Energy & Materials Sector

• On the 10th May, Aussie lithium miner Allkem Ltd (AKE AU) inked a $US10bn+ “merger of equals” with Livent (LTHM US), ostensibly forming the world’s fifth largest lithium producer.
• Allkem’s Scheme Meeting is the 19 December, with implementation expected on the 4 January. The IE is supportive and Allkem’s board unanimously recommends the transaction. 
• This looks done. Buy Livent. And get borrow on Livent to be able to short it into the inclusion or in the days following. 

• On 10 November, it was announced that Ki-Sun Chung was promoted to Vice Chairman which could signal more positive news flow on HD Hyundai in the coming months.
• The consensus expects DPS of 4,200 won for HD Hyundai in 2023, which suggests a dividend yield of 7.1%. HD Hyundai has one of the highest dividend yields in KOSPI200.
• According to our NAV analysis, it suggests a base case valuation of 71,970 won per share for HD Hyundai, representing a 22% upside from current levels.

• Irc Ltd (1029 HK) has announced a mandatory conditional offer from Nikolai Levitskii (Chairman) at HK$0.118 per share, a 32.6% premium to the undisturbed price (1 November). 
• The offer is conditional on the offeror and concert parties representing more than 50% of voting rights.  The offeror currently represents 30.61% of outstanding shares.
• The offer looks light vs long-term trading ranges. The minimum acceptance threshold implies a minority acceptance rate of 27.9% (36.8% if MIC Invest does not tender), which is not onerous.

• Nikolai Levitskii, Russian iron-ore play IRC Ltd (1029 HK)‘s chairman and largest shareholder, has acquired 4.72% of shares out, lifting his stake above 30%, triggering an MGO. 
• The Offer price of HK$0.118/share, a 32.58% to last close, is the same price paid for the stake increase. 
• The Offer is conditional on Levitskii holding more than 50% of shares out. His intention is to maintain IRC’s listing. 

• Australis Oil & Gas (ASX:ATS) is an oil and gas producer/developer, with a strategic and controlling position in the emerging Tuscaloosa Marine Shale (TMS) oil play, onshore US.
• The TMS is an Eagle Ford-equivalent but early-stage oil play with gross recoverable oil potential of around 7bn barrels – this is likely to be the next big thing.
• Australis represents a highly- leveraged and attractive exposure to the transformational potential of the TMS oil play. 

• Saudi Aramco will invest more in the refining and petrochemical businesses in China as the Saudi Arabian oil giant tries to wring more money from every barrel of oil the kingdom produces amid a global shift toward a low-carbon economy, a company executive said.
• Aramco’s Senior Vice President of Strategy and Market Analysis Fahad Al-Dhubaib talked up China’s importance to the company’s business in Asia and worldwide.
• “Our partnerships in China enable us to help create new pathways for growth by working with a country driving the increased integration of refining and petrochemical processes,” Al-Dhubaib told Caixin last month in a written interview.

• Vitesse’s business mission is to return capital to stockholders from free cash flow generated from its capital allocation model targeting non-operated interests in oil & gas assets in major onshore US producing regions.
• Favored assets are located in plays where advancing technology can positively affect future returns.
• A fixed common stock dividend is management’s preferred vehicle to return capital to stockholders.

Nanoco Group has signed a new two-year joint development agreement (JDA) with its existing major Asian chemical partner to optimise and scale up production of Nanoco’s second-generation quantum dot materials for infrared sensing applications. This marks the company’s latest milestone on its path to becoming a commercial provider of nanomaterials to the sensing market and provides support for our FY24 forecasts.

• Given Korea’s blanket ban on short-selling, we should concentrate on the likelihood of these ADRs being significantly discounted compared to their underlying shares.
• It should persist for an extended period, highlighting the importance of continuously monitoring ADR spreads over the next 2-3 months to seize the opportune entry timing.
• Since all these carry single-stock futures, a flexible setup targeting this spread can be designed, ideally incorporating currency hedges.

• Ecopro Materials reported disappointing IPO book building results. IPO price has been finalized at 36,200 won, which is at the low end of the IPO price range.
• The demand ratio was 17.2 to 1 which was low. Total IPO offering amount was 419 billion won. Ecopro Materials will start trading on 17 November. 
• Our base case valuation of Ecopro Materials is target price of 37,436 won per share, which is 3.4% higher than the IPO price. We remain negative on this IPO.

