Energy & Materials Sector

• International Flavors & Fragrances delivered a mixed set of results in the quarter.
• Sales were up 4% on a comparable, currency-neutral basis for the quarter, with increases seen in almost all divisions.
• Besides that, their scent division performed well, achieving a 6% year-over-year sales increase, driven by double-digit growth in fine fragrance and mid-single-digit growth in consumer fragrance.

• Petróleo Brasileiro achieved strong in the quarter last quarter and managed an all-around beat.
• By increasing the utilization rate of its refineries and introducing new products with renewable content, Petrobras continues to be competitive.
• We give Petróleo Brasileiro S.A. – Petrobras a ‘Hold’ rating with a revised target price.

• On the 9th Jan, lithium player Essential Metals (ESS AU) entered into a Scheme with Tianqi Lithium JV, comprising Tianqi Lithium (9696 HK) (51%) and IGO Ltd (IGO AU) (49%). 
• Shortly before the 20 April Scheme Meeting, Mineral Resources (MIN AU) announced a 19.55% stake. 
• A Scheme failure was expected. And 68.47% voted against the transaction. The question is – now what? 

Alkane continues to increase its production guidance, indicating confidence in a strong close to FY23, from 62,000–70,000oz to 65,000-73,000oz. It also lowered its expected unit costs to an AISC of A$1,550–1,700/oz, from previous guidance of A$1,550–1,800/oz. These updates follow confirmation of Q323 gold production of 16,641oz and a total for the year to date of 54,431oz, at an AISC of A$1,446/oz.

• delivered a mixed set of results in the quarter.
• Despite the lower price of crude oil and the lower refining margins, net income increased by almost 160% year over year.
• Refining & Marketing also delivered strong results.

• We now have an environment that allows Korea’s battery ETFs to include LG Chem in upcoming reviews. KODEX is in June, and TIGER is in July.
• If LG Chem is included in each review, the expected one-day inflow is at 0.7-0.8x DTV, which can lead to a price impact similar to that of SKIET in 2021.
• We should consider setups targeting this, including Long Short, which utilizes LG Energy Solution or LG Corp as a hedge.

• The Korea Exchange announced today (20 April) the change in index constituents and major dates for the Oci Co Ltd (010060 KS) spin-off. 
• Oci Co Ltd (010060 KS)’s shares will be suspended from trading from 27 April to 26 May 2023.
• After the spin-off and relisting of holdco/opco shares, we believe that there is a greater probability of OCI Co (opco) shares outperforming OCI Holdings (holdco). 

• “Feedback” from shareholders overturned numantine resistance from the Board of Wood, which has reluctantly decided to grant due diligence access to Apollo. New PUSU deadline is 17 May.
• As top shareholder of Vallourec, Apollo knows the sector. At the 240p offer proposal, Wood would be valued at an undemanding 5.7x EV/Fwd EBITDA on consensus numbers. 
• My fair value estimate is 261.7p (average of SOTP-multiples and DCF). There is value in the sector and Apollo may have turned a corner. Long.

• Armour Energy Limited (AJQ.ASX) is a junior energy producer and explorer with assets across northern, southern and eastern Australia.
• The company has been listed on the ASX since April 2012 and is set to pursue a growth strategy with particular focus on production optimisation at Kincora to be delivered over the next 24-30 months.
• Importantly, we should also see a return to high-impact exploration with the drilling of the Enterprise North-1 well in the Otway Basin subject to regulatory approvals.

• Trigon reported high-grade near-surface drill results (3.62% Cu over 17.0m)
• Management announced that its mine contractor is preparing to start mining with the first blast scheduled for May 16, 2023
• Despite a strong month for the stock (up ~40%), TM is trading at just 0.2x NAV compared to copper producing peers at 0.7x NAV

Wheaton’s (WPM’s) Q123 results are scheduled for 4 May. Ahead of their release, we have refined our forecasts to reflect, principally, a hiatus in mining the high-grade Pampacancha pit at Constancia, owing to regional road blockades (announced by Hudbay, on 30 March) and the suspension of production from the lower levels of the Stillwater West mine by Sibanye-Stillwater for around four weeks, following damage to shaft infrastructure during non-routine maintenance (announced on 13 March). We have also updated our estimates for actual cf forecast, precious metals prices.

• Los Andes Copper Ltd (LA CN) published its long-awaited PFS in late February. The PFS shows an NPV of 2.77 billion USD vs a 240 million USD market cap.
• In our opinion, LA is one of the largest, Chile-based copper miners without a strategic investment partner. 
• Lundin Mining (LUN CN),  Hudbay Minerals Inc (HBM US) and Glencore Plc (GLEN LN) have announced offers for copper producers recently. Last year Rio and BHP also made copper acquisitions.

