Tag: Commodities

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Commodities Trading Ideas & Charts

AGL Posted Strong 1H22 result with Potential Capital Management and Demerger initiative

Investment Thesis

  • Energy margins bottom out and could potentially start to improve (higher customer and volume numbers). 
  • Strong cash flow business which provided flexibility to deploy cash in growth opportunities and capital management.
  • On-going focus on costs and digitalization should support margins.
  • Potential capital management initiatives (e.g., buyback).
  • Demerger into AGL Australia and Accel may unlock shareholder value. 
  • Potential favourable changes to the regulatory environment. 
  • Potential M&A – AGL has already received a takeover bid at $7.50 per share which was rejected by the AGL Board. 

Key Risk

  • Competitive pressures leading to margin erosion.
  • Cost pressure and fuel supply issues leads to margin erosion. 
  • Increase in supply leading depressed prices. 
  • Regulatory risk (policy uncertainty), such recent regulation in electricity markets [ Victorian Default Offer (VDO) and Default Market Offer (DMO)]
  • Un-scheduled shutdowns impacting earnings. 

1H22 headline results

  • 1H22 group underlying profit after tax of $194m, was down -41% on pcp or down -23% excluding the non-recurrence of the Loy Yang outage insurance proceeds. In term of AGL Australia, the key drivers of performance were consumer energy margin was down predominantly due to the impact of milder weather on demand, higher cost of energy with increased residential solar volumes, and margin compression from customers switching to lower priced products. Further, supply and trading gas margin was lower as expected, impacted by lower priced legacy supply contracts rolling off, during the 2H21. With respect to Accel Energy, trading and origination electricity margin were lower due to lower contracted electricity prices and lower offtake sales to consumer electricity resulting from increased penetration of solar. Providing some positive offsets to underlying profit was positive movement in centrally managed expenses driven by cost-out initiatives, favourable movement in depreciation due to the asset impairments recognized in FY21 and lower tax expense (reflecting the fall in profit). 
  •  Underlying cash flow from operations was up +8% YoY, driven by a large inflow from margin calls versus an outflow pcp and positive working capital movements, which was able to more than offset the decline in underlying EBITDA
  • FY Q21 Results 
  • 1H22 headline result. C

Company Profile

AGL Energy Limited (AGL) is one of Australia’s leading integrated energy companies and the largest ASX listed owner, operator and developer of renewable energy generation in Australia. The company sells and distributes gas and electricity. Further, it also retails and wholesales energy and fuel products to customers throughout Australia. The business operates four main segments: Energy Markets, Group Operations, New Energy and Investments.

(Source: Banyantree)

  • Relative to the pcp: (1) 

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

NRG Narrows Winter Storm Uri Loss, Moves Forward With Capital Allocation Plan

Business Strategy and Outlook

NRG Energy has completed its latest strategic shift following the $3.625 billion acquisition of Direct Energy in January 2021, the sale of most of its Northeast power generation fleet, and the planned closure of four Midwest power plants. A higher share of retail energy earnings helps offset the long-term threat to NRG’s legacy fossil fuel generation fleet as renewable energy grows. NRG will benefit the most if electricity demand grows in its key markets, particularly Texas and the Northeast. In Texas, brief summer heat spells in 2018 and 2019 along with Winter Storm Uri in February 2021 show that growing demand can also create more energy price volatility and risk. Uri resulted in $1 billion of gross losses for NRG in just two weeks. 

Despite offsetting much of those one-time losses, it’s uncertain how energy market reforms in Texas will impact NRG in the long run. NRG’s transformation has taken twists and turns during the last five years, ultimately shrinking its wholesale generation business and increasing its retail energy business. Between 2016 and 2020, NRG divested half of its generation fleet, brought in nearly $3 billion of cash, and eliminated $10 billion of debt. In spring 2017, NRG sent subsidiary GenOn Energy into bankruptcy and in 2018, NRG sold its renewable energy business, its 47% stake in NRG Yield, and its South Central generation.

