Anglo American PLC (LON: AAL): Robust Financial Position and Sustainable Business Growth Rate Trajectory

Anglo American PLC is FTSE 100 Mining Company with operations in Australia, Southern Africa, South America, and North America, and is headquartered in London, United Kingdom. The Company’s primary activities include mining, exploring, and processing of minerals and metals at various geographies globally.

Investment Rationale – Hold at GBX 2,483.04

• Over the past four years (H1 FY16 to H1 FY20), revenue has grown at a CAGR of ~5.85% and net margin has stayed above 6.50% in the past four years, which is significantly higher than the industry median of 3.90%.
• From the technical standpoint, 20-day SMA (2308.60), reflects an uptrend in the stock.
• During H1 FY20, the Company demonstrated operational agility through the diversified base of assets as the strong performance of Collahuasi copper (in Chile) and Minas-Rio iron ore (in Brazil) offset the overall decrease in production due to the Covid-19 lockdown.
• The Company reached towards the holiday season; it has been seeing an encouraging improvement in demand for rough diamonds.

Risk Assessments

• The subdued outlook for global economic growth coupled with geopolitical issues can affect foreign exchange rates.
• Also, the ongoing COVID-19 disruption can delay commissioning and approval of certain projects.
• The revenue and profitability can also be impacted by volatility in prices of metallurgical coal, iron ore, and copper.

Recent News

10 December 2020: Hilary Maxson will join the Board as a non-executive director and member of the Audit Committee from 1 June 2021.

Q3 FY20 Production Report for the quarter ended 30 September 2020 (22 October 2020)

(Source: Company Website)

• The Company continued the strong operational recovery with a 24% increase in production against Q2 FY20.
• Therefore, the Company is now operating at 95% of normal capacity.
• Against Q3 FY20, Copper production increased by 4% and Rough diamond production decreased by 4%.
• Guidance for FY20:
  • For diamond, production guidance remained unchanged at 25-27 million carats.
  • For copper, production guidance has been tightened to 630,000-660,000 tonnes.
  • For platinum, production guidance (metal in concentrate) is revised to 1.7-1.8 million ounces of platinum.
  • Production guidance for metallurgical coal is maintained at 16-18 million tonnes.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company benefits from a range of high margin, high return, and fast payback options within the existing portfolio, which is complemented by industry-leading explorations projects and backed by the best technical experts in the industry. It is planning to increase the production from old and new operations in the coming future. Moreover, the Company appears to be resilient with operating and capital expenditure cut in 2020. Adjacently, integration activities of Sirius Minerals PLC have been progressing well, and it is expected to incur US$300 million capital expenditure for FY20 to develop a major new polyhalite project in the UK. Stock 52 week High and Low were GBX 2,564.50 and GBX 1,018.20, respectively.

Based on the factors discussed above, we have given a “Hold” recommendation on Anglo American PLC at the current market price of GBX 2,483.04 (as on 10 December 2020, before the market close at 10.10 AM GMT), while we look forward to reviewing the upcoming catalysts.

Polymetal International PLC (LON: POLY) – Continued to exceed production budget and generated massive cash flows.

Polymetal International PLC is a FTSE 100 index listed Company, which has a portfolio of nine producing gold and silver mines. With high-quality asset portfolio and exploration investments, it is a top-10 global gold producer and top-5 global silver producer with assets in Russia and Kazakhstan.

On 3 March 2021, the Company expects to release the preliminary results for FY20.

Investment Rationale – Buy at GBX 1,660.00

• The Company distributes 50% of underlying net income as US$2.0 billion has been paid out in dividends since the IPO. As of H1 FY20, the YTD dividend yield stood at 5.4%, which is significantly higher than the benchmark index, FTSE100.
• As of 1 July 2020, net debt was US$1.7 billion with 1.3x Net Debt/EBITDA, which is below the number of 1.4x (level seen at the end of FY19), and 1.5x (mid-term target). Moreover, the Company has reduced the cost of debt to 3.6% from 4.5% (level seen at H1 FY19), which is supported by lower benchmark interest rates and solid financial position.
• EBITDA margin and net income margin of POLY in H1 FY20 was 56.7% and 33.6%, respectively, which are significantly higher than the industry median.
• From the technical standpoint, 20-day SMA is supporting the upside potential.
• Production guidance for 2021 and 2022 of 1,500 Koz and 1,600 Koz GE respectively is reiterated.