• Whitehaven Coal (WHC AU) guided down production in an update released yesterday by 5-10% from a range of 19-20 mnt to 18-19 mnt for FY23.
• Net cash increased 300 mn AUD QoQ from 2.5 bn to 2.7 bn AUD representing 44% of market capitalization with 1.2 bn AUD of operating cash flow alone in Q3!
• We agree an OCF yield of 80% (1.2 bn*4 qtrs on a six bn mkt cap) is unsustainable; the capital allocation possible on this name is mind-boggling. 

• In this insight, we highlight the pricing gap divergences of the major Korean holdcos and opcos in 2Q 2023.
• Of the 38 pair trades, 21 of them involved holdcos outperforming opcos YTD and 17 of them involved opcos outperforming holdcos in the same period.
• We highlight 38 pair trades that involve Korean holdcos and opcos.

• At TMA we deliver high probability outcomes by focusing on our 3 pillars of technical analysis. 1) Response to key levels. 2) Price action. 3) Momentum confirmation.
• On 31 March 2023 we published a bullish recommendation in PetroChina Co Ltd (857 HK), targeting an initial 13% upswing from 4.68 to 5.28.  Longer term scope identified to 6.50/6.80.
• Initial target at 5.28 (+13%) was achieved on 17 April 2023 (8 trading days). We continue to highlight strong evidence of LT bullish trend change targeting 6.50/6.80 (+40%) multi-quarter. 

• Rio Tinto’s business remained resilient in the last quarter and the company successfully entered the year with quite a good operational momentum, particularly in Pilbara iron ore.
• However, accelerating cost inflation and lower prices throughout the year led to margin compression.
• At Simandou, Rio Tinto incorporated the infrastructure joint venture with its various partners and the government of Guinea.

• Vale SA delivered an all-around beat in its last results with a strong performance in iron ore solutions and a strong price realization.
• Also, in Vale’s energy transition material business, the nickel production was steady, with production and sales up, driven by the excellent performance of its Sudbury mines which successfully delivered very high production rates.
• Vale is developing a first-of-its-kind plant in North America and Canada to produce nickel sulphate from low-carbon nickel from Canadian refineries.

• The review period for the price cutoff for the MSCI May Quarterly Comprehensive Index Review (QCIR) starts today. MSCI should choose a day from this week to compute market cap.
• The most changes (especially adds) are expected in mainland China following an expansion of the universe for inclusion of stocks in Northbound Stock Connect.
• There are stocks in India where there will be FIF changes triggering large flows and there are things to watch on some stocks in Korea and China.

• Gold miner St Barbara Ltd (SBM AU)’s reverse merger with Genesis Minerals (GMD AU) always had a whiff of biting off more than they could chew. That’s now validated.
• St Barbara has confirmed it will sell its flagship Leonora gold project to Genesis for $600mn (in cash and GMD scrip). The reverse merger has been cancelled.
• Post transaction, St Barbara will hold up to ~19.5%,  and be left with no debt and ~$197m in cash. Genesis will emerge with no debt, and ~$175mn cash (pre-transaction costs). 

• Merdeka Battery Materials (2012725D IJ) raised around US$591m in its Indonesian IPO.
• It has the largest resource globally in terms of contained nickel at the Konawe Nickel Mine (the SCM Mine), according to Wood Mackenzie. 
• In this note, we will talk about the trading dynamics and valuation.

• USDA on Tuesday pegged the 2022-2023 U.S. orange crop at 62.25 million boxes (2.57 million tonnes), an 86-year low and down 23% on the year.
• That is less than 20% of U.S. output in the record 1997-1998 season.
• Florida, which has previously accounted for more than 80% of the annual U.S. orange crop, is seen producing an 87-year low of 16.1 million boxes, down 61% on the year.

• Chevron had a decent year in 2022, with improved financial performance, increased production of traditional energy, and progress in developing lower carbon businesses.
• The company had a mixed result in the last quarter as it surpassed the revenue expectations of Wall Street but delivered lower-than-expected earnings.
• The company generated decent free cash flows, surpassing its previous high in 2021 by over $15 billion, resulting in a strong dividend increase and a buyback of almost 4% of its shares.

After the usual slower start to the year, Treatt has had a strong Q2; H123 sales growth was 8.5% at constant currency. Momentum is expected to continue into H2, with current sales growth mainly skewed to price as Treatt continues to recover increased costs, though there was also a small contribution from an improvement in mix. Citrus continued to perform strongly as Treatt pursues its strategy of moving away from the lower-margin products. We raise our FY23 sales forecasts to reflect the strong revenue growth but leave our profit forecasts broadly unchanged at this stage, though we see upside risk to forecasts.