Financial Strength

NRG’s transformation, which started in mid-2017, simplified its balance sheet and improved its credit metrics. Before the Direct Energy acquisition, NRG had cut its recourse debt below $6 billion and was on track to reach investment-grade credit metrics by the end of 2020. The all-cash Direct Energy acquisition and losses from the Texas winter storm in February 2021 push that back slightly. Management is targeting 2.5-2.75 times net debt/EBITDA, a level it reached in 2019 but might not reach again until 2023 or later. The winter storm losses led management to scale back its 2021 debt reduction target to less than $300 million from the pre-storm $1.05 billion target. The board’s decision to initiate a $1 billion stock repurchase plan in late 2021 suggests NRG’s capital allocation focus has shifted away from balance sheet repair. Lower capital expenditures should boost cash flow as NRG adjusts to maintenance levels at its core business. The retail business requires little capital investment.  

The $3 billion of cash proceeds from the renewable energy, NRG Yield, and South Central business sales helped NRG finance the Direct Energy acquisition with no new equity. Management reset the dividend at $1.20 per share annualized in 2020, up from $0.12 in 2019. NRG plans to pay a $1.40 per share annualized dividend in 2022. Robust free cash flow and share buybacks should allow management to meet its 7%-9% dividend growth target easily. Before the 2017-18 restructuring, NRG carried $19.5 billion of consolidated debt at year-end 2015, but only $7.9 billion was recourse parent debt. The rest was nonrecourse debt at GenOn Energy, NRG Yield, or project financing. The GenOn bankruptcy eliminated $2.7 billion of debt, and the 2018 divestitures eliminated another $7 billion of debt. NRG used $2 billion of cash proceeds from its 2018 asset sales to pay down parent debt and repurchase $1.25 billion of stock. NRG bought back $1.6 billion of stock in 2019-20 before the Direct Energy acquisition.

Bulls Say’s

  • NRG’s transformation in 2017-20 cut the business in half, improved its credit metrics, and generated substantial cash to use for the dividend, stock buybacks, and acquisitions like Direct Energy. 
  • NRG’s match between its wholesale generation earnings and its retail supply earnings provides a hedge that stabilizes consolidated earnings. 
  • NRG’s primary operations are in Texas, which we think will have among the fastest electricity demand growth of any state during the next decade.

Company Profile 

NRG Energy is one of the largest retail energy providers in the U.S., with 7 million customers, including its 2021 acquisition of Direct Energy. It also is one of the largest U.S. independent power producers, with 16 gigawatts of nuclear, coal, gas, and oil power generation capacity primarily in Texas. Since 2018, NRG has divested its 47% stake in NRG Yield, among other renewable energy and conventional generation investments. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.

(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

S32 reported strong 1H22 results driven by higher commodities prices and strong production results

Investment Thesis

  • Prices of S32’s key commodities expected to moderate or be relatively flat relative to FY21 realized prices.
  • Management highlighted “FY22 guidance is unchanged with the exception of non-operated Brazil Alumina and our underground base metals operation Cannington. Separately volumes at Mozal Aluminium and Cerro Matoso are expected to lift from FY21 following our investment in high returning improvement projects that will increase production into currently favourable markets for aluminium and nickel”. 
  • Analysts estimate the Company will produce significant free cash flow over the next three years; adequate to support growth and capital management.
  • Significant cash on the balance provides flexibility = capital management. 
  • The Board has resolved to further expand S32’s capital management program by $110m to $2.1bn, leaving $302m to be returned to shareholders by 2 September 2022. 
  • The Company is still paying a dividend despite the uncertainty and volatility.   
  • Both Standard and Poor’s and Moody’s reaffirmed their respective BBB+ and Baa1 credit ratings.

Key Risk

  • Decline in key commodity prices.
  • Significant shock to global growth. 
  • Cost blowouts (inflationary pressures) / production disruptions.
  • Company fails to deliver on adequate capital management initiatives.
  • Adverse movement in currencies. 
  • Value destructive acquisition. 

1H22 Results Highlights. Relative to the pcp: 

  • Underlying revenue increased +32% to $4.602m driven by higher prices for most commodities, which combined with -4.6% reduction in total cost base amid divestment of South Africa Energy Coal, led to underlying EBITDA increasing +138% to $1,871m with margins improving +19.7% to 44%. 
  • Underlying EBIT increased +288% to $1,514m with margin improving +23.5% to 35.5%, further benefitting from a reduction in underlying depreciation and amortisation following the recognition of a non-cash impairment charge for Illawarra Metallurgical Coal in FY21. 
  •  Underlying earnings increased +638% to $1,004m and statutory profit after tax increased +1847% to $1,032m, benefiting from portfolio changes completed in FY21 and a broad recovery in commodity prices.

