Energy & Materials Sector

• Ecopro BM’s weight has expanded to 22%. Since the probability of receiving a 15% cap is virtually 100%, it will inevitably undergo a weight change of up to nearly 7%p.
• If the ongoing rally subsides before March 10th and returns to the January DTV level, the price impact could surge up to 0.3-0.4x daily for three trading days.
• This seems to be a sufficient level for a shorting entry point. It may be worth considering an outright short position on Ecopro BM or Long Short with SK Innovation.

• 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 3 February 2023 we identified a material topside failure in RIO LN and pending high probability multi-week to multi-month decline into the 5415/5650 range.
• RIO LN declined from 6064 on 3 February to a low of 5568 on 27 February, a decline of 8.2%. Target achieved.

• In theory, the fundamental building blocks of the universe, matter and anti-matter, should exist at a 1:1 ratio, a positron for every electron, a yin to each yang.
• However, owed to some miraculous flaw in the simulation’s code, a perturbation in the motion of the universe’s marionette, this is not the case.
• Rather than the big-bang resulting in the almost immediate annihilation of matter and anti-matter into photons, matter prevailed, surviving in excess to its counterpart.

• Kingston Resources Limited (ASX:KSN) is an ASX-listed gold and copper mining company with two significant projects at Mineral Hill (Cobar, NSW), where the tailings production project is delivering record quarterly results, and the 3.8Moz Misima Gold Project in PNG, with a recently completed DFS.
• The tailings project at Mineral Hill is a precursor to the company’s aim to return to full-scale mining through building the reserves and resources base during 2023.
• The company expects to commence open-pit operations at the Pearse deposits in early 2024, progressing to underground works and first copper in late 2024 from the Southern Ore Zone.

• Pacgold Limited (ASX:PGO) is an ASX-listed minerals exploration company focused on the Alice River gold project at the northern end of the North-east Queensland Mineral Province.
• Pacgold has a 100% interest in Alice River, covering an historical high-grade goldfield and open-pit mine with eight mining leases and five exploration permits over an area spanning 377km2.
• The company commences drilling in March/April with a pipeline of high-grade targets along a previously overlooked 30km trend.

• Southern Cross Gold Ltd (ASX:SXG) is an ASX-listed gold and critical metals company with three projects in the Victorian goldfields and one in Mt Isa, Queensland.
• The company’s flagship project Sunday Creek is an epizonal gold-antimony deposit with antimony a critical metal used across the semi-conductor, defence and energy sector, in particular in lithium ion battery production.
• SXG listed on the ASX in May 2022 after raising $9.093mn at $0.20/share in an initial public offering to give a market capitalisation at listing of $31.25mn. 

• We expect the steep revenue ramp, which commenced in 2Q22, to continue into 2023 as Flotek continues to expand service to a growing number of ProFrac’s pressure pumping fleets to meet the terms of the 10-year supply agreement signed in February 2022.
• Flotek will supply the greater of 70% of ProFrac’s stimulation chemistry requirements or 30 frac fleets. For its part, ProFrac expects to have up to 49 active fleets by mid-year 2023.
• We have built a 2023 reported revenue estimate of ~$224 million based on supplying an average of 26 ProFrac crews.

• The changes to the Hang Seng family of indices and the SSE STAR50 (STAR50 INDEX) were announced post market close on Friday.
• Busy start to the coming week with the MSCI implementation at the close on 28 February and a few announcements to other indices later in the week.
• There were outflows from Tracker Fund of Hong Kong Ltd (2800 HK) during the week taking the YTD outflows to over US$1bn.

• DuPont had a mixed fourth quarter and its revenues were below analyst expectations but the company managed to deliver an earnings beat.
• The company has also succeeded in enhancing its grip on industrial-end markets such as healthcare and aerospace.
• There was a strong pricing growth as well that helped mitigate the impact of inflation.

