Energy & Materials Sector

Tata Steel’s Q1/23-24 results were weaker than expected, as the European business dragged down profitability. On a standalone basis, Tata Steel India performed well, registering a strong EBITDA margin (c. 22%) which was slightly better than that of JSW Steel. However, the EBITDA loss in the European business, particularly the UK business, affected profitability. The company’s financial risk profile deteriorated, with Net Debt/EBITDA increasing to higher than management’s guided range. Liquidity remains sound. However, management is committed to deleveraging its balance sheet and aims for Net Debt/EBITDA to be 2-2.5x by FYE 2023-24.

Tata Steel India’s business remained solid. Compared to its closest peer, JSW Steel, Tata Steel India is 100% self-sufficient in terms of iron ores with huge reserves (500-550 mn tonnes), and 30% in terms of coking coal. It also has a lower dependence on exports (which is pressured by increasing Chinese exports), with exports typically accounting for c. 10-15% of sales (vs. 25-30% for JSW Steel).

The group’s future will depend on the decisive action that management takes towards the UK business, which is highly uncompetitive, mainly due to: [1] increased energy costs in the UK; and [2] high capex required for a green transition. Energy costs in the country were already twice those in Europe before the Russia-Ukraine war, and are now at elevated levels. Plants in the region are also reaching end-of-life, and production levels have hence become less stable (with unplanned outages). Any long-term solution for the UK business must address rising carbon costs and local emissions reduction goals. Tata Steel UK has asked the government to subsidise 50% of capex for its green transition. Management said it will continue to run Tata Steel UK optimally for cash, with minimal support from Tata Steel in India.

• The US rig count has declined in recent months as operators have curtailed activity in the face of declining oil and natural gas prices.

• According to the Baker Hughes rig count, total US working rigs had declined to 669 on July 21, 2023, from 755 on March 31, 2023.

• ICD’s fleet of pad-optimal super-spec rigs primarily serves customers in the Haynesville, Permian, and Eagle Ford regions.

• Kinder Morgan had a disappointing performance in the last quarter with revenues below Wall Street expectations.
• The natural gas and terminals businesses outperformed with increased transport and gathering volumes, while the CO2 business beat the production plan.
• Kinder Morgan’s strong performance in various segments and ability to adapt to market dynamics demonstrate its resilience and expertise in the energy industry.

• LyondellBasell stock offers a high dividend yield of 5.5% and improving cash flow coverage.
• Some major headwinds are dissipating and this puts LyondllBasell in a very good position to improve its profitability profile.
• LyondellBasell (NYSE:LYB) delivered nearly 16% total return since December of last year, when I took a deep dive into the company’s operations and explained why the stock is attractive for anyone looking for attractive risk-reward opportunities.

• PPG Industries managed to exceed analyst expectations in terms of revenue as well as earnings.
• PPG’s strong posture in these end-use areas resulted in significant second-quarter sales in aerospace, automotive, automotive refinish, PPG Comex, and its protection and marine coatings division.
• We give PPG Industries, Inc. a ‘Hold’ rating with a revised target price.

• Over the last few weeks, companies in India have been disclosing their shareholding pattern as of end-June. There are a few companies with significant float changes from end-March and/or end-December.
• The changes in free float could be reflected in domestic and global indices over the next couple of months resulting in action from passive trackers.
• We see 6 stocks where there could be passive inflows and 2 stocks that could have passive outflows – but there are caveats.

• As the possibility of implementing the pre-disclosure rule in the second half of this year arises, the local block deal market is expected to become more active. 
• Specifically, there are observable movements among Kosdaq mid-sized companies that are particularly sensitive to deal execution risk. This suggests that LHJ’s KIS may further solidify its dominance.
• Significant increases in trading volume through KB Securities could serve as potential clues indicating the imminence of block deals in companies where the likelihood of such deals is high.

• KRX stated in this press release that they have identified the suspected stocks involved in illegal trading and have reported them to the financial authorities (Korea FSC and Korea FSS).
• The primary concern in the short term seems to revolve around whether the battery stocks are among the ones suspected of illegal trading, as reported to the financial authorities.
• We must remain vigilant and ready for the potential recurrence of CFD-related price plunges, as seen in the recent two instances, affecting specific stocks in the short term.

• O&G junior Talon Energy (TPD AU) announced it had received a non-binding Offer from Strike Energy (STX AU). 
• The all-scrip bid – by way of a Scheme – entailed an implied A$0.20/share in Strike shares plus Talon shareholders retaining their holding in Talon’s Mongolia gas project.
• After Talon said it intended to undertake a process of evaluation of the Proposal before offering due diligence, Strike promptly withdrew its bid.

