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Commodities Trading Ideas & Charts

SGM delivered a strong 1H22 driven by higher volumes and selling prices.

Investment Thesis
Improvement in scrap volumes.
Improvement in scrap prices across key regions.
Cloud recycling could add significant earnings over the long run.
Investment in improving scrap quality should improve SGM’s competitive position.
Undemanding valuation relative to its own historical average and ASX200 Industrials Index.
Self-help initiatives to support earnings.
Improving Return on Capital (ROC).
Current on-market share buyback.

Key Risks
Significant downturn in global economy.
Trade war between China and the U.S. escalates.
Weaker scrap prices in key regions.
Lower volumes.
Regulatory changes – particularly around China’s anti-pollution policies.
Cost pressures impacting group margins.

1H22 Results Highlights
North America Metal (NAM) sales revenue of $1,997.2 was up 87.2% driven by higher sales prices and sales volumes (up +11.3%). Intake also improved over the period and returned to pre-Covid levels. Trading margin of $421.6m was up +74.6% as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Segment underlying EBIT of $142.2m was up +478%.
Australia & New Zealand Metal (ANZ) revenue of $815.6m was up +70.5% driven by +72.2% increase in average selling prices. Sales volumes were largely unchanged on pcp. Trading margin of $225m was up +58.8%. Costs were up +12.3% driven by higher contract labour costs to cover staffing shortages and inflationary pressures. Segment EBIT of $94.9m was up +243.8%. Management noted that despite Covid disruptions in Australia and New Zealand, intake volumes showed improvement and recovered to near pre-Covid levels.
UK Metal sales volumes was up +5.8% and average selling prices up +64.4%, leading to sales revenue of $744.4m increasing +73.9%. Management noted that Trading Margin of $115.7m was up +39.6% “due to market structure and competitive dynamics, UK was not able to hold onto as much of the sales price increase as NAM or ANZ.” Segment underlying EBIT of $29.4m was up +180% on pcp. Management noted that whilst the intake volumes in 1H22 were consistent with pcp, they remain below pre-Covid levels.
Sims Lifecycle Services reported revenue of $166m (up +9%) and underlying EBIT of $9.9m was up +45.6% driven by +44.4% growth in repurposed units and +9% growth in sales revenue. SA Recycling reported sales volumes growth of +18.6% and underlying EBIT (50% share) growth of +427.5% to $128.7m.

Company Profile
Sims Ltd (SGM) collects, sorts and processes scrap metal materials which are recycled for resale. SGM’s segments include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of steel semi-fabricated products.

(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

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

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

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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Commodities Trading Ideas & Charts

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.

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Commodities Trading Ideas & Charts

Soaring Steel Spreads Expected to Normalise, Maintaining BlueScope’s FVE at AUD 15.50

Business Strategy and Outlook

BlueScope’s strategy appropriately plays to its strengths and attempts to neutralise its weaknesses within its portfolio of legacy assets. Steel manufacturers produce largely undifferentiated products and have limited pricing power. Sustainable competitive advantage is typically generated by being the lowest cost provider. BlueScope’s Australian business operates at a relatively high cost and struggles to compete in highly competitive export markets. North Star is significantly more entrenched and operates toward the low end of the cost curve.

Over the past decade, BlueScope sensibly restructured Australian operations away from commodity export markets where the relatively high cost of production places it at a competitive disadvantage. The Australian operations are now tailored to the domestic market with a focus on shifting its sales mix to its value-add metal coated and painted product brands.

BlueScope is taking appropriate actions to manage its environmental, social, and governance risks. BlueScope is proactively investing in technologies to limit the carbon intensity of its steelmaking operations and has committed to a net zero emissions target by 2050.

Expecting a Normalisation in Steel Spreads at BlueScope; Maintaining FVE at AUD 15.50

A combination of supply side disruptions and large fiscal and monetary stimulus programs enacted in major economies in response to the pandemic have pushed steel prices and steelmaking spreads to unsustainably high levels. Indicative steelmaking spreads exceeded USD 1,000 at North Star and USD 500 at Port Kembla during 2021, well above long-term averages. Morningstar analysts expect BlueScope will benefit handsomely from these conditions over the next couple of years, particularly during fiscal 2022. However, Morningstar analyst longer-term view for steelmaking spreads is more subdued and expects a gradual return to historical spread levels largely beginning in fiscal 2023. 

