Energy & Materials Sector

• Vale had a bad quarter with revenues and earnings well below expectations.
• The company saw a decent performance in iron ore production, particularly at S11D.
• Although there was a gap between production and sales, Vale’s management expects to offset the impact in the second half of the year.

• Flotek is repositioning the company’s field operations to serve customers in both the Chemistry Technologies and Data Analytics business segments.
• Improved cost control contributed to $1.9 million of adjusted gross profit in 1Q23, compared with ($2.1) million in 4Q22 and ($0.5) million in 1Q22.
• The 1Q23 adjusted gross profit margin was 5.5% in 1Q23.

Pan American Silver (PAAS) completed the Yamana transaction at the end of March, continuing its track record of timely and value-accretive acquisitions that add scale and improve profitability. With the full annualised contribution from the Yamana assets, we estimate PAAS will produce c 25Moz of silver and 1.1Moz of gold in FY24. The anticipated launch of Escobal (FY25e) could further increase silver production to above 40Moz, bringing PAAS closer to the industry leader, Fresnillo. In this note we reinstate our estimates and update our valuation to reflect the Yamana acquisition. Our sum-of-the-parts valuation is now US$22.5/share.

• SDRL reported Q1 results affirming the positive attributes of the business after repositioning assets in the fourth quarter. The first quarter included economic utilization of 95% resulting in cost absorption
• Day rates continue to trend higher putting SDRL in an advantageous spot as a portion of its fleet becomes available late in 2023 and early 2024
• Subsequent to the first quarter, SDRL closed the acquisition of Aquadrill and has now provided full year guidance incorporating the business

• Following the spin-off, Dongkuk Steel Mill (001230 KS) will be deleted from the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) and replaced with Youlchon Chemical (008730 KS). 
• Youlchon Chemical (008730 KS) just missed being added to the index at the June rebalance but will be added a couple of weeks after the regular rebalance.
• Shorts on Dongkuk Steel Mill (001230 KS) have increased over the last month but overall short interest is way below historical levels.

• Growatt Technology (1833969D CH), a leading PV inverters manufacturer, is pre-marketing a US$400 million HKEx IPO, according to press reports.  
• We previously discussed the IPO in Growatt Technology IPO: Growing Watts, Growatt Technology IPO: The Bull Case and Growatt Technology IPO: The Bear Case. 
• The updated PHIP which disclosed the 2022 results and latest developments suggests that Growatt continues to deliver profitable and cash-generative growth. 

• Applying the T+3 relisting date as the effective date will again lead to noteworthy changes to the timeline of rebalancing flow trading.
• It seems unnecessary to concentrate shorting on the trading halt day for Dongkuk Steel. We should aim for price corrections driven by passive flows on the T+2 period before effective.
• Despite the Dongkuk Steel shareholders’ approval on the 12th, Youlchon Chemical’s price experienced a significant decline. The ongoing risk of major shareholder stake sales appears to have overshadowed this event.

• Swiss agricultural giant Syngenta Group is moving its $9.4 billion initial public offering to the main board of the Shanghai Stock Exchange and dropping a plan to go public on the Nasdaq-like STAR Market, the company said Thursday.
• The unit of Chinese state-owned ChemChina said it made the decision after China fully rolled out its registration-based share issuance system across all boards in February.
• Syngenta Group will be a better fit on the main board, making the stock available to more diversified investors, Syngenta said.

• It was a successful first quarter for Marathon Oil as it delivered an all-around beat with strong financial and operational performance.
• The company exceeded its commitment to return at least 40% of its cash flow from operations to shareholders, generating strong free cash flow despite not receiving any EG cash dividends.
• First-quarter oil production was consistent with guidance, and the company expects an improving trend in the second and third quarters.

• Albemarle had a mixed Q1, with net sales below market expectations though EBITDA was up nearly four times to $1.6 billion resulting in an earnings beat.
• Albemarle selected a site for their U.S.
• Mega-Flex lithium processing facility in Richburg, South Carolina, and announced restructuring their MARBL joint venture in Australia.

