Energy & Materials Sector

We view Yankuang as “Low Risk” on the LARA scale. This reflects: [1] the company’s huge scale (producing over 100 mn tons a year) and status as the second-largest producer in the Chinese coal sector; and [2] that it is majority owned by, and has strategic importance to, the Shandong government. These translate to strong access to onshore capital. Our assessment also takes into account Yankuang’s: [1] earnings being dependent on coal price fluctuations; [2] improving financial profile; [3] exposure to adverse movements of the USD against the CNY; and [4] track record of operation.

Our fundamental Credit Bias on Yankuang is “Positive”, due to: [1] the company’s enhanced SOE status following the completion of the Yanzhou Coal/Shandong Energy merger; and [2] supportive coal prices.

Controversies are “Immaterial”, but the ESG Impact on Credit is “Moderately Negative”. The coal mining industry in China is exposed to regulatory and geopolitical risks, such as forced closures of inefficient mines. The industry also faces extreme scrutiny from environmental agencies, given its negative impact on the environment.

Wheaton’s Q223 results exceeded our expectations. Production of gold equivalent ounces (GEOs) was 4.6% higher than our prior forecasts, while sales of GEOs were 6.9% higher, driving a positive variance in revenue of 6.6%, or US$16.4m. This was partially offset by costs but nevertheless resulted in a US$7.8m (or 5.4%) positive variance in earnings from operations that, to all intents and purposes, dropped through to the bottom line.

• Exxon Mobil delivered a mixed result in the recent quarter, with revenues above market expectations but failed to surpass the analyst consensus regarding earnings.
• The company reported nearly $8 billion in earnings, twice the amount earned in the same quarter three years ago under comparable industry conditions.
• Exxon Mobil also achieved significant production rates in the Permian and Guyana regions, demonstrating progress in meeting global energy needs while reducing emissions.

• The Williams Companies delivered mixed results for the previous quarter, with revenues below the analyst consensus.
• Starting with adjusted, the company experienced another solid quarterly growth, which aligns with a 5-year CAGR of 8.6% for the same metric.
• The company’s adjusted EPS for the second quarter also increased, continuing the long history of robust EPS growth, with year-to-date EPS currently up by 23%.

• TotalEnergies’ results were a major disappointment as the company failed to meet the revenue expectations as well as the earnings expectations of Wall Street.
• The company produced a healthy cash flow during the second quarter.
• In this report, we have carried out a fundamental analysis of the historical financial statements of the company.

• Ionic Tech begins REO recycled magnet production at Belfast facility; 
• IXR’s flagshipMakuutu Rare Earths project is significant given its ionic adsorption clayhostedgeology
• In Sep22 IXR received a £1.72m grant from the UK government todevelop its demonstration magnet recycling plant in Belfast, UK.

Pan American Silver (PAAS) reported its first quarterly results that include the assets acquired as part of the Yamana transaction, with Q2 revenues and adjusted EBITDA of US$640m and US$218m, an improved margin of 34%. Despite somewhat weaker than expected numbers, PAAS maintained its operational and cost guidance for FY23, which points to a visible improvement in performance in H2. Escobal continues to advance through the ILO 169 consultation process, with completion of Phase 2 expected by the authorities in October. We have updated our financial estimates and revised our valuation, which now stands at US$22.2 per share.

• Originally, this was an analysis of tax-loss selling baskets over the years, and seasonal performance of baskets of stocks with certain attributes. On average, they fell vs index.
• Of course, on average, they also rose vs index after the selling was done.
• This insight puts a cap on the 2023 edition with results across the four baskets. The sell made 4.2% vs ASX200 in May, then is up

Canacol Energy released its Q223 results on 10 August, which were in line with our full year expectations. Adjusted Q2 EBITDAX increased to US$60.7m, which represents a 10% increase year on year. This was driven primarily by a rise in netbacks, which increased to US$3.94/mcf in the quarter, compared to US$3.66/mcf in Q222. We are not changing our forecasts after these numbers.

• Southern Copper Corporation delivered disappointing results as the company could not meet the revenue and earnings expectations of Wall Street.
• Another element that is having an impact on the copper market is low copper inventories.
• We give Southern Copper Corporation a ‘Hold’ rating with a revised target price.

