Energy & Materials Sector

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.

• Shareholders have approved Invocare Ltd (IVC AU)‘s acquisition by TPG and IVC is expected to stop trading after the close on 3 November.
• Invocare Ltd (IVC AU) will be replaced by Emerald Resources Nl (EMR AU) in the S&P/ASX 200 (AS51 INDEX) at the close on 3 November.
• Boss Resources (BOE AU) misses out this time but should be added to the index late November or at the regular rebalance in December.

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

  Ineos AG was awarded another gold sustainability rating by EcoVadis in 2022, while Ineos Group Holdings received a low-risk rating from Sustainalytics and was ranked the third-best commodity chemicals company out of 234 rated by the agency.

UPL’s Q2/23-24 results were very weak, with revenues and earnings declining significantly and a deterioration in working capital. Our scepticism of the company has continued to deepen with the results. We are concerned about the lack of discussion on the huge debt reduction and unusual earnings call set-up in Q4/22-23, as well as the subsequent rebound in debt in Q1/23-24. We note that the pressure to reduce net debt to USD 2 bn in Q4/22-23 was to meet management’s aggressive guidance and rating agencies’ expectations. Management had released the Q4 results in early May 2023, almost halfway through Q1/23-24. Yet, there were few indications of very weak Q1 or H1 numbers.

In addition, we are sceptical of management’s guidance, even after it has been revised downwards. The new guidance implies c. 18% y-o-y revenue growth and a c. 28-30% increase in EBITDA in H2/23-24. That said, management does not expect y-o-y improvement in Q3. Hence, for UPL to meet the guidance, all the growth would have to be registered in Q4. We do not believe that the company will be able to meet the full-year guidance.

• This is our first report on energy equipments and services provider, Baker Hughes.
• Despite global economic uncertainty and fluctuating commodity prices, Baker Hughes remains optimistic about the outlook for the year, emphasizing a durable upstream spending cycle driven by international and offshore markets.
• Baker Hughes continues to optimize its corporate structure with a cost-reduction strategy and a focus on achieving higher margins and returns.

• This is our first report on energy infrastructure major, Cheniere Energy Inc.
• The company performed decently in the previous quarter as global inventory levels reached historic highs.
• The U.S.’s mild climate and increased production kept Henry Hub prices below $3 during the quarter, encouraging coal-to-gas switching and boosting power sector demand.

• This is our first report on Energy Transfer LP had a solid Q2 2023, characterized by robust performance in its base business, delivering record volumes in multiple segments, including intrastate and midstream operations.
• Energy Transfer remains optimistic about its industry’s future and achieving distribution growth targets while ensuring financial stability.
• Energy Transfer continues to prioritize the equilibrium between distribution growth, leverage reduction, and maintaining robust free cash flow for ongoing expansion.

• This is our first report on oilfield service major, Halliburton Company.
• The company delivered a mixed set of results for the previous quarter with revenues well below analyst expectations but managed an earnings beat.
• As Halliburton capitalizes on this extended upcycle, its strategic execution reaffirms its trajectory of sustained success in the oilfield services sector.

• • Current production stands at ~39 mboe/d including 7.1 mbbl/d at CPO-5 and 24.4 mboe/d at Llanos-34. • Following the recent exploration success at Toritos-1 and Saltador-1, Llanos-123 is now producing 2,140 bbl/d (1,070 bbl/d net to GeoPark).
• The company is now drilling the Bisbita Centro exploration well that could add further production at the block if successful.

• This is our first report on an independent energy sector, Hess Corporation.
• Net production averaged 387,000 barrels of oil equivalent per day.
• In the deepwater Gulf of Mexico, the second quarter reported net production of 32,000 barrels of oil equivalent per day, with the third quarter expecting an average of approximately 25,000 barrels of oil equivalent per day, considering scheduled maintenance and hurricane preparedness.

• • Chariot has received approval for its Environmental Impact Assessment (EIA) for the Anchois project. • The EIA covers all aspects of the development including future wells and offshore infrastructure, the onshore Central Processing Facility and the link to the GME pipeline.
• Positive news would also have a beneficial impact on the attractiveness of Morocco for the oil and gas sector.

