Materials Analyst/Strategist, Janus Analysis

Gaius King

Materials Analyst/Strategist

Accelerating Tomorrow’s Independent Research

Boost Research

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Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/23731" target="_blank" data-smartkarma-citation="entities:23731:1">Vale SA (VALE US)</a> have had two major fatal dam-failures in three years</li>
<li>Possible (probable?) design flaw</li>
<li>Expect all Vale's iron ore operations to be technically audited</li>
<li>Substantial Management &amp; Board changes inevitable</li>
<li>Probability that<span class="apple-converted-space"> </span>a portion of Vale's existing operations will fail engineering inspection.</li>
<li>Forecast resultant capacity constraints</li>
<li>
<a href="https://www.smartkarma.com/entities/13" target="_blank" data-smartkarma-citation="entities:13:1">Rio Tinto Ltd (RIO AU)</a>,  <a href="https://www.smartkarma.com/entities/147" target="_blank" data-smartkarma-citation="entities:147:1">Bhp Billiton (BHP AU)</a>, <a href="https://www.smartkarma.com/entities/41" target="_blank" data-smartkarma-citation="entities:41:1">Fortescue Metals (FMG AU)</a> to benefit from lost production</li>
</ul>



Vale SA (VALE US) have had two major fatal dam-failures in three years
Possible (probable?) design flaw
Expect all Vale's iron ore operations to be technically audited
Substantial Management &amp; Board changes inevitable
Probability that a portion of Vale's existing operations will fail engineering inspection.
Forecast resultant capacity constraints

Rio Tinto Ltd (RIO AU),  Bhp Billiton (BHP AU), Fortescue Metals (FMG AU) to benefit from lost production


Vale in Trouble - Expect Rio, BHP, FMG to Benefit (Flash Note)

Over 25-yrs in Global Materials & Soft Commodities

Charles Spencer

<p><strong>Investment Conclusion: <br></strong>We recommend closing our long-<a href="https://www.smartkarma.com/entities/13" target="_blank" data-smartkarma-citation="entities:13:1">Rio Tinto Ltd (RIO AU)</a>/short-<a href="https://www.smartkarma.com/entities/147" target="_blank" data-smartkarma-citation="entities:147:1">Bhp Billiton (BHP AU)</a> following recent trading updates from both companies which helped to narrow the previous valuation gap we identified in our Aug-18 note: <a href="https://www.smartkarma.com/insights/us-20bn-in-lost-market-cap-looks-hard-to-justify-recommend-long-rio-short-bhp" target="_blank" data-smartkarma-citation="insights:23456">US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP</a></p>

Investment Conclusion:  We recommend closing our long-Rio Tinto Ltd (RIO AU)/short-Bhp Billiton (BHP AU) following recent trading updates from both companies which helped to narrow the previous valuation gap we identified in our Aug-18 note: US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP

RIO & BHP:  Valuation Gap Gone; Closing Long-Rio/Short-BHP

Thematic (Sector/Industry)

<ul>
<li>Quantifying nuclear statistics with substantial discrepancies</li>
<li>LT contracts &amp; speculative hoarding driving recent 40% spot price increase</li>
<li>Primary/secondary Uranium supplies currently 112% of 2017 demand</li>
<li>Uranium supply deficits extremely unlikely before 2022</li>
<li>Global Uranium demand to fall 25-40% by 2050</li>
<li> Primary Uranium sector LT SELL</li>
</ul>
<p>We have independently audited global nuclear construction statistics in order to determine future Uranium demand.  Although near-term statistics match those in the public domain, long-term demand determined via construction pipeline illustrates substantial discrepancies.  Compiling planned plant construction, operational extensions, nameplate upgrades, versus decommissioning announcements/events, and in many cases, public policy inertia; has led us to believe that despite historical primary supply shortages, global nuclear demand peaked in 2006.</p>
<p>Since plateauing and despite strong Chinese growth, nuclear power generation has fallen &lt;2% over the past two decades, a decline that is predicted to accelerate as a number of developed and developing nations pursue other energy options.</p>
<p>The macro-trend not replacing existing nuclear infrastructure means (dependent on assumptions), according to our calculations, global uranium demand will decrease between 20 to 40% by 2050.</p>
<p>As opposed to signifying a fundamental change in underlying demand, we believe that recent Uranium price increases are the result of producers closing primary operations, and substituting production with purchases on the spot market to meet long-term contract obligations.  In addition, hedge funds are buying physical uranium in order to realise profits on potential future commodity price increases.  Critically, we determine that primary and secondary supplies are more than sufficient to meet forecast demand over the next four to five years; before taking into account substantial existing global uranium stocks, some of which are able to re-enter the spot market at short notice.</p>