• Itochu owns 36.3% of building materials and engineering firm Daiken Corp (7905 JP). They have launched a tender with gimmicky Majority-of-Minority to buy the rest at ¥3,000/share, 4.7x FY2024e EBITDA. 
• That’s low-ish, but given securities holdings, inventory, and net receivables at 4+x EBITDA it’s probably too cheap, but it gets quite close to the minimum threshold just with cross-holders.
• This deal price doesn’t include synergies (according to the valuations and the SC) but a bump would need an agitator. Hope alone won’t get it.

• The CFD balance information (both overall and individual stock) will be provided by KOFIA and KOSCOM, starting from September 1st.
• September 1st also marks the day when local brokerages that temporarily suspended CFD trading services will resume them.
• With the disclosure of individual stock CFD balances starting from September 1st, there’s a high probability of another volatility turning point.

• Daiken Corp (7905 JP) has recommended Itochu Corp (8001 JP)’s tender offer of JPY3,000 per share, a 28.8% premium to the undisturbed price (10 August).
• The transaction is a two-step acquisition through a cash tender offer and subsequent squeeze-out. The lower limit of the tender offer is set at a 31.83% ownership ratio.
• The minimum acceptance condition (lower limit) requires a 50.0% minority acceptance rate (majority of minority condition). The tender offer is light vs historical multiples but represents a 5-year high price.

• The review period for the September rebalance of the S&P/ASX family of indices ends on Friday. There will be a lot of changes across the family.
• Hang Seng Indices will announce the changes to the Hang Seng Index, Hang Seng China Enterprises Index, Hang Seng TECH Index and the HSCI after market close on Friday.
• There were HUGE inflows to onshore China focused ETFs during the week with CSI 300 Index, CSI 500 Index and SSE50 Index ETFs taking in the largest amounts.

• Eastman Chemical Company delivered a mixed result in the recent quarter, with revenues below market expectations, but it managed to surpass the analyst consensus in terms of earnings.
• Despite signs of improvement and expectations for lessening destocking in the upcoming quarters, these challenges reduced the company’s earnings outlook for the rest of the year.
• We give Eastman Chemical Company a ‘Hold’ rating with a revised target price.

• International Paper Company delivered a mixed set of results in the last quarter, with revenues falling short of analysts’ anticipations but above-par earnings.
• Although underlying demand for their products improved during the quarter, it remained constrained by inventory destocking.
• We give International Paper Company a ‘Hold’ rating with a revised target price.

• ________________________________________ ADX Energy (ADX AU)C; target price of A$0.08 per share: A high-quality industry partner in Austria to fund and accelerate Anshof development – ADX is farming out 30% WI in the Anshof discovery to MND.
• MND will also fund ADX’s share of drilling and completion costs of A$3.9 mm per well (total of A$7.8 mm for two wells).
• Kosmos Energy (KOS US/LN): 2Q23 results – 2Q23 net production was ~58 mboe/d.

• In Egypt, 2Q23 WI production was 11,579 boe/d (guidance of 10.6-11.6 mboe/d) with 13 new wells drilled in 1H23. • As a result of this strong operational performance, VAALCO has increased the lower end of the FY23 production guidance range from 20.4-24.4 mboe.d to 22.4-24.3 mboe/d.
• With better drilling efficiency in Canada and Egypt, the FY23 capex guidance has been reduced from US$70-90 mm to US$65-75 mm.

• For a change of pace, this insight briefly canvasses a clutch of Holdco’s trading at extreme levels. 
• Preceding the chart-heavy insight are the current setup/unwind tables for Asia-Pacific Holdcos.
• These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation >20%.

• Recent information leaked through local media reveals that KRX has ultimately opted not to list Ecopro Co’s SSF in the upcoming September round.
• Given the unusually high trading volume of at-the-money (ATM) options in the local SSO market, the market’s interest in covered calls for dividend-yielding stocks can be substantial.
• So, we should pay attention to stocks whose SSO is already listed or will be newly listed in September among those that have shifted their ex-dividend dates to post-dividend confirmation.