Notwithstanding the trials and tribulations that it has had to deal with in Ethiopia in recent years, KEFI believes that it is finally nearing the end of its approvals odyssey. Being first mover and also traversing the country’s turbulent swing to democracy has cost the company unpredictability, time and money. However, the new mining minister is reported to be serious – to the point of being enthusiastic – about developing KEFI’s Tulu Kapi project and the three substantive pre-conditions for final approval (the two banks having equal protections in the country, government installation of elevated security and the right for KEFI to administer its own banking and capital servicing arrangements) have been met or (in the case of the third) appear in the process of formalisation. With respect to security, KEFI reports that a disciplined formation of the Ethiopian Federal military has been deployed to secure mine sites throughout the country, including Tulu Kapi. In the meantime, the company has continued to upgrade and develop its assets in Saudi Arabia.

• Phillips 66 had a disappointing quarter failing to meet Wall Street expectations in terms of revenues as well as earnings.
• The management managed to strengthen their financial position by retiring debt and resuming their share repurchase program with their cash flow production.
• After completion, the management anticipates having an 87% economic interest in DCP Midstream by the second quarter of 2023.

• Riley is well-positioned to execute its strategy that aims to drive shareholder returns through a combination of growth in production and proved reserves from reinvesting a portion of cash flow into the asset base and using the balance to maintain a conservative balance sheet and return cash to shareholders.
• The recent $330 million acquisition of assets in New Mexico’s Yeso Trend added a second core area and provides management greater flexibility to allocate capital to maximize operational efficiency.
• The Yeso Trend produces from conventional reservoirs that have similar drilling and completion characteristics to the San Andres formation in Riley’s legacy Champions assets.

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads  111 Inc (YI US), Alliance Aviation Services (AQZ AU), Estia Health (EHE AU), United Malt Group Ltd (UMG AU), Aag Energy Holdings (2686 HK), Origin Energy (ORG AU). 
• Lowest spreads – Healius (HLS AU), Essential Metals (ESS AU), Liontown Resources (LTR AU), Lian Beng (LBG SP), Golden Energy & Resources (GER SP),  Mincor Resources NL (MCR AU).

• The rights issue is fully underwritten and should bolster the balance sheet. This is akin to a placing by market volume. There are arbitrage opportunities (although not limitless borrowing available).
• The arbitrage is a long position on a synthetic put. Rights will trade up to 17:30 on 3 May.
• The new shares coming is a giant block compared to the existing shares outstanding. There may be a wave of selling from 4 May, and the shares should drop then.

• There are 42 – 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 past week: Singaporean construction firm Lian Beng (LBG SP) announced a voluntary unconditional cash Offer from the controlling Ong family,
• Key updates took place for Newcrest Mining (NCM AU) and OZ Minerals Ltd (OZL AU), and Glory Star New Media Group Holdings (GSMG US).

• Genesis Minerals (GMD AU) and St Barbara Ltd (SBM AU) have dropped their merger plans. Instead, GMD will acquire SBM’s Leonora gold assets for a total consideration of A$600 million.
• The transaction is favourable for GMD shareholders. GMD is getting the assets at an attractive price. GMD will fund the acquisition through a A$450 million placement at A$1.15 per share.
• The transaction provides a way out for long-suffering SBM shareholders as they retain exposure to gold assets and have option value on the sale of SBM’s remaining assets.

• This is our first report on an international energy major, Equinor.
• The company delivered a mixed operational performance for the fourth quarter with below-par revenues but managed an earnings beat.
• Equinor improved security for its assets and cyberspace by enforcing tougher security rules, providing more training, and collaborating more closely with law enforcement.

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. Softbank Group
2. Central China Real Estate
3. Sino-Ocean Group
4. Seazen (Formerly Future Land)
5. Vedanta Resources

and more…

• Shareholders have approved OZ Minerals Ltd (OZL AU)‘s acquisition by BHP Group Ltd (BHP AU) and OZL is expected to stop trading after the close on 18 April.
• OZ Minerals Ltd (OZL AU) will be replaced by Bellevue Gold (BGL AU) in the S&P/ASX 200 (AS51 INDEX) and by Seven Group Holdings (SVW AU) in the S&P/ASX 100.
• There has been huge short covering on Seven Group Holdings (SVW AU) and Bellevue Gold (BGL AU) over the last few months.

• After declaring a whopping 18% dividend yield in FY22, we expect Shougang Fushan Resources (639 HK)’s generous payments to continue as they could declare another 14% in FY23e.
• The margin of safety is high as there is a cash buffer (55% of the market cap in cash) and 10-year average annual free cash flows of 1.5 bn HKD.
• China’s FAI stimulus and stabilizing the steel margins could be catalysts to drive the share price forward in the short term.

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.

• Meituan
• Nickel Industries Ltd
• Vedanta Resources