Quantifying nuclear statistics with substantial discrepancies
LT contracts &amp; speculative hoarding driving recent 40% spot price increase
Primary/secondary Uranium supplies currently 112% of 2017 demand
Uranium supply deficits extremely unlikely before 2022
Global Uranium demand to fall 25-40% by 2050
 Primary Uranium sector LT SELL

We have independently audited global nuclear construction statistics in order to determine future Uranium demand.  Although near-term statistics match those in the public domain, long-term demand determined via construction pipeline illustrates substantial discrepancies.  Compiling planned plant construction, operational extensions, nameplate upgrades, versus decommissioning announcements/events, and in many cases, public policy inertia; has led us to believe that despite historical primary supply shortages, global nuclear demand peaked in 2006.
Since plateauing and despite strong Chinese growth, nuclear power generation has fallen &lt;2% over the past two decades, a decline that is predicted to accelerate as a number of developed and developing nations pursue other energy options.
The macro-trend not replacing existing nuclear infrastructure means (dependent on assumptions), according to our calculations, global uranium demand will decrease between 20 to 40% by 2050.
As opposed to signifying a fundamental change in underlying demand, we believe that recent Uranium price increases are the result of producers closing primary operations, and substituting production with purchases on the spot market to meet long-term contract obligations.  In addition, hedge funds are buying physical uranium in order to realise profits on potential future commodity price increases.  Critically, we determine that primary and secondary supplies are more than sufficient to meet forecast demand over the next four to five years; before taking into account substantial existing global uranium stocks, some of which are able to re-enter the spot market at short notice.

Uranium - About to Enter Its Own Nuclear Winter

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

<p>Morningstar and PitchBook hosted the 10th annual Management Behind the Moat Conference in Chicago on Nov. 7 and 8, offering our institutional clients an opportunity to engage with the management of 49 public companies we think have structural competitive advantages, or economic moats, as well as two private companies worth watching. This report distills the highlights from company presentations. A roster of all companies that participated in the conference, including those that held one-on-one meetings with investors, can be found on Page 2 of the attached document.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/069/790/original/img%201.JPG?1542165661" class="editor-image img-responsive" data-smartkarma-image-id="69790"></figure>

Morningstar and PitchBook hosted the 10th annual Management Behind the Moat Conference in Chicago on Nov. 7 and 8, offering our institutional clients an opportunity to engage with the management of 49 public companies we think have structural competitive advantages, or economic moats, as well as two private companies worth watching. This report distills the highlights from company presentations. A roster of all companies that participated in the conference, including those that held one-on-one meetings with investors, can be found on Page 2 of the attached document.

Morningstar Management Behind the Moat 2018: Conference Highlights

LNG, Oil & Gas, M&A Market Intelligence Specialist

Massimo Bellino

<p>A new wave of consolidation is unfolding in the upstream oil and gas industry. Three company takeovers involving US shale E&amp;Ps were announced in just four days. The renewed M&amp;A activity has not been limited to the US. In Canada, <a href="https://www.smartkarma.com/entities/22923" target="_blank" data-smartkarma-citation="entities:22923:1">Husky Energy (HSE CN)</a> launched a $5bn hostile bid for <a href="https://www.smartkarma.com/entities/25700" target="_blank" data-smartkarma-citation="entities:25700:1">MEG Energy Corp (MEG CN)</a> while in Europe the terms of the merger between Wintershall and DEA, with an estimated value of $10bn, have finally been agreed. The total upstream oil and gas M&amp;A announced in the last four months reached $66bn, a quarterly aggregated deal value last seen in March 2017.</p>
<p>Meanwhile, the price of the crude Brent fell by more than 10% from its $85 per barrel peak reached in October as rising inventory levels, trade disputes, and worries about economic growth impacting the oil demand, shifted the market sentiment. As a result, the average valuation of the independent E&amp;Ps decreased back to the levels seen when the oil price traded at around $50 per barrel (Exhibit 1).</p>
<p>The strategic need to grow scale to remain competitive in the more efficient industry emerging from the downturn is one of the main drivers of consolidation. Oil and gas companies are taking advantage of the disconnect between the oil price and valuations to pursue M&amp;A and share buybacks while generating plenty of cash to implement these strategies. Will investors take notice?</p>
<h2><strong>Exhibit 1: M&amp;A Deal Volume vs E&amp;P Index and the Oil Price</strong></h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/660/original/Picture1.png?1541306124" class="editor-image img-responsive" data-smartkarma-image-id="68660"></figure>
<div class="content-caption"><em>Source: Energy Market Square, Capital IQ. Market value-weighted index including independent E&amp;P companies with a market value greater than $300m as of 19 April 2018. Data as of 2 November 2018. M&amp;A volume includes $5bn Husky Energy hostile takeover for MEG Energy and the estimated $10bn value for the merger of Wintershall and DEA.</em></div>
<h2><em><strong>Exhibit 2: Brent Oil Price and Consensus Forecasts Since 2016</strong></em></h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/703/original/update2latest.png?1541324157" class="editor-image img-responsive" data-smartkarma-image-id="68703"></figure>
<div class="content-caption"><em>Source: Energy Market Square analysis based on Capital IQ data. Prices as of 2 November 2018.</em></div>

