Energy & Materials Sector

• 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

• Empire Energy Group Limited (ASX:EEG) is an oil and gas producer/developer, with onshore Northern Territory (NT) and US oil/gas assets.
• EEG has the largest tenement position in the highly prospective Greater McArthur Basin, which includes the Beetaloo Sub-basin.
• The NT energy basins are fast developing as strategic high calorific gas bolsters for east coast Australia’s future domestic requirements, growing Gladstone LNG ullage and potential supply for Darwin’s expanding LNG export terminals, amid funding support from territory and federal governments.

Pan African Resources (PAF) announced its FY23 interim results in the context of known production results and a JSE listing requirement paragraph 3(b) trading statement that indicated both earnings per share and headline earnings per share (HEPS) in the range 1.40–1.64c at the interim stage. In the event, HEPS and EPS for the six-month period were exactly in the middle of the guided range at 1.52c/share. In the wake of the H123 results, we have upgraded our forecast for normalised HEPS for FY23 from 3.82c/share to 4.17c/share (assuming the gold price remains at US$1,835/oz for the remainder of the year). NB Our upgrade would have been to 3.91c/share had our gold price forecast for the balance of the year remained unchanged at US$1,749/oz. Further out, we estimate that development of additional productive assets will increase PAF’s production to c 250koz in 2026 and its normalised HEPS to c 6.00c/share.

• Yesterday, Indonesia’s second largest coal mining business Adaro Energy (ADRO IJ) announced a buyback. This follows another buyback which ended in December 2022.
• The Sep21-Dec22 buyback bought back 1bn shares, but did not spend all the money allocated to the buyback. This new one might buy back a similar quantity.
• Looking at Real World Float is the right frame of reference. And the stock was at a recent low vs a Peer Basket. 

• EDG is one of the highest grade at-surface discoveries in Canada with grade open along strike and to depth
• Simplistic gold camp in the making – Idyllic access to infrastructure, within 10km of another permitted operation, low permitting risk in comparison to the Golden Triangle
• Resource has potential to be several million ounces – Orogenic gold deposit confirmed over a 1.5km trend and gold anomalies spanning across the property Endurance Gold’s flagship Reliance Gold Project is the primary driver of our valuation for the Company as it is showing early-yet-strong signs of becoming a multi-million-ounce high-grade gold deposit with economical ounces just kilometers from another permitted gold operation.

• Shell produced a mixed set of results in the quarter, meeting the revenue expectations of Wall Street but missing out on earnings.
• The company’s working capital situation has improved significantly and working capital was a substantial cash inflow in the quarter.
• The improved cash flow position in the quarter enabled Shell to enhance its distributors to shareholders.

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

• The review period for the March rebalance of the KOSPI Size Indices ends 28 February. The results will be announced early March and implemented at the close on 9 March.
• We see 5 migrations between MidCap and LargeCap, 8 migrations from SmallCap to MidCap, 3 new adds to MidCap, and 11 migrations from MidCap to SmallCap.
• Stocks migrating from SmallCap to MidCap have outperformed stocks that are migrating between other categories.

• On 14 February 2023, Idemitsu Kosan (5019 JP) reported Q3 results. They were less impressive than one would have hoped. 
• Lower USDJPY and lower Dubai crude prices mean a JPY 90bn hit to inventory marks, but the rest of the petro business made almost no money in the quarter. 
• However, the company announced a large buyback. THAT is worth looking at. 

• Ecopro Co Ltd (086520 KS) is one of the likely inclusions in the MSCI Korea rebalance in May 2023.
• Many investors have pushed up share price of Ecopro Co, already factoring in that this stock will be included in the next round of MSCI Korea index rebalancing.
• Our NAV analysis of Ecopro Co suggests an implied NAV per share of 207,087 won, representing a 5% upside from the current price. 

• In this insight, we take a look at the Potential ADDs/DELs for the BSE SENSEX, 100, 200, and 500 Indices in the June 2023 Rebalance.
• The sharp price drops experienced by the Adani Group companies have resulted in a negative change in index flow expectations for some names.
• However, some Adani Group companies could be experiencing positive index flows in the June 2023 rebalance due to some peculiar derivative-linkage requirements in the index methodology.