• Rent.com.au Limited (ASX:RNT) is a purpose-led company seeking to empower home renters through its technology platform and a growing number of aligned transactional services.
• The company has reported Q1 FY24 revenue of $0.786m, with the search engine, Rent.com.au, returning to positive EBITDA of ~$0.05m.
• Separately the company has launched a fully-underwritten entitlement offer to raise $1.95m at $0.017/share to support the commercialisation of its fintech platform RentPay. 

• Back on the 6 August, Western Australian-based miner OreCorp Ltd (ORR AU) signed a Scheme Implementation Deed with Canada’s Silvercorp Metals (SVM CN).
• OreCorp shareholders are offered A$0.15 in cash and 0.0967 new Silvercorp shares – or an implied value of A$0.60 – for each OreCorp share held.
• The Scheme Booklet is out with a shareholder vote on the 8 December. Implementation is the 22 December.

• The Orecorp Ltd (ORR AU) IE considers Silvercorp Metals (SVM US)’s A$0.15 cash per share and 0.0967 SVM shares per ORR share offer fair and reasonable. 
• The offer is subject to the Tanzanian Fair Competition Commission and shareholder approval. The offer is attractive compared to the adjusted exchange ratios and historical prices.
• While the offer has suffered from the steep SVM share price decline, there has been no visible dissent from major shareholders. At the last close, the gross spread was 12.1%. 

• ECVT has navigated a challenging 2023, marked by unforeseen external factors that have made accurate quarterly forecasting a formidable task
• As the year comes to a close, ECVT is seizing an opportunity during the seasonal refinery downtime to expedite its capital expenditure plans from 2024.
• ECVT reported third quarter sales of $173.3 million compared to our estimate of $171.3 million. The miss was the result of greater than expected slowdown in ecoservices segment

Vedanta Ltd (VEDL) has released puzzling Q2/23-24 results. The oil & gas segment recorded a huge y-o-y jump in earnings during the quarter, for no apparent reason. In our view, the lack of explanation and attribution for the unexpectedly large earnings jump is very strange, compounded by the timing of the call (on a weekend, when fewer analysts would have attended). It is unclear if VEDL has made an accounting error, or if this was an attempt to put itself in a more positive light to gain better access to capital. This is a crucial period for the group, with parent Vedanta Resources (VRL) facing significant debt maturities in the next two years (USD 3 bn, with the nearest being the USD 1 bn maturing in January 2024). The results have increased our scepticism of the group’s financial reporting.

We move our recommendation on the VEDLN notes to “Not Recommended” from “Hold”.

• Portfolio strength and market weakness. At a recently held Investor Day, RYAM management highlighted its cellulose product portfolio, the company’s biomaterials initiative, and the current state of the industry in the wake of the G-P closure announcement.
• RYAM also provided an update on 2023 guidance and a look at 2024 and 2027 EBITDA bridges.
• Asset evaluation proceeding to the next round. Following the Investor Day, RYAM announced that it engaged Houlihan Lokey as its financial advisor to explore the potential sale of its paperboard and high-yield pulp (HYP) assets located at its Temiscaming site, as it advances its initiative to expand into higher-growth, higher-margin specialty businesses and reduce its exposure to commodity cellulose markets.

• Amman Mineral Internasional (AMMN IJ) listed on the Main Board of the IDX in July by raising US$715m in the largest Indonesia IPO for the year.
• The stock did not get Fast Entry to any of the local or global indices given the low float, but there could be multiple index inclusions in the near future.
• The stock is up 3x from its IPO price and there could be supply from some of the investors that got in at the offering price.

• A weekly summary of key developments across ECM and Event-Driven names tracked by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Thailand, Korea, India and Chinese ADRs.
• ECM developments – EcoPro Materials (ECO123 KS), WuXi XDC Cayman (1877628D HK), Midea Group Co Ltd A (000333 CH) and Cainiao Smart Logistics Networ (1437124D HK) IPOs
• Event-Driven developments – Origin Energy (ORG AU), Azure Minerals (AZS AU), Tietto Minerals Ltd (TIE AU), Symbio Holdings (SYM AU), Eoflow (294090 KS), Hollysys Automation Technologies (HOLI US). 