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

• Indo Tambangraya Megah (ITMG IJ) suffered a >30% decline in market capitalization owing to the drastic drop in coal prices from 400 USD/ton to 160 USD/ton.
• At a 1.9 bn USD market cap, the company can generate 700 mn USD profit at current coal prices/paying a 5000-6000 Rph dividend equating to a 20-25% yield. 
• Also, with 1.0 bn USD of net cash after accounting for the dividend liability (>50% of the market capitalization is cash), there is an excellent margin of safety. 

• W&T Offshore is an independent oil and natural gas exploration and production company focused on extracting value from producing assets in the US Gulf of Mexico.
• The company has plied the Gulf since its founding 40 years ago.
• High-quality reservoir rock properties and the tendency for reservoirs in the Gulf of Mexico to outperform original reserve estimates are key drivers of management’s affinity for the basin. Proved reserves (1P) often expose the company to embedded optionality in probable and possible reserves that can be captured over time through well performance with modest incremental capital investment.

• Foreign investors have been buying stock in Korea. They now hold 32% of the KOSPI market cap and 18.5% of the KOSDAQ market cap.
• As a percentage of market cap, foreigners have been big buyers of Yg Entertainment, Hyundai Rotem and Meritz Financial Group. Selling has been on Ecopro Co and Posco Future M.
• Shorts have increased on Ecopro Co Ltd (086520 KS) and Posco Future M (003670 KS) while there has been covering on Kakao Pay (377300 KS) and POSCO Holdings (005490 KS). 

• The Kazakh government silently allowed Russia to buy 49% stake in JV Budenovskoye sometime in 2021-H2.
• Kazatomprom owned 51% in the JV, but the deal was not properly disclosed in Kazatomprom reports.
• Many company officials resigned since the deal fearing breach of legal duty on disclosure.

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. Melco Resorts & Entertainment
2. Hopson Development
3. China Jinmao Holdings
4. Lifestyle International Holdings
5. Geely Auto

and more…

• HWKN reported Q4 (April 2) results at first read suggesting beating estimates. However, demand has been declining and EPS beat our forecast due to one-time gain on an asset sale
• The competitive environment has intensified in recent quarters where imports are being offered at lower prices while HWKN faces higher costs
• We have changed our fiscal 2024 estimates to incorporate reduced sales from the asset sale, longer timeline in gross margin improvement, and the industrial segment facing competition

• There will be 2 additions and 2 deletions for the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) at the June rebalance that will be implemented on 8 June.
• Kum Yang (001570 KS) and Cosmochemical (005420 KS), both high probability names, are inclusions while Hwaseung Enterprise (241590 KS) and Dongwon Industries (006040 KS) are deletions.
• Not surpisingly, there is almost no short interest on the adds. Short interest on the deletes is higher and rising. Expect short covering on the deletes prior to implementation.

• Korea Exchange announced the KOSPI 200 and KOSDAQ 150 indices constituents changes today. 
• Kum Yang (001570 KS) and Cosmochemical (005420 KS) were included in the KOSPI 200. Dongwon Industries (006040 KS) and Hwaseung Enterprise (241590 KS) were excluded in KOSPI 200 index.
• We expect continued underperformance of Kumyang and Cosmo Chemical as many investors will now start to sell these stocks based on “buy on rumor, sell on news” strategy.

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

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

• Ecolab performed well in the third quarter and managed an all-around beat.
• In the quarter, margins expanded significantly.
• Organic sales had a solid improvement across all segments, increasing from 12% in the fourth quarter to 13% in the first.

• 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 HDFC Limited (HDFC IN) – HDFC Bank (HDFCB IN) merger could complete earlier than previously expected, triggering intra-review index replacements.
• Separately, I have presented some interesting new trading ideas involving some of the index change candidates, and I discuss the status of pre-existing trade ideas.

• Rio Tinto Ltd (RIO AU) last year started the long-awaited simplification of its Oyu Tolgoi ownership via the $3.1 billion purchase of Turquoise Hill Resources (TRQ CN). 
• With Oyu Tolgoi having an 80-year mine life and ramping up to become the world’s fourth-largest copper mine the ultimate consolidation of its last remaining minority investment is upon us.
• Entree Resources (ETG CN), where Rio already owns 16%, is the final M&A target to consolidate ownership.  With arbitration set for April 2024, the clock is ticking.