• Trigon announced that the Kombat Mine mill will produce its first concentrate in the coming week, with sales planned for end of August.
• This morning, Trigon Metals Inc. (TM:TSXV), provided a progress update on mining operations at the Kombat Mine in Namibia.
• The Company provided a detailed update on the open pit mining operations as well as all the work being done to achieve their goal of starting the underground mining operations in April 2024.

• Stars are aligning and both Steno Research and 3Fourteen research are now energy bullish.
• Last week at Steno Research we looked at the potential for a bounce in Manufacturing PMI numbers and we thought it would be natural to look at both hard and soft data through the lens of one of the most important signals in the energy markets, namely the flip from contango to backwardation.
• In general it can be said that the flip brings more volatility to soft data than hard data. Given PMIs general tendency to converge with hard data and its current levels (Almost GFC bearishness) we feel like there are plenty of reasons for betting on higher Manufacturing PMI numbers.  

• In this insight, we take a look at the names leading the race to become ADDs/DELs for the NIFTY 50 and NIFTY 100 indices in the September 2023 rebalance.
• The NIFTY Next 50 methodology was supposed to change in June 2023 but this has been kept on hold for now. This change could still take place before September 2023.
• In this insight, we take a look at our expectations for index changes under both the existing methodology and the proposed new methodology.

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

Vedanta Ltd’s Q1/23-24 results were weak in our view, as expected. The company is facing challenges from lower commodity prices and the large debt-servicing and repayment requirements from parent Vedanta Resources. Gross debt and net debt increased significantly, while the cash declined materially. The low and declining cash position will limit VEDL’s dividend-upstreaming capacity this fiscal year.

• Wheat futures soared as much as 9%, the biggest jump since 2012, as Russia threatened ships sailing to Ukrainian ports, escalating a conflict over exports from the key Black Sea region.

• Russia’s defense ministry said that all ships headed to the ports from Thursday will be considered as potentially carrying military cargo.

• It also said flag countries of vessels sailing to Ukraine will be considered as on Kyiv’s side in the conflict.

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.

• HPCL-Mittal Energy Ltd
• Innergex Renewable Energy

We believe ArborGen Holdings is in prime position, not only to address increasing demands from clients for its seedlings, but also for its ongoing investment in genetic improvement to continue to drive the switch to sales of higher-value, higher-margin seedlings to all its key markets. While this process plays out, underlying EBIT is set to increase five-fold in the next two years as gross margins return to and then exceed historical levels. We determine a value of NZ$0.49/share, implying attractive upside.

• 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 – Chindata Group (CD US), Estia Health (EHE AU), 111 Inc (YI US), ENM Holdings (128 HK), JSR Corp (4185 JP), Costa Group Holdings (CGC AU).
• Lowest spreads  Healius (HLS AU), Liontown Resources (LTR AU), Toyo Construction (1890 JP), Penguin International (PBS SP), ARTERIA Networks Corp (4423 JP), Inner Mongolia Yitai Coal Company Ltd (3948 HK).

• Prior to recent developments, Andrew Forrest held a 36.25% stake in Fortescue Metals (FMG AU).
• An ASIC shareholder disclosure into the giant iron-ore miner earlier this year fuelled speculation, culminating in an ASX notice Andrew was separating from his wife after 31 years of marriage. 
• A private statement assures there will be no impact on the control of FMG. But that won’t put a stop to the rumour mill.

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.

• AAC Technologies Holdings
• JSW Steel Ltd
• Reliance Industries

• This is the First of a series of reports on Nippon Paint Holdings (4612 JP) and in this insight, we deep dive into the company’s Japanese business.
• The automotive coating biz in Japan is heavily reliant on the domestic automotive market while decorative paints is facing challenges due to slowdown in population in the country.
• The outlook for Japan biz remains stagnant with growth rates slowing down and margins on a downward trend.

• Welcome to the final series of our “Business Cycle Week”, where we cover how a possible rebound in manufacturing might affect asset markets, and if markets are already starting to position for it.
• Commodities is the only asset class we need to tick off, and what a way to end the business cycle week with the most cyclical asset of them all, looking to benefit the most from a rebound in manufacturing.
• Commodities have had a rough 2022 (and start of 2023) as USD strength and a lack of Chinese demand have held commodities prices down, despite the scarcity that characterizes the market currently.