• The discounts to NAV of covered holdcos haven’t shown a clear trend during October. Discounts to NAV: C.F.Alba, 47.8% (vs. 49.2%); GBL, 35.5% (vs. 35.3%); Heineken Holding, 14.9% (vs. 14.5%); 
• Industrivärden C, 6% (vs. 7.4%); Investor B, 16.5% (vs. 15.4%); Porsche Automobile Holding, 40.9% (vs. 41.1%). The spread of Rio DLC widened to 21% (vs. 15.8%).
• What seems interesting: holding trades, Investor B vs. listed assets, Porsche SE/vs. listed assets and the Rio DLC: long RIO LN/short RIO AU.

• State Gas Limited (ASX:GAS) is a junior energy producer and explorer with assets concentrated in the Bowen Basin, Queensland.
• Having secured some $7mn in equity financing, the company is well progressed in the construction phase of the Rolleston West CNG Project (RW-CNG), with production set to commence in December.
• First gas is always a critical event driver in demonstrating the commercial potential of the assets and providing a platform from which growth strategies can emanate.

• If you are still long the Financial Group (8377 JP) from before, stay long.If you sold Hokuhoku from before, be long again, and buy on weakness
• Disaster for arb players as AusSuper rewrites the record books as an investor class and shoots down Brookfield’s sweetened Offer for Origin Energy (ORG AU).
• Kyocera (6971 JP) announced Q2 results and lowered its full-year forecast. Then the CEO said it was “reconsidering” what to do with KDDI (9433 JP) shares (after an AGM disaster).

Tata Steel has released its Q2/23-24 results. Consolidated production and sales volume declined 3% and 2% y-o-y, respectively, to 7.31 mn tons and 7.07 mn tons, respectively. Consolidated revenue fell 7% to INR 55,682 cr, driven by lower volume and prices. EBITDA was INR 4,315 cr, with a margin of 8%. EBITDA margin/ton was INR 6,106. The Indian business continued to perform well, but the European business continued to weigh on the overall performance.

While the results were decent, the Indian business’ good performance was offset by increasing losses in the UK operations. The financial risk profile is deteriorating. Positively, liquidity is solid, with a large cash position. Key near-term credit drivers would be the restructuring of the UK business and a GBP 1.25 bn green steel manufacturing project in the UK.

• TPL Summary Texas Pacific Land (TPL) reported third quarter results where a decline in daily production led to lower than expected oil and gas royalties.
• The rate of production has always been the variable part of TPL’s results. In Q3 production levels were impacted by the summer heat in Texas causing abnormal electricity levels
• TPL reported third quarter revenue of $158.0 million compared to our estimate of $178.7 million

• HWKN reported fiscal second quarter (September) results with improved gross margin and continued reversal of last in first out (“LIFO”) reversals
• HWKN converted inventory to cash that was then used to reduce the debt balance allowing HWKN to acquire two more water treatment businesses
• The quarter included a sharper decline in industrial sales than expected. However, the higher gross margin in water treatment and health and nutrition segments were able to offset the impact

• On the 31st October, AustralianSuper (with 13.67% of shares out and Origin Energy (ORG AU)‘s largest shareholder) argued the Brookfield/EIG-backed Consortium Offer remained substantially below its estimate of fair value.
• Brookfield/EIG have now increased their Offer by 8% to $9.53/share from $8.81/share, which now comprises cash components of A$6.59/share and US$1.86/share. A consideration-reducing fully-franked dividend of A$0.39/share is expected.
• The Offer is declared “best and final.” It is above the top-end of the IE’s valuation range. AustralianSuper should accept the revised terms. But they say no.

• Origin Energy (ORG AU)  has disclosed a best and final offer from Brookfield/EIG at A$6.59 and US$1.86 per share, which implies A$9.53 per share, 8.1% higher than the previous offer.
• AusSuper will vote against the final offer. Taking advantage of the share price dip, AusSuper is said to have further increased its shareholding to 14.98% of outstanding shares.
• The scheme will likely fail as a minority YES vote turnout of 88% is required to pass. Brookfield/EIG could return with an off-market takeover offer, but it also faces issues. 

