Energy & Materials Sector

• In this insight, we take a look at the potential index changes for ASX 200, 100, 50, and 20 in the run up to the December 2023 Rebalance.
• There could be up to four ASX 200 changes including the intra-review changes that could potentially be triggered by M&A events.  
• The Origin Energy (ORG AU), Newcrest Mining (NCM AU), and Allkem Ltd (AKE AU) deals also could have interesting index change and/or flow implications over the next few weeks/months.

• Liontown Resources (LTR AU) is looking to raise A$365m (US$230m) for capital expenditure and to plug its funding gap for the Kathleen Valley Lithium (KVL) project. 
• Together, the combined A$1.14bn equity/debt raising comes after Albemarle abandoned its A$6.6bn (US$4.2bn) acquisition bid for Liontown Resources earlier in the week.
• In this note, we will talk about the deal dynamics and run the deal through our ECM framework.

• This transaction just keeps on giving. First, you received an additional dividend. Now the Offer price has been increased. 
• On the 26 July, Geo Energy Resources (GERL SP) announced an intention to acquire a 58.65% stake in coal miner Golden Eagle Energy (SMMT IJ) (GEE).
• Geo shareholders approved the purchase on the October 13 and the acquisition was completed on the 18 October. This triggered an MTO, which has been revised upward to IDR 1,305.50.

• Liontown Resources (LTR AU) resumes trading today after announcing a raise of up to A$1.18bn to fully fund the Kathleen Valley Lithium Project to first production and beyond.
• The equity component is up to A$421m and the placement price of A$1.8/share is a 35.5% discount to the last close.
• The placement price is higher than the stock price prior to the Albemarle Corp (ALB US) offer and during a period when its peers have performed poorly.

• On 20th October, the ACCC cleared Brookfield to take over Origin Energy (ORG AU). 
• The transaction still needs shareholder approval and AustralianSuper with its too-big-to-ignore 13.68% stake reckons terms are below long-term value.
• The Scheme Booklet is out with a 23 November Scheme Meeting. The IE backs out a fair value range of $8.45-$9.48/share, but as at June 30. A bump is imminent.

• The investigative analysis highlights a deceptive and confusing saga involving the Vedanta Group’s semiconductor venture in India. 
• The group skillfully blurred the lines between Vedanta Ltd (VEDL IN)  and Vedanta Resources (VED LN), creating an impression that the semiconductor business was under Vedanta Limited, despite previous clarifications. 
• Eventually, regulatory authorities penalized Vedanta for disclosure lapses, exposing governance concerns and a lack of transparency in this complex corporate maneuver.

• We listened to the conference call held by Whitehaven Coal (WHC AU) to update investors on its acquisition of BHP’s coking coal mines and  Q2 2024 production. 
• Based on spot prices of coking coal over 350 USD/ton and cash costs of 20% lower than the average of 2 years, the EV-EBITDA of acquisition is 1.8x
• The acquisition could be massively accretive if coking coal prices remain stronger for longer as the company pivots its strategy to becoming a large met coal producer. 

• Youngpoong Paper Mfg’s shares declined sharply by 30% to 33,900 won today, trading only 190k shares (3% of ADTV). 
• There is high probability that this sell-off could be related to CFD related margin call. 
• Daiyang Metal, the largest shareholder of Youngpoong Paper Mfg, also dropped limit down today. The Korea Exchange has temporarily suspended trading of both Youngpoong Paper and Daiyang Metal. 

• Lithium Power International (LPI AU) has entered a scheme implementation deed with Corporacion Nacional del Cobre de Chile (Codelco) at A$0.57 per share, a 119.2% premium to the undisturbed price.  
• Shareholders representing 32.47% of outstanding shares will vote in favour of the scheme. Forums suggest that retail shareholders are broadly resigned to accepting the offer.
• The offer is conditional on FIRB approval. The scheme meeting will be held on 23 January 2024. At the last close, the gross spread was 7.5%. 

• There has been little change in day rates since Seadrill (SDRL) reported second quarter results with the Company having two vessels with contracts expiring next month
• The only news flow since SDRL reported second quarter results has been about the Company regularly buying back stock
• The two vessels with contracts expiring are currently in different geographies

• Taiwan Cement (1101 TT) is looking to raise US$395m in its global depository share (GDSs) issuance. Included in the offering is a concurrent US$420m convertible bond issuance.
• The deal is a relatively large one to process at 19.5 days of three months ADV. Recent momentum on the stock hasn’t been the greatest as well.
• That being said, the deal is very well flagged, and short interest remains elevated as well.