Ahead of Wheaton Precious Metals’ (WPM’s) Q223 results, scheduled for 10 August, we have honed our forecasts to reflect, principally (1) Newmont’s suspension of mining at Penasquito since 8 June, (2) updated metals prices, (3) estimated production from Salobo in the light of Vale’s Q223 production and sales report (released on 18 July) and (4) the closure of the Minto mine on 13 May. As a result, we have reduced our Q223 basic EPS forecast by 5 US cents per share to 28 cents per share and our FY23 adjusted basic EPS by 8 cents per share (or 6.1%) to 124 cents per share.

• Leader Energy Holdings (1814173D MK) is looking to raise up to US$300m in its upcoming Malaysia IPO. The deal will be run by Affin Hwang, RHB, CIMB, Maybank and CLSA. 
• Leader Energy Holdings (LE) is an independent power producer (IPP) primarily engaged in the development, ownership, O&M of power assets and projects. 
• As of the Latest Practicable Date (LPD, 30th Apr 23), its power assets and projects (including those owned by jointly controlled entities), are located in six Southeast Asian countries.   

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

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

• Enterprise Products Partners delivered a mixed set of results for the previous quarter, with revenues below the analyst consensus.
• Enterprise Product Partners remains on track with significant projects, aiming to put approximately $3.8 billion into service this year.
• We give Enterprise Products Partners a ‘Hold’ rating with a revised target price.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We assess Sasol’s ESG as “Adequate”, in line with its “Adequate” Environmental and Social scores. The company has a “Strong” Governance score. The Environmental and Governance pillars carry higher weightages than the Social pillar in our assessment, given the nature of the business and industry. Controversies are “Material”, but Disclosure is “Strong”. The group harbours an ambition to be included in the DJSI.

• Yonhap News reported on the exclusive coverage of Ecopro BM and L&F’s KOSPI transfer listing.
• L&F announced through the disclosure that they are considering the KOSPI transfer listing. Ecopro BM told another local news outlet that they are not currently reviewing the KOSPI transfer listing.
• It seems that L&F’s KOSPI transfer listing is almost a confirmed fact. However, the Ecopro company in question may be Ecopro Co, not Ecopro BM.

• In this insight, we take a look at Quiddity’s flow expectations for the September 2023 index rebalance.
• Since my last insight, my estimate for the tracking AUM estimate assumption for September 2023 has increased and has caused changes to my flow expectations.
• Separately, the SHORTs suggested in my last insight have underperformed the index by 15.6% in 3 weeks. I have updated my thoughts on that as well.

• At the 20 April Scheme Meeting, Mineral Resources (MIN AU) (with 19.55%) and other shareholders voted against the Tianqi Lithium JV transaction for Essential Metals (ESS AU). 
• This left Essential in no man’s land until MinRes (presumably) made a move. But on the 3 July, Develop Global (DVP AU) announced a binding Scheme with ESS.
• The all-scrip Scheme transaction has the backing of MinRes, which also owns a ~13% stake in Develop. This deal – this time- looks all stitched up.

• Whitehaven Coal (WHC AU) released its June Quarterly. The company is in blackout (starting July 1st) till its release of annual results on August 24th, 2023.
• June quarter OCF was 435 mn AUD ( Avg Coal Px 177 USD/ton), and net cash on the balance sheet was 2.65 bn AUD representing 45% of market capitalization.
• To complete its buyback program, 147 million shares remain left to repurchase (current o/s shares 836 mn). 196 million shares have been repurchased so far since March 2022.

• Welcome to your weekly maverick energy newsletter from both sides of the pond.
• Stars are starting to align for energy as i) the business cycle seems to be holding up better than feared, ii) the USD is weakening and iii) ongoing supply negative news (prolonged Saudi Arabian supply cut and Russia abandoning the grain deal).
• Time to go long energy?

• Exxon Mobil’s share price has come under pressure in recent months as investor sentiment shifts.
• It is too early to consider this retracement as an attractive buying opportunity as short-term headwinds are to be expected.
• Exxon’s management continues to make the right moves from a capital allocation point of view.

• The Company has completed 11 drill holes, totalling 3,570m.
• This morning, Omai Gold Mines Corp. (OMG:TSXV, OMGGF:OTC) announced additional drill results from the Omai gold project in Guyana.
• In 2023, a total of 3,570m have been completed in 11 holes with five holes being reported today.

• The important point is that the regulations also incorporate a provision mandating the disclosure of the actual end traders’ identities when brokerages engage in CFD transactions disguised as proprietary trading.
• Recent suspicious incidents raise concerns because they are carried out through brokerages’ proprietary trading practices, making them relatively more difficult for local regulatory authorities to detect and monitor.
• We need to closely monitor the market’s abnormal volatility following the strengthened new rules on CFDs and carefully consider the setup for responding to these changes.