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 sustainably 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. 

  • Relative to the pcp: (1) 

(Source: Banyantree)

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

Origin Energy Ltd signals to exit coal-fired power generation; Replacing the plant with a large-scale battery

Investment Thesis

  • Higher oil prices benefit ORG’s APLNG project (higher revenues).
  • Balance sheet position is being restored with management focused on getting the debt covenants back to an investment grade level.
  • Achieving milestones within the APLNG project.
  • On-going focus on operating cost and capital expenditure reduction.
  • Increasing dividend profile and with a restored balance sheet the Company can also consider other capital management initiatives. 
  • Rationalization of asset portfolio, including asset sales and the IPO of its conventional upstream business should help improve the balance sheet position.  

Key Risks

  • Exploration and production risks.
  • Lower energy prices, particularly oil prices (for its APLNG project). 
  • Structural change in energy markets & increased competition.  
  • Not meeting cost-out targets. 
  • Highly geared balance sheet, with the company not being able to reduce debt fast enough. 

1H22 Key Highlights

  • Underlying EBITDA declined -4.8% over pcp to $1,099m, as increased earnings from Australia Pacific LNG amid higher oil and gas prices were more than offset by expected lower earnings in Energy Markets reflecting lower retail tariffs (set in FY21 when wholesale electricity prices were at lows due to subdued economic activity and increased renewables penetration) and higher energy procurement costs. 
  • Underlying profit increased +18% over pcp to $268m, driven by strong commodity prices, however, the Company recorded statutory loss of $131m, reflecting the one-off impairment and net capital gains tax expense associated with the $2bn sale of its 10% interest in Australia Pacific LNG. 
  •  Operating cash flow was an outflow of $79m vs inflow of $669m in pcp, amid lower earnings from Energy markets, higher working capital primarily due to timing of LNG cargo delivery and oil hedging and LNG trading losses. FCF (including major growth projects of Octopus equity investment of $260m and Kraken licence implementation costs of $37m) was an outflow of $112m vs inflow of $594m in pcp. 
  • Adjusted net debt increased +10.6% over 2H21 to $5.133bn, driven by the consideration associated with the investment in Octopus and higher working capital associated with the payment for an LNG cargo partially offset by APLNG cash distributions. (5) The Board declared an unfranked interim dividend of 12.5cps, representing 66% of FCF (excluding major growth projects), with partial franking expected to be restored in FY23.

Sale of 10% interest in APLNG – expected to restore balance sheet flexibility

Management executed an agreement to sell 10% of APLNG for net proceeds of $2.12bn (ORG retains 27.5% of shareholding, existing two APLNG board seats and upstream operatorship), with sale expected to be completed in 3Q22 (first half of CY22) and proceeds used to restore balance sheet flexibility with post sale adjusted Net Debt/adjusted Underlying EBITDA and gearing ratio declining to lower end of the target ranges of 2-3x and 20-30% from current levels of 3.9x and 34%, respectively. It will also provide FY22 net interest saving of $45-65m

Coal-fired generation

Management has submitted notice to AEMO for the potential early retirement of Eraring Power Station in August 2025 (vs prior targeted closure in 2032) and plans to install a large-scale battery of up to 700 MW at the site.

Company Profile

Origin Energy (ORG) is an integrated energy company with operations in exploration, production, generation and the sale of energy to millions of households and businesses across Australia. The Company has extensive operations across Australia and New Zealand and pursuing opportunities in the fast-growing energy markets of Asia and South America. The Company has two main segments: (1) Energy Markets – retail sales of electricity, gas and other customer solutions; electricity generation; and wholesale trading of electricity and gas. (2) Integrated Gas – consists of upstream exploration, development and production; the segment also holds the 37.5% ownership in Asia Pacific LNG project (APLNG). 

  • Sale of 10% inte(Sourc                    (Source: Banyantree)

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

EOG Resources scale and double premium drilling strategy support its narrow economic moat

Business Strategy and Outlook

EOG Resources is one of the largest independent oil exploration and production companies. It derives almost all of its production from shale fields in the U.S., with a small incremental contribution from Trinidad. The firm differentiates itself by attempting to identify prospective areas before most peers catch on, enabling it to secure leasehold at attractive rates (rather than overpaying for land after the market overheats). It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin (Wyoming) and a new natural gas play in southern Texas that the firm has christened “Dorado.”