Morningstar analysts maintain a fair value estimate for BlueScope Steel at AUD 15.50 per share following transition to a new covering analyst. While Morningstar analysts have maintained its fair value estimate, but have adjusted its near-term earnings estimates for the latest steelmaking futures curve. As a result, the prediction for fiscal 2023, 2024 and 2025 EBIT forecasts have increased 30%, 122%, and 32% to AUD 1.8, AUD 1.3 and AUD 0.9 billion, respectively. Offsetting a positive outlook for earnings is a slight reduction in implied underlying EV/EBITDA terminal multiple to 5.0 times from 5.6 times, aligning with recent historical levels.  Morningstar analysts maintain very high uncertainty, Standard capital allocation, and stable no-moat ratings. BlueScope currently screens at an 18% premium to Morningstar analyst fair value estimate

Financial Strength 

BlueScope has a strong balance sheet. As at the end of fiscal 2021, BlueScope’s net cash position was AUD 798 million (including operating leases) and had approximately AUD 3 billion in undrawn debt facilities. BlueScope’s balance sheet will be put to work over the next few years to fund a range of initiatives across Port Kembla, North Star, and the U.S. buildings segment. BlueScope is also strategically investing in sustainability programs associated with its commitment to net zero emissions by 2050. Longer term, BlueScope is targeting a relatively conservative net debt position of around AUD 400 million with at least 50% of free cash flows distributed to shareholders in the form of dividends and share buybacks.

Bulls Say

  • Incremental electric arc furnace capacity expansion within the U.S. will dampen North Star’s margins.
  • Investors may apply a risk premium to BlueScope’s relatively emissions intensive business. 
  • The removal of import tariffs on steel from the European Union has the potential to reduce U.S. domestic steel prices and lower North Star’s margins. The removal of tariffs on other countries’ steel has the potential to have a similar effect.

Company Profile

BlueScope is an Australian-based steelmaking firm with five steel related business units. The Australian Steel Products segment predominantly specialises in a range of high-value coated and painted flat steel products for the Australian domestic market. North Star is the group’s U.S. mini-mill specialising in the production of hot rolled coil for the U.S. construction and automotive sectors. Building Products Asia and North America comprise operations across Southeast Asia, China, India, and the U.S. West Coast involved in metal-coating, painting, and roll-forming. New Zealand Steel and the Pacific Islands business has steel operations across New Zealand, Fiji, New Caledonia, and Vanuatu. The Buildings North America segment specialises in non-residential building solutions.

 (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

Mineral Sands Prices Continue to Rise on Strong Demand, Raising Iluka FVE to AUD 9.70

Business Strategy and Outlook

Iluka is a leading global mineral sands miner. Major mines are its Jacinth-Ambrosia mine in the Eucla Basin in South Australia, Cataby in Western Australia and Sierra Rutile in Sierra Leone.Iluka’s main focus is on managing volumes and the resulting impact on prices. Efforts to maintain margins and prices means sales volumes can fall in periods of weak demand as Iluka shoulders part of the responsibility for balancing industry supply, but Iluka can also flex production to increase its market share, or liquidate excess inventories, as prices rise. Maintenance capital expenditure is relatively modest, but expansions and reinvestment to prolong life are generally pursued when Iluka sees a need for new demand and potential for reasonable returns on investment. Conversion of resources to reserves is an obvious path to life extensions, but resources are likely lower-grade and higher-cost.

The balance sheet is relatively strong with net cash of around AUD 300 million at end-December 2021. Iluka intends to maintain a conservative balance sheet with no net debt on average through the cycle. This should provide the appropriate capacity to finance inventory build when necessary and invest through the cycle.Management values cash returns to shareholders, primarily through dividends, but will flex depending on investment needs.

Mineral Sands Prices Continue to Rise on Strong Demand, Raising Iluka FVE to AUD 9.70

Iluka Resources continues to benefit from booming mineral sands markets, with both the zircon and titanium dioxide feedstock markets continuing to bounce back after the COVID-19-induced weakness in 2020. Zircon sales of 355kt were up 48% in 2021, reflecting demand strength across all of the company’s markets. High-grade titanium dioxide feedstocks also showed strong demand, supported by production issues at Rio Tinto’s Richards Bay Minerals in South Africa. Rutile sales were up 27.8%, to 207.2kt, while synthetic rutile sales rose 164% to 305.9kt. The company’s synthetic rutile kiln 2 (SR2) at Capel operated at full capacity, producing 60kt during the quarter. Given the strength in global titanium dioxide feedstock markets, restarting synthetic rutile kiln 1, due in the fourth quarter of 2022, seems reasonable. Thus, Morningstar analysts raise the fair value estimate to AUD 9.70 from AUD 9.10 on higher mineral sands prices and a lower AUD/USD exchange rate.