Risk Assessments

• The Covid-19 pandemic can disrupt the supply chain and planned production might not be achieved.
• Moreover, exploration and development are capital-intensive activities, failure to discover substantial reserves could adversely affect the POLY’s future performance.
• Also, the change in legislation, tax regimes, and political scenario in Russia and Kazakhstan can impose the financial risk.

Recent News

1 December 2020: Polymetal announced an initial investment of US$ 0.5 million in exchange for a 35% stake in a joint venture with a junior holding an exploration license for the Pekinskaya area, Taimyr Peninsula, Russia.

Q3 FY20 Trading Update for three months ended 30 September 2020 (as on 22 October 2020)

(Source: Company Website)

• During Q3 FY20, revenue increased by 35% y-o-y to reach US$ 884 million, due to increased sales volume and higher gold and silver prices.
• In Q3 FY20, the Company also generated record quarterly free cash flow, and therefore, net debt was down by US$80 million to US$1.61 billion.
• In Q3 FY20, gold equivalent production increased by 7% year-on-year to 477 Koz of GE driven by strong contributions from Omolon, Varvara, and Kyzyl.
• There was no fatal incident during the first nine months of 2020 either at Polymetal or at the Company's contractors.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

In FY20, the Company is progressing well to meet production guidance of 1.5 Moz of gold equivalent. Also, with the launch of Nezhda in H2 FY21, the Company shall be able to deliver production of 1.85 Moz by 2023. At Kyzyl, sustained and stable production with continued high grades is expected, which would ensure consistent free cash flow.

Adjacently, the guidance for TCC (Total cash costs) and AISC (All-in sustaining costs) is maintained at US$ 650-700/GE oz and US$ 850-900/GE, respectively, as increased COVID-related costs are getting offset by the depreciation of the Russian Rouble and Kazakh Tenge. Meanwhile, POLY continues to invest in greenfield exploration for virgin deposits in the Former Soviet Union. The Company also look forward to disinvesting additional non-core assets in 2020. It will support the ambition of long-life and low-cost production. Stock 52-week High was GBX 2,085.00 and Low of GBX 990.20, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Polymetal International PLC at the current market price of GBX 1,660.00 (as on 10 December 2020, before the market close at 8.00 AM GMT) with lower double-digit upside potential based on 11.87x Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.).

Centamin PLC – Generating strong and sustainable cash flows to exploit excellent growth opportunities while delivering returns for all our stakeholders.

Jersey-headquartered Centamin PLC (LON: CEY) is Gold Mining Company, specialises into exploration and development of minerals. It owns Sukari Gold Mine in Egypt with a current production capacity of 500,000 ounces per annum.

Investment Rationale – Buy at GBX 121.35

• The key trading multiples (Price/Earnings, Price/Cash Flow and Price/Book) multiples are currently undervalued compared to corresponding multiples of the Basic Materials industry.
• From a technical standpoint, 20-day SMA is supporting the upside potential.
• Over the past two years, (H1 FY18 to H1 FY20), gross profit has surged at a CAGR of 119.89%.
• The Group has confirmed FY20 guidance of 445,000-455,000 oz of gold produced, at cash costs of US$740-790/oz produced and AISC of US$950-1,050/oz sold.

Risk Assessments

• It is exposed to financial risk with fluctuations in Gold price and exchange rates.
• Furthermore, the unavailability of adequate working capital can impact regular revenue and cash flow.
• The Global Covid-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation costs.

Recent News

2 December 2020: Centamin has completed Phase 1 of the two-phase LOA at Sukari. Further, the Board intend to recommend US$35 million as the FY20 final dividend, bringing the total dividend to US$104 million.