The firm’s acreage contains over 10,000 potential drilling locations that management designates as “premium.” These are expected to generate internal rates of return of at least 30% (assuming $40/bbl WTI and $2.50/mcf natural gas). However, management is now prioritizing a sizable subset, 6,000-plus locations, designated “double premium.” These are expected to deliver twice the returns at the same commodity prices. Opportunities that don’t currently satisfy this criteria may be upgraded later, if the company can reduce the expected development cost or boost the likely flow rate of the well. During the past several years, EOG added more premium locations than it drilled, resulting in a net increase to its premium drilling opportunities, and the firm expects to do the same with its double premium inventory.

Financial Strength

Overall, EOG’s financial health is excellent compared with peers, giving it the ability to tolerate prolonged periods of weak commodity prices, if necessary. It has more cash than debt, generates substantial free cash under a wide range of commodity scenarios, and aims to retain a substantial cash cushion to enable it to take advantage of downcycles by repurchasing stock without unduly stressing the balance sheet at an inopportune time.The firm holds about $5.1 billion of debt, resulting in very low leverage ratios. At the end of the most recent reporting period, debt/capital was 19% and net debt/EBITDA was slightly negative. Furthermore, the firm also has a comfortable liquidity stockpile, with $5 billion cash and another $2 billion available on its undrawn revolver (though a portion of this will be used to fund the firm’s $600 million special dividend payable March).

Bulls Say’s

  • EOG is among the most technically proficient operators in the business. Initial production rates from its shale wells consistently exceed industry averages. 
  • EOG’s vast inventory of premium drilling locations provides a long runway of low-cost resources. 
  • EOG often adds new premium drilling opportunities to its queue via exploration or by using improved knowhow and technology to “upgrade” opportunities that did not previously qualify.

Company Profile 

EOG Resources is an oil and gas producer with acreage in several U.S. shale plays, including the Permian Basin, the Eagle Ford, and the Bakken. At the end of 2021, it reported net proved reserves of 3.7 billion barrels of oil equivalent. Net production averaged 829 thousand barrels of oil equivalent per day in 2021 at a ratio of 72% oil and natural gas liquids and 28% natural gas.

(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

Woodside Petroleum delivered strong FY21 results

Investment Thesis

  • Since our Buy recommendation in our last report, WPL’s share price has appreciated 43.1% – We acknowledge our positive view on oil and gas prices across 2022, and the quality of WPL and BHP’s assets but recommend investors take profits and downgrade our recommendation as we yield on the side of caution, before we see how the WPL/BHP’s combined entity trades and its first year of audited financials.   
  • Quality assets (NWS, Pluto, Australia Oil, Browse, Wheatstone) with superior free cash flow breakeven price relative to peers. 
  • On-going focus on cost reduction and positioning of the business for a lower oil price environment.
  • Improving oil and gas prices, which should see earnings improve. 
  • Increasing LNG demand, with WPL well positioned to fulfill this. 
  • Solid balance sheet position.
  • Strong free cash flow generation.
  • Potential exploration success in Myanmar, Senegal, Gabon. However, we have not factored any success into our forecasts + valuation.
  • Whilst the change in CEO could result in some uncertainty around future strategy, it could also be an opportunity to refresh the strategy with a “fresh” set of eyes. The Board has reiterated that current growth plans will be retained. 

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.

FY21 Result Highlights

  • Operating revenue of $6,962m, up +93%, driven by annual sales volume 111.6MMboe at realised price of $60.30 per boe, up +86%.
  • NPAT of $1,983m, up +149%. Underlying NPAT of $1,620m, up +262%. Unit production cost of $5.30 per boe.
  • Operating cash flow of $3,792m, up +105%.
  • Free cash flow of $851m.
  • At FY21-end, WPL had cash on hand of $3,025m and liquidity of $6,125m. Net debt at year-end was $3,772m and gearing of 21.9% (at the lower end of targeted 15-35% gearing).

Company Profile 

Woodside Petroleum Ltd (WPL) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naptha and liquid petroleum gas. WPL owns producing assets in the North-West Shelf (NWS) project, Pluto LNG and Australian Oil. WPL is currently developing Browse, Sunrise, Wheatstone, Grassy Point and Kitimat LNG. WPL is currently undertaking exploration activities in Myanmar, Senegal, Morocco, Gabon, Ireland, NZ and Peru.