• It was a challenging first quarter for Freeport-McMoRan due to disruptions caused by extreme weather conditions and labor shortages.
• The company managed an all-around beat and achieved essentially in-line consolidated unit net cash costs, averaging $1.76 per pound despite lower-than-expected volumes.
• Freeport-McMoRan ended the quarter with $1.3 billion in net debt, and its balance sheet, liquidity, and financial flexibility are in great shape.

• SDRL is scheduled to report first quarter results on May 23, 2023, before the market open and has provided a glimpse to the profitability Aquadrill is operating at
• The Aquadrill fourth quarter results affirm our investment thesis of the profitability the business is operating at with the day rates Aquadrill has secured
• SDRL is the last company of the major drill ship owners to report first quarter results. Peers have shed a positive outlook on the industry and day rate trend

• BP delivered a mixed set of results with revenues below the analyst consensus estimate but managed an earnings beat.
• Underlying earnings were $5 billion for the first quarter, and the company decreased net debt to $21.2 billion.
• Looking ahead, the company remains focused on delivering strong results with good momentum throughout its organization.

• DuPont de Nemours had a challenging 2023 first quarter as organic revenue declined by 3%, although there was broad demand strength in areas including water, automotive, aerospace, and healthcare.
• DuPont de Nemours recently announced a $1.75 billion definitive agreement to acquire Spectrum, a leading manufacturer of critical components and devices for medical end markets.
• We give DuPont de Nemours, Inc. a ‘Hold’ rating with a revised target price.

• TMC reported 1Q23 results, which included break-even EPS versus ($0.09) in the year-ago period, and use of $23.5 million in cash, leaving the company with $28.4 million in cash on hand, which along with still undrawn unsecured debt of $25 million, will be sufficient to fund ongoing operating expenses and working capital needs for the next 12 months, according to management.
• Resistance is futile. The ISA meetings concluded in March 2023 included the commitment by all members to complete the undersea mining code, which management believes will result in said code being finalized in 2H23 and certain media observers recognizing that the commercialization of the industry is a question of “when” and no longer “if”.
• While TMC would prefer to wait for the final mining code issuance to submit its exploitation application, management reserves the right to submit such an application, in accordance with ISA charter, even if final regulations aren’t completed by the end of 2023.

• On the 11 April, Newmont Mining (NEM US) bumped the all-scrip terms for Newcrest Mining (NCM AU) to 0.400 Newmont shares – from 0.380 – for each Newcrest share held. 
• Exclusive due diligence was granted and now a firm Offer, by way of a Scheme, has been agreed.
• The Offer permits Newcrest to pay a special franked dividend of up to $US1.10/share on top of the Offer terms. 

• Newcrest Mining (NCM AU) has entered a SID with Newmont Mining (NEM US) at 0.400 Newmont shares per Newcrest share + US$1.10 special dividend + ordinary dividends (FY2023 dividend of US$0.20).
• The proposal is subject to shareholder approval from both sets of shareholders along with regulatory approvals (FIRB, US, Canada, Papua New Guinea).
• The offer is attractive in terms of historical prices and VWAP exchange ratios but carries the volatility risk around Newmont shares and FX rates.  

Vedanta Ltd has released disappointing Q4/22-23 results. Revenue fell 4.75% y-o-y while reported EBITDA decreased 30%, mainly due to lower prices of metals and minerals, along with higher costs. Production was weak. However, leverage ratios are acceptable, with Pro-forma Gross Debt/EBITDA and Net Debt/EBITDA of 3.5x and 2.9x, respectively, in April 2023.

Production guidance is essentially flattish, with no significant growth projected in the key segments that contribute the most to EBITDA, namely zinc, oil & gas and aluminium. Refinancing risk over the next one year remains the key risk.

• The Silver euphoria is over In the past two weeks, I have spoken to many people who are euphoric about silver.
• Many charts on Fintwit also predict that now is the time to jump back on the silver bandwagon.
• I believe that the next bubble could soon run out of steam, and this is not only true for gold.