A new wave of consolidation is unfolding in the upstream oil and gas industry. Three company takeovers involving US shale E&amp;Ps were announced in just four days. The renewed M&amp;A activity has not been limited to the US. In Canada, Husky Energy (HSE CN) launched a $5bn hostile bid for MEG Energy Corp (MEG CN) while in Europe the terms of the merger between Wintershall and DEA, with an estimated value of $10bn, have finally been agreed. The total upstream oil and gas M&amp;A announced in the last four months reached $66bn, a quarterly aggregated deal value last seen in March 2017.
Meanwhile, the price of the crude Brent fell by more than 10% from its $85 per barrel peak reached in October as rising inventory levels, trade disputes, and worries about economic growth impacting the oil demand, shifted the market sentiment. As a result, the average valuation of the independent E&amp;Ps decreased back to the levels seen when the oil price traded at around $50 per barrel (Exhibit 1).
The strategic need to grow scale to remain competitive in the more efficient industry emerging from the downturn is one of the main drivers of consolidation. Oil and gas companies are taking advantage of the disconnect between the oil price and valuations to pursue M&amp;A and share buybacks while generating plenty of cash to implement these strategies. Will investors take notice?
Exhibit 1: M&amp;A Deal Volume vs E&amp;P Index and the Oil Price

Source: Energy Market Square, Capital IQ. Market value-weighted index including independent E&amp;P companies with a market value greater than $300m as of 19 April 2018. Data as of 2 November 2018. M&amp;A volume includes $5bn Husky Energy hostile takeover for MEG Energy and the estimated $10bn value for the merger of Wintershall and DEA.
Exhibit 2: Brent Oil Price and Consensus Forecasts Since 2016

Source: Energy Market Square analysis based on Capital IQ data. Prices as of 2 November 2018.

Flash Update: US Shale M&A Frenzy Drives Further Consolidation in Upstream Oil & Gas

Australia

BHP Group Ltd operates as an international resources company. The Company offers mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel, and copper concentrate, as well as petroleum exploration, production, and refining. BHP Group serves customers worldwide.

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BHP Group Ltd (BHP AU)

Vale in Trouble - Expect Rio, BHP, FMG to Benefit (Flash Note)

Vale SA (VALE US) have had two major fatal dam-failures in three years Possible (probable?) design flaw Expect all Vale's iron ore operations to...

Boost Research

RIO & BHP: Valuation Gap Gone; Closing Long-Rio/Short-BHP

Investment Conclusion: We recommend closing our long-Rio Tinto Ltd (RIO AU)/short-Bhp Billiton (BHP AU) following recent trading updates from both...

Charles Spencer

Uranium - About to Enter Its Own Nuclear Winter

Quantifying nuclear statistics with substantial discrepancies LT contracts & speculative hoarding driving recent 40% spot...

Boost Research

Morningstar Management Behind the Moat 2018: Conference Highlights

Morningstar and PitchBook hosted the 10th annual Management Behind the Moat Conference in Chicago on Nov. 7 and 8, offering our institutional...

Morningstar, Inc.

Flash Update: US Shale M&A Frenzy Drives Further Consolidation in Upstream Oil & Gas

A new wave of consolidation is unfolding in the upstream oil and gas industry. Three company takeovers involving US shale E&Ps were announced...

Massimo Bellino

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