(Source: BanyanTree)

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 Financial Markets

Santos reported strong FY21 results with underlying profit up by 230%

Investment Thesis:

  • Leveraged to the oil price.
  • High quality assets which offer a number of core assets within its portfolio (no single asset risk).  
  • On-going focus on cost reduction and positioning of the business for a lower oil price environment.
  • Strong balance sheet position. 
  • High quality management team who are able to operate assets and extract synergistic value from the recent merger with Oil Search.

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.

Key highlights:

  • Management highlighted lower unit costs, our focus on safe, low-cost and efficient operations delivered a free cash flow breakeven of $21 per barrel in 2021. 
  • EBITDAX was up 48% to $2.8bn driven by higher oil prices and lower unit costs. Underlying profit was up 230% to a record $946m.
  • Production was up +3% to of 92.1mmboe. Sales volume of 107.1mmboe, down -3%
  • Product sales revenue of US$4.71bn, up +39%
  • Record free cash flow of US$1.5bn and underlying profit of US$946m, driven by higher oil and LNG prices vs pcp due to a recovery in global energy demand and supply constraints across the industry due to lower capital investment through the pandemic
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20

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, Vietnam. The company also transports crude oil by pipeline.  

(Source: Banyantree)

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

Santos reported strong FY21 results with underlying profit up by 230%

Investment Thesis:

  • Leveraged to the oil price.
  • High quality assets which offer a number of core assets within its portfolio (no single asset risk).  
  • On-going focus on cost reduction and positioning of the business for a lower oil price environment.
  • Strong balance sheet position. 
  • High quality management team who are able to operate assets and extract synergistic value from the recent merger with Oil Search.

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.

Key highlights:

  • Management highlighted lower unit costs, our focus on safe, low-cost and efficient operations delivered a free cash flow breakeven of $21 per barrel in 2021. 
  • EBITDAX was up 48% to $2.8bn driven by higher oil prices and lower unit costs. Underlying profit was up 230% to a record $946m.
  • Production was up +3% to of 92.1mmboe. Sales volume of 107.1mmboe, down -3%
  • Product sales revenue of US$4.71bn, up +39%
  • Record free cash flow of US$1.5bn and underlying profit of US$946m, driven by higher oil and LNG prices vs pcp due to a recovery in global energy demand and supply constraints across the industry due to lower capital investment through the pandemic
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20

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, Vietnam. The company also transports crude oil by pipeline.  

(Source: Banyantree)

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

Northern Star Resources reported solid 1H22 results;Aims to become a 2Mozpa gold producer by FY26

85215903 - attractive businessman using mobile phone while having lunch

Investment Thesis

  • On track to achieve FY22 production and operational guidance.
  • Commodities price (Gold) surprises on the upside especially due to geopolitical tensions.
  • Leveraged to changes in theUSD.
  • Solid assets with reserve/resource. 
  • New acquisitions provide upside (resource and operational improvement). 
  • Strong management team with significant mining expertise.
  • Strong balance sheet.
  • Company has a good track record on shareholder return

Key Risk

  • Further deterioration in global macroeconomic conditions.
  • Deterioration in global gold supply & demand equation.
  • Deterioration in gold prices.
  • Production issues, delay or unscheduled mine shutdown.
  • Adverse movements in AUD/USD.

1H22 Results Key Highlights:  Relative to the pcp:

  • Revenue of A$1,807m was up +63%, mainly driven by higher gold volumes, with gold sales 289,786 ounces higher. Reported NPAT of A$261m, was up +43% (or Underlying NPAT of A$108m, excluding significant items of A$153m) was driven by higher production. 
  • Underlying EBITDA of A$699m, was up +47%, on a margin of 39%. Cost of sales were higher than the pcp due to increased activity with the inclusion of the Saracen Minerals Holdings’ merger assets in the current half (107% increase period on period), higher average cash costs per ounce (H1 2022: A$1,256/oz vs H1 2021: A$1,196/oz) and the increase in D&A unit costs (increase of A$291/solid oz), due to the required non-cash uplift to fair value of the merger assets, compared to the historic cash cost of those same assets. 
  • NST saw cash earnings of A$430m. 
  • NST retained a strong balance sheet with cash and bullion of A$588m; net cash of A$288m. 
  • The Board declared a fully franked interim dividend of 10cps, up +5%. 
  • NST remains on track with its key growth projects progressing as expected to become a 2Mozpa producer by FY26, including KCGM open pit development (Kalgoorlie) and Thunderbox mill expansion (Yandal). 
  • In 1H22, NST made net repayment of A$361m of corporate bank debt, completed its acquisition of Newmont’s power business for A$130m and made a A$170m investment in a Convertible Debenture with Osisko Mining Inc. NST also sold Kundana Assets realising A$402m (and contributing a pre-tax gain of A$242m).