• EcoPro Materials (ECO123 KS) is looking to raise up to US$469m in its Korean IPO.
• Ecopro Materials (EPM) manufactures and sells high-nickel precursors, one of the key materials for high-nickel cathode materials for secondary (rechargeable) batteries.
• In our previous notes, we covered the company’s performance, undertook a peer comparison and shared our thoughts on valuation. In this note, we will share our updated thoughts on valuation.

• SOE-Backed Zhaojin Mining Industry H (1818 HK), China’s fourth largest integrated gold producer, has tabled a non-binding Offer for Aussie-listed West African gold miner Tietto Minerals Ltd (TIE AU).
• The A$0.58/share cash Offer is a 36% premium to undisturbed. Zhaojin is seeking 50.1% of shares out, with 7.02% already held.
• Conditions include a raft of PRC and Côte d’Ivoire regulatory approvals. None of these should face opposition. 

• On 30 October, Kum Yang announced that it has submitted an agenda to expand the issuance limit of CB and BW to 10 trillion won.
• This increase in the limit of CB and BW issuance to 10 trillion won would mean potential capital raise through these methods that are nearly 2x its entire market cap.
• Kum Yang may be trying to raise large amount of capital (several trillion won) which could result in significant dilution risk for the existing shareholders. 

• Tietto Minerals Ltd (TIE AU) has disclosed a conditional proposal from Zhaojin Mining Industry H (1818 HK) at A$0.58 per share, a 36.5% premium to the undisturbed price of A$0.425.
• The offer is conditional on China and Cote d’Ivoire regulatory approvals (should be forthcoming) and a 50.1% minimum acceptance condition (which can be waived).
• The offer is light compared to peer resource multiples and recent share prices. The presence of large Chinese shareholders is a stumbling block for a rival offer. 

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

• We summarise the latest spreads and newsflow of merger arb situations we cover across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – 111 Inc (YI US), Eoflow (294090 KS), Hollysys Automation Technologies (HOLI US), Symbio Holdings (SYM AU), JSR Corp (4185 JP), Healius (HLS AU), Haitong International.
• Lowest spreads – Pact Group Holdings (PGH AU), Origin Energy (ORG AU), Chindata Group (CD US), Allkem Ltd (AKE AU), T&K Toka Co Ltd (4636 JP), Azure Minerals (AZS AU). 

• Recent underperformance of Newmont Mining (NEM US) vs Peers appears to be part of a “perfect storm”. 
• PCCW Ltd (8 HK) has an attractive yield on its side; and Richard Li has been buying. But a 6% premium to NAV is unsustainable for this holding company structure.
• Palliser Capital’s straightforward request is for a 35% reduction in Keisei Electric Railway Co (9009 JP)‘s Oriental Land (4661 JP) holding reflects a strategic urgency. 

Lucror Analytics Weekly Wraps provide an overview of all Morning Views comments and reports published by our analyst team in the past week, and also showcase a list of the most-read reports.

In this Insight:

1. Adani Green Energy
2. Vedanta Resources
3. China Jinmao Holdings
4. Geely Auto
5. First Pacific Co

and more…

• Cobalt Blue Holdings Ltd (ASX:COB) is a mining and mineral processing company focused onadvancing cobalt mining and refining operations in Australia.
• The company is developing the Broken Hill Cobalt Project (BHCP) in far west NSW and concurrently in planning on a Kwinanacobalt refinery in WA with a definitive feasibility study underway.
• Cobalt Blue Holdings wasfounded in 2016 and listed on the ASX in early 2017. 

• Akora Resources Ltd (ASX:AKO) is an exploration company engaged in the development of three iron ore projects, Bekisopa, Tratramarina and Ambodilafa, in Madagascar.
• The company has initially focused on Bekisopa, which has a maiden resource of 194.7Mt with the potential for significant high-grade lump direct ship ore (DSO).
• The Indicated DSO is 4.4Mt at 61% Fe, “Green Steel” 34Mt at 58% DTR to 69% Fe concentrate. 

• Resources & Energy Group Ltd (ASX:REZ) is an exploration company engaged in the development of its flagship East Menzies gold project, 130km north of Kalgoorlie, Western Australia.
• The company has been operating as a gold, nickel and cobalt exploration and development company since 2015 and currently has gold and silver resources of 183koz gold and 862koz silver.
• REZ recently announced (17-Oct) that optimisation studies at the Goodenough and Maranoa gold prospects within the East Menzies district had confirmed an opportunity for a low cost, near- term open cut mining operation at Goodenough, which had previously been worked as an underground resource with historic production of ~21,532t at 14.91g/t. 