In our view, Indika Energy’s 9M/23 results were weaker than expected due to a sharp decline in Kideco’s production and sales volume in Q3, lower-than-expected profitability at Kideco (which accounts for 90% of Indika’s EBITDA) and negative OCF, which came as a surprise. The balance sheet turned to a net debt position, after a few quarters of net cash. Liquidity remains sound, with a large (albeit fast shrinking) cash position.

OCF and FCF were negative, which was surprising as Indika has previously managed to generate positive FCF even when coal prices were lower than current levels. The last time the company generated negative FCF was in 2015, during a major coal downturn. We believe that the negative OCF may be due to the new businesses, which are ramping up. Indika’s key business strategy in the medium term is to diversify away from and reduce its reliance on coal-related activities, with the company aiming to derive 50% of its revenue from non-coal sources by 2025. The new businesses include a gold mine, renewable energy solutions (mainly solar power), electric scooters and several digital technology businesses.

• Empire Energy Group Limited (ASX:EEG) is an oil and gas producer/developer, with onshore Northern Territory (NT) and US oil/gas production assets.
• EEG has the largest tenement position in the highly prospective Greater McArthur Basin, which includes the Beetaloo Sub-basin.
• The investment case is building with the development model becoming more defined after the completion of the Carpentaria-3H testing campaign. 

• ADF is entering a multi-year growth phase due to major tailwinds in infrastructure spending and non-residential construction.
• ADF Group Inc. (DRX:TSX, ADFJF:OTC) is a North American leader in the design, engineering, fabrication, and installation of complex steel structures for non-residential construction.
• ADF has posted a long-term track record of growing revenue and EBITDA, but we believe it has entered a multi-year growth cycle where it can post consistent growth and FCF generation.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We view Indika Energy’s ESG as “Adequate”, in line with its Environmental, Social and Governance scores. Controversies are “Immaterial” and Disclosure is “Adequate”.

• • 3Q23 production was 3,683 boe/d, slightly below the company’s guidance due to maintenance, turn-around operations at two of the production facilities and unscheduled downhole maintenance on pumping equipment on a few of the more productive wells. 
• This is more than offset by the high current production of ~4,100 boe/d following Pisces 10 and 11 being brought into production.
• Calima forecasts 4Q23 production of 4,028 boe/d and we have increased our 4Q23 production forecast of 3,740 boe/d to 4,030 boe/d to be in line with Calima’s guidance.

• Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
• We assess Guala Closures’ ESG as “Adequate”, in line with its Environmental, Social and Governance scores. Controversies are “Immaterial” and Disclosure is “Strong”.
• Guala Closures is a leading producer of closures for spirits, with a strong presence in emerging markets. Its main product lines are Safety Closures, Wine Closures and Standard Closures. 

• Canacol Energy has exercised 18.4 mm warrants. The company will now hold 60.1 mm shares in Arrow representing 21.2% of the issued share capital.
• Tim Leslie has exercised 10.2 mm warrants, which more than doubles his interest from 7.6 mm shares to 17.8 mm shares.
• This represents 6.3% of the issued share capital.

• Pulsar has signed a lease with a private mineral rights holder to expand the area surrounding the company’s Topaz helium project.
• The additional mineral rights are within a 6.2 mile radius of the Topaz discovery and cover a total of 2,840 gross acres (1,049 net acres).
• This more than doubles net acres under lease (existing net area of 1,040 net).

• The Sherwin-Williams Company delivered a solid result and managed an all-around beat in the last quarter.
• In the third quarter, Sherwin-Williams’ Paint Stores Group exhibited commendable resilience, with a 3.6% increase in sales, despite a demanding 21.5% comparison.
• Within the Paint Stores Group, the Protective & Marine sector emerged as the fastest-growing, achieving double-digit percentage sales growth against a mid-teens comparison.

• Southern Copper Corporation delivered a strong result and managed an all-around beat in the last quarter, demonstrating resilience and adaptability.
• Copper, constituting a significant 75% of their sales, faced a marginal 9% decline in production, primarily due to diminished ore grades in the Cuajone mine.
• Amidst these challenges, Southern Copper remained proactive, predicting a 6% increase in copper production for the year 2023, aiming for 917,000 tons.