Company Profile

Northern Star Resources Limited (Northern Star) is a gold production and exploration company with a Mineral Resource base of 10.2 million ounces and Ore Reserves of 3.5 million ounces, located in highly prospective regions of Western Australia and the Northern Territory. NST is the third largest gold producer in Australia. The Company also recently acquired a gold mine in Alaska. 

(Source: Banyantree)

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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First-Half Earnings Evaporate for No-Moat Mineral Resources. Despite This, FVE Upped to AUD 47.30

Business Strategy and Outlook

Mineral Resources grew significantly following listing on the Australian Securities Exchange in 2006. Demand for crushing and screening services grew strongly with iron ore output from the major Western Australian iron ore miners. Cost inflation encouraged large mining companies to outsource capital-intensive, lower-returning processes. Mineral Resources also rapidly expanded its own iron ore mining business, though lacking the integrated rail and port infrastructure of major competitors and at a competitive disadvantage. More recent diversification into lithium production at Mt Marion and the Wodgina mine has sustained earnings momentum. 

The financial record to now is impressive and the balance sheet is unleveraged. Mineral Resources has diversified its earnings streams and improved financial disclosure. In fiscal 2010, the company was a mining service provider and minerals producer as now. But disclosure extended to just iron ore production tonnage, and segment earnings. Mining Services and Processing contributed 96% of group EBIT. Step forward to fiscal 2020 and Mineral Resources has materially improved its level of financial disclosure, and the greater depth of clients and number of project sites also reduces risk. We think the business model is demonstrably sustainable. The volume-linked crushing and screening business should be somewhat more resilient to commodity price weakness.

Mineral Resources’ mining services business builds, owns, and operates crushing and screening plants on behalf of mining customers. Despite contributing only 40% of group EBIT, Mining Services is core. Twelve 5 to 15 million tonne per year crushing and screening plants are owned and operated on 12 sites. Clients substantially include the largest mining companies and contract books have been renewed over time leading to volume growth. Power is supplied by mining companies and margins are comparatively stable. Bolstering growth in the core business centred on mining services around Australian bulk commodities, Mineral Resources will selectively own and develop its own mining operations, with the aim of subsequent sell-down while retaining core processing and screening rights.

First-Half Earnings Evaporate for No-Moat Mineral Resources. Despite This, FVE Upped to AUD 47.30

Group revenue fell 12% to AUD 1.4 billion reflecting a sharp 40% drop in realised iron ore price, only partially countered by improved lithium pricing and higher mining services volumes and revenue.Underlying first-half NPAT collapsed to a loss of AUD 36 million against a previous corresponding period, or pcp, profit of AUD 430 million. Despite this, Morningstar analyst increased its fair value to A$47.30 as they don’t think the drivers behind the first-half earnings miss affect the longer-term outlook, and time value of money is an ever present tailwind.

Financial Strength

Mineral Resources is in reasonable financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020, from a net debt position of AUD 872 million at end June 2019. But strong net cash outflows in first-half fiscal 2022, including high costs associated with COVID-19, see the net cash balance deteriorate to an AUD 583 million net debt position as of December 2021 . The current circumstance is unusual and a return to the normal territory is expected for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. A failed investment in Aquila Resources in 2014 attempted to leverage Mineral Resources into Aquila’s West Pilbara Iron Ore Project, and was symptomatic of where Mineral Resources found itself. Booming lithium markets directed the investment decision.

Bulls Say 

  • Mineral Resources grew strongly since listing in 2006. The chairman and managing director have been with the business for over a decade and have meaningful shareholdings. 
  • Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth. 
  • Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
  • Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.

Company Profile

Mineral Resources listed on the ASX in 2006 following the merger of three mining services businesses. The subsidiary companies were previously owned by managing director Chris Ellison, who remains a large shareholder despite selling down. Operations include iron ore and lithium mining, iron ore crushing and screening services for third parties, and engineering and construction for mining companies. Mining and contracting activity is focused in Western Australia.

(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.