• Liontown Resources‘ Suspension from Quotation “pending the release of an announcement regarding the finalisation of funding arrangements associated with the Kathleen Valley Project” could last till the open 20 October.
• Short interest continued to increase prior to the trading halt and passive selling will be higher following Hancock increasing its stake to 19.9%.
• The immediate funding for Liontown Resources (LTR AU) could come from debt sources with an equity raise coming later this year or early next year.

• Lithium Power International (LPI AU) has announced it has entered into a Scheme Implementation Deed with Chilean state miner Codelco, the world’s largest copper producer. 
• Codelco is offering LPI shareholders A$0.57/share, a whopping 119% premium to last close. LPI’s major shareholder, Minera Salar Blanco SpA with 28.25%, is supportive. As is LPI’s board. 
• The Scheme Meeting is expected to be held on the 23 January with implementation on the 8 February. Clean deal. 

Treatt’s FY23 trading update demonstrated a resilient performance despite the tougher trading environment towards the end of the year. Revenue growth of c 5% (to c £147m) has been driven by price increases, which have mitigated inflationary pressures and supported margins. Sales in H223 slowed due to destocking as clients reduced inventories, although management notes early signs that this is reversing. New markets (Coffee, China and Treattzest citrus) displayed particularly strong growth, with revenue up 60% to £16m. Cash generation was at a record high leading to net debt more than halving in a year to £10.5m (FY22: £22.4m).

• On 16 October, Kumho Petrochem (011780 KS) announced that it will cancel 0.77 million shares on 23 October, representing 2.6% of its outstanding shares or about 100 billion won. 
• We particularly like Kumho Petrochem preferred shares which provide a dividend yield of nearly 6.7% which is 2x the dividend yield of the common shares.
• Foreigners have been net buyers of Kumho Petrochem preferred shares this year while they have been net sellers of its common shares this year. 

• Back on the 26 July, Geo Energy Resources (GERL SP) announced an intention to acquire a majority stake in coal miner Golden Eagle Energy (SMMT IJ) (GEE).
• GEO shareholders have now approved the purchase of a 58.7% stake in Golden Eagle from Indonesian conglomerate Rajawali Group, triggering an MTO at IDR1,255/share, which is subject to Indonesia’s OJK.
• In addition, GEE announced a special/additional dividend, with a cum-entitlement today, the 17th of October. 

• ADX is expected to start drilling the Anshof-2 appraisal well in November.
• The Anshof-1 well will then be drilled in Q2 or Q3 24 increasing gross production from the Anshof field to ~1,000 bbl/d with three wells (500 bbl/d net to ADX). 
• MND has already paid ADX A$3.2 million for past costs and long lead drilling expenditures.

• Light & Wonder (LNW AU) will replace United Malt Group Ltd (UMG AU) in the S&P/ASX 200 (AS51 INDEX) at the close on 17 October.
• Invocare Ltd (IVC AU) is expected to stop trading after the close on 3 November and Boss Resources (BOE AU) is best placed to be the replacement.
• There are stocks that are close on the heels of Boss Resources (BOE AU) and will compete for a place. Two of those could be added at the December rebalance.

• EcoPro Materials (ECO123 KS) is a leading player in the electrode material industry. It is seeking to raise up to US$470 million in a KRX IPO.
• We previously discussed the IPO in EcoPro Materials IPO: The Bull Case and EcoPro Materials IPO: The Bear Case.
• In this note, we look at the syndicate’s valuation methodology. Our valuation analysis suggests that the IPO price range is unattractive, and we would pass on the IPO.

• The Allkem/Livent “merger of equals” discussed in Allkem/Livent (AKE AU | LTHM US) Merger Of Lithium Equals Has Index Surprises and Allkem/​Livent: Enlarged Charging Unit is on track.
• As of the end of last month, all approvals are received or are expected to be received. The Scheme Booklet is expected next month. Deal is expected to close end-CY2023.
• The deal STILL has interesting side issues with index. Even more interesting than Newcrest/Newmont. This is an update with more detail as we probably have 8-10 weeks left.

• I tally 45 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• One new deal was discussed on Smartkarma this week: Haitong Securities Co Ltd (A) (600837 CH)‘s Offer for Haitong International Securities Group (665 HK).
• Key updates took place for: Origin Energy (ORG AU), Estia Health (EHE AU), Newcrest Mining (NCM AU), Liontown Resources (LTR AU), NWS (659 HK),IMAX China (1970 HK), and Eoflow (294090 KS).