Q3 FY20 Report for the three months ended 30 September 2020 (as on 21 October 2020)

 (Source: Company Website)

• During Q3 FY20, the Company delivered solid performance, which has brought year to date free cash flow generated to US$137 million, with US$345 million in net cash and liquid assets, reflecting a strong balance sheet position.
• Following the operational update on 2 October 2020, the Company refined our 2020 guidance to 445,000 - 455,000 ounces of gold produced.
• During Q3 FY20, gold production was 128,240 ounces from the Sukari Gold Mine.
• The revenue generated was US$230 million from gold sales of 118,617 oz at an average realised gold price of US$1,933/oz sold.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

During H1 FY20, CEY confronted no material operational impact on the supply chain due to Covid-19 mayhem. Due to operational efficiencies, cost per tonne also improved. Due to the rescheduling of the open pit operations the Company forecasts FY21 gold production of 400,000-430,000 oz, at cash costs of US$875-950/oz produced and AISC of US$1,200-1,275/oz sold. In a nutshell, it is aiming to generate a significant sustainable return for the shareholders. Stock 52 week High and Low were GBX 233.30 and GBX 88.28, respectively.

(Source: Company Website)

Based on the factors discussed above, we have given a “Buy” recommendation on Centamin PLC at the current market price of GBX 121.35 (as on 10 December 2020, before the market close at 8.25 AM GMT) with lower double-digit upside potential based on 16.50x Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.).

Petropavlovsk PLC - Assuming no further significant disruption arising from the current COVID-19 pandemic.

Petropavlovsk PLC (LON: POG) is a FTSE 250 listed Company, which is engaged in the mining of precious and non-precious metals. It has been operating continuously in the Far East of Russia for over 25 years, from where it has produced over 7.8 million ounces (Moz) of Gold to date.

Investment Rationale – Buy at GBX 30.15

• It has a long-life mineral resource base with high expansion potential. Moreover, it is an established explorer, developer, and miner of Gold, with distinctive technological expertise and R&D capabilities over peers.
• As per valuation metrics, Price/Earnings, EV/Sales, EV/EBITDA, Price/ Cash Flow and Price/Book multiples of the Petropavlovsk PLC are currently lower as compared to the corresponding multiples of the Basic Materials industry.
• From a technical perspective, 20-day SMA is supporting the upside potential.
• The new CEO, Denis shall bring significant experience in the Russian gold mining sector, and he has a proven ability to grow businesses for the benefit of all stakeholders.

Key Risks

• Regarding the risk factors, the Company’s performance is subject to various kinds of risk, such as inflation cost associated with the ramping up of POX Hub, operational risk arising from the potential supply chain disruption due to Covid-19, and lack of funding to pursue the growth opportunities.
• Moreover, it is also exposed to financial risk with fluctuations in Gold price and exchange rates.
• Petropavlovsk has not declared a dividend for eight years.

Recent News

30 November 2020: Denis Alexandrov was appointed as Chief Executive Officer (CEO). He also became a director of the Company from 1 December 2020.

Interim Results for the Period Ended 30 June 2020 (as on 30 October 2020)

 (Source: Company Website)

• In H1 FY20, EBITDA almost doubled from H1 FY19 level to US$193 million, which benefitted from increased production and higher gold prices.
• The gold sales also increased by 39% year-on-year to 312.4koz (H1 FY19: 225.0koz) driven by the increase in gold production.
• The total cash cost increased by 27% year-on-year, primarily due to higher costs associated with third-party gold concentrate.
• As of 30 June 2020, net debt reduced to US$538.0 million, principally driven by an increase in cash.

Share Price Performance

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology

Conclusion

The Gold production outlook is set at 560koz to 600koz for FY20. Similarly, the Gold production target for FY20 from the Company's own ore is anticipated to produce 395koz and 415koz. The capital expenditure is projected to remain between US$90 million to US$100 million for FY20, due to accelerated expenditure on the Malomir flotation plant expansion and POX related upgrade expenditure. Adjacently, the POX Hub continues to demonstrate the ability to process multiple streams of complex ores simultaneously. Moreover, with the completion of Pioneer flotation plant in Q4 FY20, utilisation of the POX Hub will increase from the Company’s own concentrates. Subsequently, it will have a direct bearing on free cash flow generated by the Company. Overall, the Company has world-class asset with the incremental capacity to generate sustainable and significant shareholder value. The stock made a 52-week high and low of GBX 41.60 and GBX 11.51, respectively.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation on Petropavlovsk at the current price of GBX 30.15 (as on 10 December 2020, before the market close at 11.00 AM GMT), with lower-double digit upside potential based on 15.47x Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.).