• Today saw 65mm shares of Newcrest Mining (NCM AU) print at the close and 85+mm shares crossed in blocks post-close. There was another 15mm shares traded in additional excess volume.
• That suggests a certain lack of “risk taking” by passive managers, increasing today’s trade in NY. 
• Furthermore, the settlement logistics appear to indicate an interesting trade to do 7 November (worth checking with your custodian/broker). 

• When lithium mining play Azure Minerals (AZS AU) was halted this week “regarding a potential change of control transaction“, Sociedad Quimica y Minera (SQM/B CI) was the obvious suitor.
• This was confirmed this morning with a A$3.52/share Offer, a 44.3% premium to undisturbed, by way of a Scheme. A concurrent conditional off-market takeover at A$3.50/share is also present. 
• $3.50 is locked in, no matter what. Gina may take her stake up to 19.9%, but it won’t affect the A$3.50 floor. But it may kickstart a competitive bidding situation. 

• Float and capping changes will require passive trackers to sell Bank Central Asia (BBCA) and Adaro Energy (ADRO) while buying Bank Rakyat Indonesia (BBRI) and GoTo Gojek Tokopedia (GOTO). 
• There will be passive trading to other stocks too, though the impact and flow is not material on most of the stocks.
• Passive trackers will trade at the close on 31 October, so there are only 3 days to implementation of the changes.

• Azure Minerals (AZS AU) has entered a scheme implementation deed with Sociedad Quimica y Minera de Chile (SQM US) at A$3.52 per share, a 44.3% premium to the undisturbed price.
• To avoid a repeat of the Albemarle Corp (ALB US)/Liontown Resources (LTR AU) situation, if the scheme fails or is terminated, SQM will launch an off-market takeover offer at A$3.50.
• Gina Rinehart is rumoured to have built a 14.5% stake, suggesting the final offer is an off-market takeover. The offer is conditional on FIRB approval. 

• Ocean Power Technologies entered a contract with WildAid and Caribbean Law Enforcement to provide a WAM-V 16 Uncrewed Surface Vessel (USV) equipped with an integrated quadcopter aerial drone that should help in protecting vital marine species and combat illegal, unreported, and unregulated (IUU) fishing activities in critical habitats.
• OPT and WildAid and Caribbean Law Enforcement are teaming up to use unmanned surface and aerial vehicles to identify, track, and gather information on people who are harming marine life and ecosystems through illegal activities
• Additionally, the company also received an additional volume order from Sulmara worth $1.6 million, a prominent player in offshore services, of WAMV 16 uncrewed surface vehicles (USVs), making this the largest single order of WAM-Vs to date.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Medco Energi

• Japanese activist Murakami-san and Cosmo Energy Holdings (5021 JP) have been duking it out for 18 months. He now has 20%. Wants more. Management wants to exercise the poison pill. 
• Cosmo’s efforts are not completely honest, but Murakami-san’s efforts are clearly designed to benefit Murakami-san over general shareholders, and Cosmo has finally explained the reasons publicly. Read the doc (Japanese).
• At 1.0x book, lower refining margins vs earlier in the year, and difficulty for Murakami-san to force the issue, one must take more care here than one did 40% ago.

• Lithium mining play Azure Minerals (AZS AU) went into a trading halt Monday (23 October) “regarding a potential change of control transaction“. That halt has been extended to Friday morning. 
• The obvious suitor is Sociedad Quimica y Minera de C (SQM/B CI) with 19.9%, who approached Azure with a $2.31/share Offer in August but was rejected.
• Mark Creasy, a major shareholder in Azure and also a direct stakeholder in Azure’s flagship mine, is the key. Should a firm Offer unfold, expect a chunky premium. 

• KRX has amended the stock selection methodology for the KOSPI2 INDEX and KOSDQ150 INDEX and added ‘Expert Judgement’ as a criteria.
• The qualitative and quantitative criteria and the detailed filtering standards will be described in the manual but will NOT be publicly disclosed.
• There is no change from using full market cap to free float market cap in stock selection, so the stocks that could be added/deleted will be broadly same as forecasts.