Financial Strength

Iluka’s balance sheet is strong with net cash of around AUD 300 million at December 2021. Modest net cash at end 2015 turned to a relatively small net debt position with the acquisition of Sierra Rutile for AUD 455 million in late 2016. The subsequent improvement in prices meant debt was repaid by the end 2018. Iluka intends to maintain a conservative balance sheet and targets no net debt on average through the cycle. The company’s strategy is to build inventory during periods of weak sales demand. Excess inventories at the end of 2016 were about AUD 400 to 500 million. The excess inventories were largely liquidated through 2017 and 2018 as external conditions improved and sales volumes exceeded production. Iluka is expected to use cash flow for incremental organic growth projects, the potential expansion of Sierra Rutile, debt repayment and cash returns to shareholders (primarily dividends). In the medium to long term, cash flows will either be reinvested or returned to shareholders. Iluka’s total debt facilities stood at AUD 500 million at end-June 2021, maturing in July 2024. The debt profile gives significant financial flexibility to hold inventory or make opportunistic and/or countercyclical investments.

 Bulls Say  

  • Iluka is an industry leader with relatively high grade zircon and rutile deposits. Supply can be withheld to defend prices and margins in times of weak demand. 
  • Management has improved company fortunes with a strong focus on returns on capital. Demand for zircon is likely to be bolstered by new applications such as chemicals and digitally printed tiles. 
  • Iluka has some diversification. The revenue mix is approximately half from zircon and half from high grade titanium products. Geographically, revenue is split between North America, Europe, China and the rest of Asia.

Company Profile

Iluka Resources is a leading global mineral sands miner. It is the largest global producer of zircon, and the third-largest producer of titanium dioxide feedstock (rutile, synthetic rutile) behind Rio Tinto and Tronox. Low zircon costs are underpinned by the high-grade Jacinth-Ambrosia mine in South Australia but reserve life is less than 10 years. The Sierra Rutile operations in Sierra Leone lack a cost advantage but expansions could bring some scale economies if they can be effectively executed. A 20% shareholding in Deterra Royalties brings exposure to the high-quality Mining Area C iron ore royalty. Iluka’s nascent rare earths operation at Eneabba is a low-cost source of rare earth oxides neodymium and praseodymium, albeit with a reserve life of only around 10 years.

(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

CSX Corp. Automotive and Intermodal Volumes Under Pressure

Business Strategy and Outlook

Railroad turnaround legend Hunter Harrison led Eastern Class I railroad CSX from early 2017 until his death in December that same year. Before joining CSX, he turned around three railroads. Most impressively, his leadership improved Canadian Pacific’s reported OR from 81.3% in 2011 to 58.6% in 2016. While his time was cut short at CSX, Harrison laid the foundation for rapid improvement. As his replacement, the rail installed James Foote, who is quite familiar with Harrison’s precision railroading model from years working at Canadian National. 

This has been Foote’s first opportunity to lead a Class I railroad and, on top of that, CSX operates a complicated spiderweb network in a densely populated area. This differs from the railroads Harrison and Foote ran in Canada, which are mostly linear and run through remote locations. Even so, considering CSX’s impressive operating ratio improvement over the past four years, we think Foote has executed admirably carrying the precision railroading, or PSR, baton–the rail posted an impressive 58.4% OR in 2019 and kept it near 58.8% in 2020 despite lower volume for the year. Previously, CSX’s OR had been range-bound between 69.4% and 71.5% for seven years, even as other rails progressed. In fairness, CSX lost almost half of its highly profitable coal franchise during that time and still maintained a respectable OR. 

Foote has overseen the implementation of Harrison’s PSR playbook at CSX, particularly in terms of rightsizing all assets, including human resources, real estate, sorting yards, motive power, and rolling stock. Fewer assets and longer trains drive up network fluidity, resulting in labor productivity gains, better service levels, and higher potential incremental operating margins. Better service also creates greater intermodal opportunities. Intermodal saw first-half 2020 volume headwinds from COVID-19 disruption, but has since rebounded on robust retailer restocking and tight truckload market capacity (rising truck-to-rail conversions). CSX’s domestic intermodal volume may face congestion-related constraints lingering into early 2022, but we still see intermodal as a key long-term growth opportunity for CSX.