• The annual WisdomTree rebalance takes place next week Wednesday in the closing auction. Turnover on the JSE at the rebalance last year (20 Oct) was R30.6bn, 1.5 times the 5-day average.

• There are several SA stocks being added to and deleted from the range of WisdomTree EM funds.

• Our buy flow estimate for SA additions is R1.3bn, our sell flow estimate for SA deletions is R1.8bn. This excludes up and down weightings.

• Pulsar Helium (PLSR CN)C; target price of C$0.90 per share: Additional acreage should increase the size of the prize – Pulsar has signed a lease with a private mineral rights holder to expand the area of 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).
• OMV (OMV AG): 3Q23 update – 3Q23 production was 364 mboe/d.

• Market concern on company’s redemption of Bonds of $ 3 bn in 2024 
• Liquidity gap for company is much larger estimated at nearly $11 bn
• Company needs to raise long term funds and/or divest assets to raise the required amount

Medco Energi’s tender offers are positive for existing bondholders in our view, as the early tender considerations are 2-3 pts above the last traded prices before the announcement. Conversely, we doubt the repurchases will provide significant interest savings for the company. Still, we view the proposed new notes issuance as credit positive for Medco, as it will lengthen the debt maturity profile and enable the company to finance a Middle East acquisition using long-term funding.

We recommend that holders of the MEDCIJ 6.75 25 tender before the early tender deadline, but are neutral on the tender offer for the remaining notes. We see fair value for the proposed 2029 notes at 9.2-9.7%. 

On 10 October, Canacol Energy provided an update on gas sales and drilling results. Gas sales in Q3 were 178mmcf/day, which was down approximately 4% from the level seen in Q2 due to previously flagged problems at its Jobo gas processing plant. This is being resolved and management is confident about achieving its average 2023 production targets.

• Ecopro Materials reduced the upper end of the IPO price range from 46,000 won to 44,000 won.
• The bankers reduced the IPO discount, EV/EBITDA valuation multiple, and outstanding shares. 
• We maintain our Bearish view of the Ecopro Materials IPO. Our base case valuation of 37,436 won per share is towards to lower end of the IPO price range. 

• EcoPro Materials (ECO123 KS) is a leading player in the electrode material industry. It is seeking to raise up to US$477 million in a KRX IPO.
• In EcoPro Materials IPO: The Bull Case, we highlighted the key elements of the bull case. In this note, we outline the bear case.
• The bear case rests on weakening sector market sentiment, margin pressure likely to persist, cash burn, elevated leverage and high related-party transactions.

Pan American Silver (PAAS) has announced that it will begin restarting operations at the La Colorada mine on 16 October. Operating activities at the project have temporarily been suspended since 5 October due to security concerns at the mine site following the concentrate robbery. The company does not expect any impact on the FY23 production and cost guidance from the suspension of production. We maintain our estimates and valuation.

• WestRock Company delivered a mixed result in the recent quarter, with revenues below market expectations but surpassing the analyst consensus regarding earnings.
• The company delivered outstanding results this quarter, surpassing expectations through effective execution, increased productivity, and managed input costs.
• Despite changing conditions in the global paper business, WestRock is leveraging its scale, diverse substrate portfolio, and strategic customer relationships.

• Putting science first. TMC’s recent announcement of a deepening of its relationship with Norway’s leading software company, Kongsberg Digital, to further develop its Digital Twin software serves as another indication of the company’s efforts to move beyond simplistic and often alarmist computer models based on little to no actual data and instead to develop robust monitoring and analytical capabilities that can help regulators ensure mining code compliance, while helping TMC optimize its production process, increase operating efficiencies, and further reduce the environmental impact of seabed mining.

• Putting multiple tools to work. As with many of TMC’s key system components, the prototype Digital Twin was deployed and put to work during the company’s successful large-scale pilot collection test conducted in 4Q22 that not only collected and transported to the surface more than 300 wet tons of polymetallic nodules but generated more than 200 terabytes of data collected from a suite of marine sensors throughout the water column.

• The renewed and expanded collaboration between TMC and Kongsberg will allow for integration of Digital Twin into the broader Adaptive Management System that will use AI and hybrid machine learning to analyze data from the immense amount of live operational sensor telemetry and provide real-time 3D visualization of TMC’s deep-sea operating environment to mining regulators and other stakeholders that can help monitor and assess the impact of seabed mining from operational and environmental perspectives.