• Troubled coalbed methane play Sino Oil And Gas Holdings (702 HK) is currently suspended pursuant to the Hong Kong Code on Takeovers and Mergers. 
• Sino Oil is burdened with a large convertible note and a winding-up petition.  Its auditor has disclaimed accounts since 2017 over its ability to continue as a going concern.
• Jiangxi Jovo Energy (605090 CH) is interested in taking more than 50% of Sino Oil (via new shares), but less than 75%. Sino Oil is up >100% in the past month. 

• WTI’s bearish flat/triangle is setting up to break lower and a harbinger of weaker growth in coming months amid a stronger USD.
• Bearish oil also gels with our stronger dollar and weaker demand view. It will also bring energy shares back to earth.
• New low targets at 69 and 65 then review for a tactical recovery attempt.

As expected, the NSW Minister for Planning has approved Alkane’s Tomingley Gold Extension Project, allowing both open-cut mining at the Roswell and San Antonio deposits (including underground mining at the former) and extending the mine life to 2032. The approval accepts a processing rate of up to 1.75Mtpa, with underground mining due to commence at Roswell before the end of CY23. Financing has been secured via A$50m of debt funding from Macquarie Bank, together with 100koz of gold hedging at a weighted average price of A$2,825/oz (US$1,928/oz).

• Devon Energy delivered a mixed performance in the last quarter of 2022.
• The company managed to surpass the revenue expectations of Wall Street but its earnings were well below par.
• We give Devon Energy Corporation a ‘Buy’ rating with a revised target price.

• Ecolab delivered a mixed performance in the fourth quarter.
• Organic sales increased by 12%, and sector-wise growth was strong but the company failed to meet the revenue expectations of Wall Street.
• Healthcare & Life Sciences resumed growth and delivered 7% organic growth.

• Pertamina Geothermal Energy (PGE) raised around US$600m in its Indonesia IPO. PGE is an Indonesian state owned power producer which utilizes geothermal energy to produce electricity.
• PGE currently manages 13 Geothermal Working Areas with a total capacity of 1,877 MW, of which 672 MW is owned by it, while 1,205 MW is via joint operations.
• In our previous notes, we looked at the company’s past performance and valuations. In this note, we talk about the deal dynamics ahead of its listing.

• Pertamina Geothermal Energy (PGEO IJ) priced its IPO at IDR875 per share to raise gross proceeds of IDR9.1 trillion (US$600 million). The shares will start trading tomorrow.
• We previously discussed the IPO in Pertamina Geothermal IPO: The Investment Case and Pertamina Geothermal IPO: Valuation Insights. 
• Peers have modestly re-rated and the IPO price continues to imply a discount to the median peer CY2023 EV/EBITDA multiple. Therefore, the IPO price remains attractive.

We view Tata Steel as “Low Risk” on the LARA scale. The company has delivered outstanding results in recent years (before the current downturn in the steel industry), with significant deleveraging and strong earnings growth. This resulted in a substantial boost to its credit profile. We view favourably the company’s track record of achieving guidance, especially in terms of deleveraging. The business’ cyclical nature is offset by Tata Steel’s commitment to paying down debt, balancing growth and deleveraging.

We like Tata Steel’s size, complete vertical integration and diversified operations. The Indian operations enjoy strong domestic demand (which supports capacity expansion), and benefit from trade protectionism (a safeguard duty). We incorporate a credit uplift on account of Tata Group’s strong reputation, which partly mitigates the highly cyclical nature of Tata Steel’s commoditised steel-making business.

Our Credit Bias on Tata Steel is “Negative”. This is due to a sharp deterioration in the operating environment, especially in Europe, driven by high energy and coking coal costs. The structural weaknesses in the European business will likely weigh on the group during downturns.