Financial Strength

CSX’s balance sheet is in good shape. The firm held more than $2.2 billion of cash and short-term investments compared with $16.3 billion of total debt at year-end 2021. Debt increased slightly in 2020 as the firm took measures to shore up liquidity amid the pandemic–as most transports did. Net debt/EBITDA was about 2.0 times and EBITDA/interest coverage stood at a comfortable 10 times in 2021. It is expected that net-debt/EBITDA to remain near 2 times in 2022. Overall, we consider these levels secure, given CSX’s reliable cash generation. CSX employs a straightforward capital structure composed of mostly long-term unsecured debt to fund its business, although it uses a small amount of secured debt to finance equipment.

Bulls Say’s

  • Thanks to PSR, CSX has posted impressive operating ratio gains in recent years despite losing half of its highly profitable coal business over the past eight years. 
  • Rooted in heavy service corridor investment over the past decade, CSX’s intermodal franchise has posted solid mid-single-digit container growth on average over the cycle. 
  • Compared with trucking, shipping by rail is less expensive for long distances, is 4 times more fuel efficient per ton-mile, and does not contribute to freeway congestion. These factors should support incremental intermodal growth over the long run.

Company Profile 

Operating in the Eastern United States, Class I railroad CSX generated revenue near $12.5 billion in 2021. On its more than 21,000 miles of track, CSX hauls shipments of coal (13% of consolidated revenue), chemicals (22%), intermodal containers (16%), automotive cargo (9%), and a diverse mix of other bulk and industrial merchandise

(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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Commodities Trading Ideas & Charts

Iron Ore price rise more than offsets Rio Tinto’s modest production weakness

Business Strategy and Outlook:

Rio Tinto’s fourth-quarter production was overall mildly softer than expected. The company’s share of iron ore Pilbara shipments, the key earnings driver, finished the year at 268 million tons. Shipments were down on 2020’s 273 million tonnes with headwinds from weather, delayed expansions and traditional owner relationships post the Juukan Gorge disaster. COVID-19 also reduced labour availability. The destruction of the caves sees the major Pilbara iron ore miners facing additional scrutiny around traditional owner relationships. This has slowed output and growth somewhat but has not materially impacted the value of Rio Tinto shares, given the supportive iron ore price has more than made up for the lower volumes.

Aluminium, alumina, and bauxite production was marginally below our full-year expectations. Copper output in 2021 was about 3% lower than expected and down 7% on 2020 levels. Weaker grades and COVID-19 restrictions on labour hindered output. On guidance for 2022, the main change is an approximate 2% reduction in expectation for Pilbara shipments, which reflects continued headwinds from COVID and traditional owner issues. Shipments are expected to be of 277 million tonnes in 2022, up by 3%.

Financial Strength:

The fair value estimate of Rio Tinto has been increased to AUD 91 per share. The increase reflects higher the stronger iron ore futures curve and the softer AUD/USD exchange rate, partly offset by weaker production forecasts. The iron ore price is expected to average USD 110 per tonne to 2024, versus our prior USD 100 per tonne assumption. Shares have rallied about 25% in the past two months and are again overvalued. 

The dividend yield generated by the company is a whopping 6.3% during the duration of the 2019 ad 2020.

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)

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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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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.

Categories
Commodities Financial Markets

Northern Star Resources reported strong result realised by gold price and production growth

Investment Thesis 

  •  Leveraged to changes in the USD. 
  • 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 Risks

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

FY21 Results Highlights

  • Solid first half results with gold sales coming in at the top end of Company’s guidance and management noting that they remain on track to meet full year guidance. Relative to the pcp, revenue was up +34% to $1.1bn, with average gold price realized up +17% (AUD terms) and gold sold (ounces) up +21% over the period. Operating earnings (EBITDA) were up +47% to $472.2m and underlying NPAT of $194.4m was up +63%. 
  •  Company declared an interim dividend of 9.5cps (fully franked), which was in line with payout policy of 6% of revenue. 
  •  Underlying free cash flow was strong, up +94% to $225.7m. 
  •  Strong balance sheet, with $672m in liquidity available, consisting of cash, bullion and investments of $372m and $300m in undrawn facilities. 
  •  NST currently has approx. 10% of annualised production hedged over the next 3 years (350kozs at $2,128/oz). NST has been focusing on reducing its hedge book so that it can potentially participate in higher gold prices. 
  • FY21 guidance was unchanged on what was provided at the FY20 results

Company Description

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.

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.