. Fiscal third-quarter sales increased 26% year over year and 4% sequentially, driven by a continued recovery in the firm’s end markets.

Air Products unveiled its updated capital deployment plan and aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027. The company has already either spent or committed roughly $17.8 billion of that amount. Management said on the earnings call that of the remaining $12.2 billion, it expects to invest roughly $5 billion to support the existing business and the remainder in large growth projects, focusing on opportunities in gasification, green hydrogen, and carbon capture.

Bulls Say’s 

  • Air Products is poised for rapid growth due to business opportunities that drive its ambitious $30 billion capital allocation plan.
  • After acquiring Shell’s and GE’s gasification businesses in 2018, Air Products is the global leader in this segment and is poised to benefit from growing coal gasification in China and India.
  • The company’s focus on on-site investments will result in a derisked portfolio with more stable cash flows.

Company Profile 

Since its founding in 1940, Air Products has become one of the leading industrial gas suppliers globally, with operations in 50 countries and 19,000 employees. The company is the largest supplier of hydrogen and helium in the world. It has a unique portfolio serving customers in a number of industries, including chemicals, energy, healthcare, metals, and electronics. Air Products generated $8.9 billion in revenue in fiscal 2020.

(Source: Morningstar)

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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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Investors Overlooking Occidental’s long term Cash Generation Potential

fair value is estimated to $37 per share, from $32. The increase primarily reflects a reduced cost of capital assumption. Given how quickly the firm is deleveraging it is appropriate to penalize the firm with an above average cost of debt.

The preoccupation with near-term capital returns has driven investors away from Occidental. The firm is still coping with uncomfortable leverage ratios following the ill-timed 2019 acquisition of Anadarko Petroleum, making debt reduction the only prudent use of its excess cash. The market is overlooking the firm’s relatively modest base decline. 

Oxy has a diversified portfolio, with oil and gas contributions from non-shale assets in the Middle East and the Gulf of Mexico to complement its unconventional operations in the Permian Basin and the DJ Basin. So it can more easily sustain its production than shale pure plays that must continually invest in new drilling to offset steep declines from existing wells.

Company’s performance

The firm’s enhanced oil recovery operations further reduces the base decline. The firm also generates stable cash flows from its extensive midstream and chemical segments. As a result, the firm can hold its volumes flat with a long term reinvestment rate of about 35%. And when the firm reaches its target debt level, which it can realistically do in 6 months from now, given how quickly it is generating excess cash, then that very low reinvestment rate should leave plenty of free cash to distribute. The three firms we highlighted earlier–Pioneer, Devon, and EOG–have 2025 discretionary cash flow yields of about 10% at current prices. 

Company’s Future Outlook

That means the market is baking in long-term dividend yields of around 5%, assuming these firms plan to return half of their surplus cash. In contrast, Oxy’s discretionary cash flow yields in 2025, after accounting for all capital spending and preferred dividends, is over 20% at the current price. This underscores our view that shares are undervalued.

Company Profile

Occidental Petroleum Corporation (NYSE: OXY) is an independent exploration and production company with operations in the United States, Latin America, and the Middle East. At the end of 2020, the company reported net proved reserves of 2.9 billion barrels of oil equivalent. Net production averaged 1,306 thousand barrels of oil equivalent per day in 2020 at a ratio of 74% oil and natural gas liquids and 26% natural gas.

 (Source: Morningstar)

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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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AGL’s Earnings Falling as Expected but Light at the End of the Tunnel

in line with our expectations and in the middle of the guidance range. Earnings are expected to fall again in fiscal 2022 as management has been flagging for some time. Guidance is for underlying NPAT of AUD 220 million to AUD 340 million, with the midpoint down 48% in 2021. AGL’s cheap coal supply underpins its competitive advantage.

Competitors with shorter dated coal supply contracts should start to be hurt by high coal prices in coming years, potentially forcing them out of the market and pushing electricity prices higher. EBITDA fell 21% to AUD 1.6 billion in fiscal 2021 on lower electricity prices and higher gas supply costs. Headwinds from low electricity prices continue into fiscal 2022, and management is focused on reducing operating costs and maintenance capital expenditure through efficiency initiatives.

EBITDA rose 16% to AUD 337 million on cost savings and higher retail gas prices. The retail business has made a few interesting acquisitions recently to expand its geographic footprint to the West Coast, widen its service offering to include telecommunications and solar installations, and benefit from economies of scale. This should generate good returns.

Company’s Future Outlook

It is estimated that NPAT bottoms in fiscal 2023 at AUD 231 million before recovering back to AUD 442 million by 2026. The stock materially undervalued on a long-term view. Based on the current share price, it is forecasted to have a PE ratio of about 10 by 2026. Far more important is the expected recovery in electricity prices, given AGL is a huge producer of electricity through its three coal-fired power stations. It is expected that AGL’s financial position is sound; though there is modest risk given, banks are making life difficult by trying to reduce lending to coal power stations.

Company Profile

AGL Energy Ltd (ASX: AGL) is one of Australia’s largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.

(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.