The ESG Impact on Credit is “Neutral”. The metal & mining industry is exposed to regulatory and geopolitical risks. Furthermore, the nature of the industry places Tata Steel under scrutiny from environmental agencies and investors. However, the company has managed this well by making significant efforts for environmental factors. That said, there is room for improvement in the management of water, waste and toxic materials, as well as in social aspects. While there has been some controversy (most notably in the sudden change of chairman at Tata Sons in 2016, and later at Tata Steel), this was some time ago and the new chairman has since proven himself. Thus, we see Controversies as “Immaterial”.

• Guangzhou Tinci Materials Technlgy (002709 CH) is looking to raise up to US$1.5bn in its upcoming Swiss GDR listing. Bookrunners on the deal are CICC, HSBC, and JPMorgan.
• As per the firm’s filings, it is to issue no more than 289m A-shares, or not exceeding 15% of the firm’s total ordinary share capital.
• In this note, we discuss the GDR’s timeline, and the firm’s recent financial performance.

• We are updating our estimates to reflect the operating outlook Earthstone provided on February 16, 2023, and changes to certain assumptions around commodity prices and costs.
• We expect detailed 4Q22 financial results in early March.
• 4Q22 production averaged ~104.8 MBOE/d, above the high end of management’s previous 98-102 MBOE/d guidance.

• The Brookfield/EIG consortium has reduced its Offer for Origin (ORG AU) to ~A$8.90/share, down from A$9.00/share, after conducting due diligence in the wake of the Aussie government’s gas price intervention.
• Oddly, this revised proposal remains non-binding, suggesting a number of political kinks still need to be ironed out.
• For its part, Origin’s board reckons the revised proposal has the potential to deliver significant value to shareholders, all but guaranteeing board support, assuming a firm Offer unfolds.

• BP had a mixed quarter and its revenues were significantly above Wall Street expectations.
• The management’s emphasis on cost performance as well as operational reliability underpinned robust financial delivery.
• Despite the fact that its costs are being controlled, the company missed out on meeting the earnings estimates of analysts.

• BHP Group Limited’s half-year earnings report isn’t as bad as it seems, as there is a disparity between the firm’s realized performance and its prospects.
• Lower rainfall could result in ramp-ups across the board.
• Slower core and non-core inflation will likely establish a lower cost base for BHP.

• Origin Energy (ORG AU) has disclosed a revised non-binding proposal from Brookfield/EIG. The headline price has been lowered by -1.1% from A$9.00 to A$8.90 per share.
• Under the revised proposal, shareholders’ first 100,000 shares get A$8.90. Beyond that ownership, the offer is A$4.334 plus US$3.194 per share (currently worth A$8.99 per share). 
• While the recut introduces FX rate risk, the average implied value is A$9.01 since 10 November. Both the offeror and the Board seem keen to get a binding offer.

• Sibanye-Stillwater (SGL SJ), the holder of 19.9% of shares, has made an off-market takeover for Queensland zinc miner New Century Resources (NCZ AU) at $1.10/share, a 42.9% premium to last close.
• Sibanye-Stillwater said it was concerned about the change in the strategic direction of NCZ under the current management.
• Concurrently, Sibanye-Stillwater has made an on-market buy order for 10.92% (14.4mn shares) of shares out to take its stake to ~30%. Shares closed at $1.095. ~32mn shares changed hands.

FY22 marked a record-breaking year for Agnico Eagle Mines (AEM) after its Kirkland Lake acquisition, achieving annual gold production of 3,281koz at a US$780/oz total cash cost and a US$1,090/oz all-in sustaining cost (AISC). In Q422, AEM delivered strong gold production of 799koz at a US$863/oz cash cost, despite inflationary pressure and reduced production at LaRonde, Kittila and Pinos Altos. AEM’s quarterly dividend was maintained at US$0.40/share and it expects its recently announced acquisition of Yamana’s Canadian assets to close in March.

• For the recent conversion, the listing date is March 3rd, involving 500K shares. Despite the ongoing rally, there is a possibility of a significant price impact due to the volume.
• We still have 1,632,333 shares to be converted. This represents 6.5% of the SO. There is a high likelihood that these will also be applied for conversion soon.
• Assuming that it occurs in increments of 400-500K, there could be roughly 3-4 opportunities for shorting.