Hochschild PLC - Output has steadily increased and HOC generated substantial free cashflow.

Hochschild Mining PLC (LON: HOC) is a FTSE 250 index quoted Mining Company, which focuses on Gold and Silver deposits. The Company has been operating over the past 50 years, and has operations in the region of Argentina, Chile, and Peru. It currently operates with one underground mine in the southern part of Argentina and three underground mines in the southern part of Peru.

On 20 January 2021, HOC expects to release production results for Q4 FY20.

Investment Rationale – Buy at GBX 197.10

• Liquidity Position (as of 30 September 2020): Net debt increased to US$21 million (30 June 2020: US$58 million). Adjacently, cash and cash equivalent balance increased to US$196 million (30 June 2020: $162 million).
• The Gold prices are trading nearly at an all-time high, which is supported by record inflows into Gold-backed ETFs. Meanwhile, the silver price has also topped its highest price in seven years, which shall support the strong rebound in HOC's profitability.
• Over the past four years, the Company has maintained a Gross Margin and EBITDA Margin of above 23.80% and 34.80%, respectively. Moreover, the Debt/Equity ratio has remained below 0.30x in the past four years, which is lesser than the industry median.
• From the technical standpoint, 14-day RSI (38.09) is reflecting the potential for a short term rebound in the stock price.
• As per valuation metrics, Price/Earnings, EV/Sales, EV/EBITDA, Price/ Cash Flow and Price/Book multiples of the Hochschild Mining PLC are currently lower as compared to the corresponding multiples of the Basic Materials industry.

Risk Assessments

• The Global Covid-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation costs.
• Moreover, the financial performance is highly dependent on the Gold price, and the Gold market is cyclical and sensitive to the economic changes and numerous factors, which are beyond the Company’s control.
• Furthermore, the business needs to adhere to the stringent environmental and compliance guidance, failure to adhere to those policies can have an adverse impact on output and cause legal actions as well.

Recent News

7 December 2020: HOC has restarted limited operations at the San Jose mine.

3 December 2020: HOC raised approximately £123 million in gross proceeds by selling an aggregate of 61,665,067 ordinary shares, representing nearly 12% of existing issued ordinary share capital, at a price of 200 pence per share.

Q3 Production Report for the quartered ended 30 September 2020 (21 October 2020)

• HOC recovered from the challenging H1 FY20 as output has increased, and thus, the Company generated substantial free cashflow despite the Company not being in full production throughout the entire period.
• The Company is on track meet the overall production target of 280,000-290,000 gold equivalent ounces at all-in sustaining costs of $1,250-$1,290 per gold equivalent ounce.

Interim Results for the six months to 30 June 2020 (as on 19 August 2020)

(Source: Company Website)

• In the first half of the financial year 2020, due to lower production of gold and silver, the revenue declined by 35%. However, the Company witnessed a 28% rise in gold prices and 8% rise in silver prices somehow offset the impact of declined production.
• The Profitability margin for the period declined as the output in the first half was impacted due to Covid-19 related stoppages, while cash balance remained decent.
• The Company restarted production at Inmaculada on 28 July 2020 and was expected to achieve full capacity in August end.
• Full brownfield exploration plan was projected to be completed by the end of FY2020, while drilling programmes remained on target across all operations.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

HOC is focused on generating long-term shareholder return through the transparent delivery of key minerals. With ore sorting and mine digitalisation, the Company expects to generate more value from its mining and exploration projects. Meanwhile, the demand for silver is projected to rise by 16.8% in 2020 from 2019, which should be supported by strong demand in the electronics sector. Adjacently, it has increased the budget for brownfield exploration to US$37 million and greenfield budget to US$9 million, which shall support the future development by discovering low-cost resources and drill a balanced portfolio of opportunities. Stock 52 week High and Low were GBX 326.80 and GBX 80.40, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Hochschild Mining PLC at the current market price of GBX 197.10 (as on 10 December 2020, before the market close at 8.05 AM GMT) with lower double-digit upside potential based 27.98x Price/Earnings (approx.) on FY20E Earnings Per Share (approx.).

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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