• ECVT has gone from one maintenance issue at the beginning of the year to another that is expected to impact second half results and creates near-term headwind for investor sentiment.
• Maintenance and CapEx spending is likely to receive much of the scrutiny from investors after ECVT had two issues this year. However, they are unrelated, and one was from weather
• The sell-off in ECVT’s stock price after the quarterly results reflects investor anxiety over the business being able to generate free cash flow on a consistent basis

• HWKN reported fiscal first quarter (June) results where higher prices had offset the decline in unit volume.
• Without having to take LIFO reserves, HWKN was able to materially beat our expectations. We do not believe this is likely to occur again in the September quarter
• There is no evidence of unit volumes rising in the short-term. However, input costs might have stabilized in the June quarter

• A year ago I wrote that same headline as Inpex Corp (1605 JP) reported H1 results, a change in forecasts, and a bigly buyback.
• Yesterday, Inpex reported FY2023 H1 results, a change in forecasts, and a bigly buyback. 
• The mechanics are the same. The impact is a bit different, but it is worth looking at. Then there is the event on 28 February 2024.

• delivered mixed results in the past quarter, with revenues falling short of analysts’ expectations but above-par earnings.
• In 2023, the company surpassed expectations in terms of the underlying operating profitability.
• With increases in Mozambique, Mexico and production recovery in Kazakhstan, upstream production averaged 1.61 million barrels per day in the quarter, up 2% yearly and exceeding the company’s target of 1.6 million barrels per day.

• Glencore plc’s first half earnings landed softer than most of its shareholders would’ve liked.
• We think a period of stability is near, but key indicators fail to suggest the miner is set for a steep recovery.
• Mining powerhouse, Glencore plc (OTCPK:GLCNF) released its first-half earnings results on Tuesday and delivered a few surprises by doing so.

• Western Australian-based miner OreCorp Ltd (ORR AU) has signed a Scheme Implementation Deed with Canada’s Silvercorp Metals (SVM CN).
• Assuming the Scheme is successful, OreCorp shareholders will receive A$0.15 in cash and 0.0967 new Silvercorp shares – or an implied value of A$0.60 – for each OreCorp share held.
• A shareholder meeting is expected to be held in mid-November with implementation expected end-Nov, early-Dec. Separately, Perseus (PRU AU) is understood to be kicking OreCorp’s tyres.

• Orecorp Ltd (ORR AU) has entered a SID with Silvercorp Metals (SVM US) at A$0.15 cash and 0.0967 SVM shares per ORR share, a 31.5% premium to the undisturbed price.
• The offer is attractive compared to the adjusted exchange ratios and historical prices. However, the offer is light in comparison to peer multiples. 
• The bid could spur Perseus Mining (PRU AU), a rumoured suitor, to show its hand. At the last close, the gross spread of the offer is 19.1%.

• Reliance Steel & Aluminum’s results were a major disappointment as the company failed to meet the revenue and earnings expectations of Wall Street.
• Stainless steel and aluminum products represented more than 30% of the total sales of the quarter, with stainless and aluminum aerospace products comprising around 9%.
• We give Reliance Steel & Aluminum Co an ‘Underperform’ rating with a revised target price.

• Ecopro Co Ltd, Kum Yang, Jyp Entertainment, Hanwha Ocean, Hanmi Semiconductor and Posco DX have all rallied recently and could find their way into global passive portfolios.
• There could be liquidity events in some of the stocks as early as the end of the month and there is pre-positioning on a lot of the stocks.
• Retail investors have been big buyers in Ecopro Co and Kum Yang while foreign investors have been buyers in Jyp Entertainment, Hanwha Ocean, Hanmi Semiconductor and Posco DX.

• 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), Chindata Group (CD US), Estia Health (EHE AU), Invocare Ltd (IVC AU), ENM Holdings (128 HK), Eoflow (294090 KS), JSR Corp (4185 JP). 
• Lowest spreads – Healius (HLS AU), Toyo Construction (1890 JP), Penguin International (PBS SP), Itochu Techno Solutions (4739 JP), Oishi Group PCL (OISHI TB), Kenedix Retail REIT (3453 JP).