• 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 – 21Vianet Group (VNET US), Alliance Aviation Services (AQZ AU), Origin Energy (ORG AU), 111 Inc (YI US), Golden Energy & Resources (GER SP), Genesis Minerals (GMD AU). 
• Lowest spreads – Boustead Projects (BOCJ SP), Ihara Science (5999 JP), Nitro Software Ltd (NTO AU), Tyro Payments (TYR AU), Essential Metals (ESS AU), Warrego Energy (WGO AU). 

• The March 2023 Rebalance results for the NIFTY broad market Indices were announced after the close on Friday 17th February 2023.
• In my previous insights, I highlighted Pidilite Industries (PIDI IN) as a potential ADD for NIFTY 50 but it will not be added in March 2023. There are no changes.
• However, for NIFTY 100 (& NIFTY Next 50), 4/5 Expected ADDs and 5/5 Expected DELs were predicted correctly.

• The company was founded in 1828 as a British trading house, active across rubber plantations, tin smelting, trading of oil products, shipping, distribution of consumer goods and more.
• After Singapore become an independent country, Boustead Singapore was spun off from its Malaysian and British counterparts.
• In 1996, the company became controlled by entrepreneur FF Wong. 

• Aag Energy Holdings (2686 HK) disclosed a pre-conditional privatisation offer from Xinjiang Xintai Natural Gas (603393 CH) at HK$1.85 per share, a 10.1% premium to the undisturbed price.
• The pre-condition is Xinjiang Xintai shareholder approval. Key condition is approval by at least 75% of disinterested shareholders (<10% of all disinterested shareholders rejection). The price is final but light.
• The total privatisation cost is HK$2,704 million vs AAG’s net cash of HK$2,270 million. The offeror is betting that minorities will not be able to launch a concerted NO vote.

• On the 14 May 2018, coalbed methane producer AAG Energy Holdings (2686 HK) announced a partial offer (50.5%) from Xinjiang Xintai Natural Gas (603393 CH) at HK$1.75/share. 
• Xinjiang Xintai has returned to the pit with a $1.85/share Offer by way of a Scheme. The Cancellation Price will NOT be increased.
• This is hardly a knockout price, at a 10.1% premium to undisturbed; and just a 2.2% premium over the highest closing price of HK$1.81/share in the past year.

• Hanwha Solutions received shareholder approval for its proposed demerger on February 13. The demerger will split Hanwha Solutions into two separate entities: Hanwha Galleria and Hanwha Solutions.
• Hanwha Solutions will experience a passive outflow of 0.92x ADTV at the closing price on February 24 for KOSPI 200. A similar passive inflow will occur on March 31.
• MSCI Standard will deliver an outflow of 0.43x ADTV at the close on March 31 as the weight of Hanwha Solutions, an existing constituent, will be reduced.

• Q3FY23 tends to be the weakest quarter seasonally. Volume de-growth was -10% QoQ, in line with the expectation as per historical seasonality trend.
• Q4FY23 is all set to be a strong quarter. Management is confident of closing FY23 as per the previously stated revenue and margin guidance.
• The new value-added segment, Barrier Packaging, has started to contribute meaningfully to the revenue. Tube Laminates, another value-added segment, will also start to contribute soon.

• ConocoPhillips had a mixed result in the last quarter as the company was able to surpass the revenue expectations of Wall Street given its diversified and deep portfolio.
• From a portfolio perspective, the company’s deep asset base is very well-positioned to generate solid cash flow and has generated a high return on capital.
• The company has many new LNG opportunities in the United States and in Qatar which provide a strong upside.

• Where is the global commodity super cycle that everyone keeps predicting? 
• Industrial metals have outperformed energy (as we predicted) and will likely continue to do so
• Selective positioning in the commodity space remains of vital value with no super cycle in sight