• Rising geopolitical tensions have driven gold prices 9% higher over the last 2 weeks. Risk of escalation provides further upside to gold prices. 
• Gold is trading at a key psychological price level of $2,000/oz with a bullish momentum. Previous rallies were rejected from the price level of $2,100/oz.
• Consumption is expected to rise in India and China due to higher seasonal consumption in India and fading domestic premium in China. But, higher prices remain a drag.

We view Reliance Industries (RIL) as “Low Risk” on the LARA scale. This is driven by the company’s: [1] large scale, leading position and diversified business portfolio; [2] strong track record of execution; as well as [3] modest credit metrics (Net Debt/EBITDA of c. 1x) and sound liquidity. There is a strong diversification effect from RIL’s three key segments (Oil to Chemicals, Digital Services and Retail), each of which is a market leader. The company raised substantial capital in FY 2020-21, FY 2021-22 and FY 2022-23 from partial stake sales of its key segments at very high valuations, resulting in a strong cash position.This will help RIL to grow and fund the persistent negative FCF. The key credit constraint is India’s rating, as the company is already rated one notch higher than the sovereign.

Our Credit Bias on RIL is “Stable”, as the company’s strong fundamentals and positive momentum in operations should partially offset the weaker outlook on India’s sovereign rating.

Controversies are “Immaterial”. While RIL is subject to controversies and lawsuits (given that it is one of the largest conglomerates in India), the disputes are mainly commercial in nature instead of ESG-related. A former director of Dhirubhai Ambani Hospital reported various instances of financial irregularities, mismanagement and corporate governance failures at the hospital. RIL and Chairman Ambani were fined in 2007 for alleged manipulative trading in shares of related companies. RIL operates in the oil & gas industry, which is subject to scrutiny from environmental agencies, given the effects of fossil-fuel drilling on greenhouse gas (GHG) emissions and biodiversity in particular (the company has not reported any such incidents). There is also global pressure to move towards greener energy and reduce GHG emissions. RIL is focused on building a gas-based portfolio, which is cleaner than oil. We deem the ESG Impact on Credit as “Neutral”.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Vedanta Resources

• Newcrest Mining (NCM AU) saw its shareholder meeting vote through the Scheme, then on teh 18th, the Special Div went ex-. 
• Since then, as gold has rebounded sharply, Newmont Mining (NEM US) has underperformed peers and juniors (VanEck Gold Miners ETF/USA (GDX US)) since gold has spiked.
• Thursday is the last day of trading and there is a LOT of NEM to trade.

JSW Steel has delivered strong Q2/23-24 results in our view, driven by higher volumes and a recovery in steel prices. The numbers were in line with management’s earlier guidance for an improvement in operating environment and steel prices. The financial risk profile is improving, and liquidity is adequate.

Steel prices remained the key credit driver. A small price increase has resulted in a significant EBITDA increment, due to the high operating leverage. Based on management’s guidance for an improvement in the operating environment and steel prices, we expect better H2/23-24 numbers, with revenues inching up and a larger earnings improvement. Debt will likely remain stable following the merger with JISPL (completed in Q2), and the leverage profile should continue improving on the back of higher earnings.

Wheaton Precious Metals’ (WPM’s) Q323 results are scheduled for 9 November. This note adjusts our forecasts – principally for Q3 – for metals prices ( 0.3% simple average for the quarter since our last note), Penasquito (returning to production from mid October, rather than end August), a new life of mine production profile at Constancia (in the aftermath of a site visit in late September) and production at Salobo, Sudbury and Voisey’s Bay (in the aftermath of Vale’s production and sales report on 17 October). We have also re-phased capital payments for Salobo III from FY23 to FY24 and FY25.

FY23 was a turbulent but ultimately pivotal year for Nanoco. The US$150m Samsung settlement (US$90m net costs) will fund the planned £33–40m return to shareholders with the retained c £20m providing good support to make the transition from development to commercial production. The company’s first commercial order is expected this calendar year. While volumes are expected to be relatively modest, this is a key milestone, and successful delivery should ease the pathway to follow-on orders and new customers. The partnership with an Asian chemicals company provides a second channel into the sensing market, while management also expects to add a third development partner potentially focusing on the display market over the course of FY24. In the longer term, pursuing other potential IP infringers could open other commercial opportunities, royalties or compensation payments.