• Gibson Energy’s revenues for 2021 increased to c$7.2bn recording a major percentage spike of 46.03% com- pared to revenues of 2020.
• Similar uptrend showed the main profitability indicators in 2021 (EBT, EATAM).
• Partial or total lifting of restrictive measures across the global economy in 2022 as well as an ongoing energy crisis, contributed to an increase in oil demand, setting the company on track to achieve record high profitability.

• Revenue rose 527.3% Y/Y to $7.8 million from $1.2 million in 1Q22. The increase in revenue was due to increased order volume and the ramp-up in production to meet demand. 
• Revenue was predominantly from the sale of batteries for Material Handling Electric Vehicles (MHEVs), which accounted for $7.4 million or ~96% of revenue for 1Q23 compared with $1.1 million or ~89% for 1Q22.
• The sale of engineering services, research grants, and other sources of revenue accounted for the remaining $0.4 million or 4% in 1Q23 compared with $0.1 million or 11% in 1Q22.

Since our last note on the company, Lepidico has successfully completed extensive further pilot plant trials at larger scale, raised over A$19m in equity, updated and improved the economics of its Phase 1 Plant project and updated and upgraded its mineral resources (and reserves) at Helikon 4 and on surface (in the form of dumps etc) at both Rubicon and Helikon. This note updates our valuation of the company for all of these developments plus new lithium price assumptions (below).

• Sibanye Stillwater Limited’s stock presents a tactical investment opportunity to traders after its significant month-over-month drawdown.
• Financial market participants could soon start pricing the prospects of self-generation.
• A recovery of the company’s U.S. PGM operations and ending South African wage strikes will likely deliver tangible results.

• Berger Paints India (BRGR IN) / Pidilite Industries (PIDI IN) are exposed to similar customers but different demand dynamics offering an opportunity to build an L/S trade.
• The valuation premium commanded by PIDI over BRGR is not justified in spite of having a similar customer base, similar growth and capital allocation profile.
• The Price ratio of the pair BRGR/PIDI has been trading in a tight range since September 2022 and is now showing signs of breaking out of the sideway trend.

• POSCO Holdings and Kumho Petro Chemical are expected to experience a level of passive outflow worthy of our attention in Feb QCIR.
• Newly emerging ones for May OCIR are Ecopro Co Ltd and Amorepacific Group. Ecopro’s inclusion is almost certain, and AmoreG isn’t too far off the borderline.
• Hanwha Aerospace also settled in the inclusion zone, whereas Posco International has moved somewhat away from the borderline. Lastly, there is S.M. Entertainment, which also deserves our attention.

• 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 – Alliance Aviation Services (AQZ AU), 21Vianet Group (VNET US), Origin Energy (ORG AU), 111 Inc (YI US), Golden Energy & Resources (GER SP), Toyo Construction (1890 JP). 
• Lowest spreads – Tyro Payments (TYR AU), Boustead Projects (BOCJ SP), Essential Metals (ESS AU), Nitro Software Ltd (NTO AU), Ihara Science (5999 JP), Nissin Electric (6641 JP).        

• There are 41 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Five new deal was discussed on Smartkarma this past week: Newmont/Newcrest; First Abu Dhabi Bank/Standard Chartered,  Boustead Projects (BOCJ SP); Ihara Science (5999 JP), and Iwasaki Electric (6924 JP).
• Key updates took place for: Nitro Software Ltd (NTO AU), Toshiba Corp (6502 JP), and Halcyon Agri (HACL SP).

• Ball’s performance in the quarter was extremely disappointing and the company missed out on meeting Wall Street expectations with respect to revenues as well as earnings.
• The company did see a decent performance in EMEA aerospace and aerosol operations, especially in its newly constructed facilities in EMEA.
• The management believes that Ball’s aerospace and aerosol segments are having ongoing success and will complement the activities of its global beverage operations.

• Equinor rose 75% over the three-year period but has stalled.
• European gas prices may be nearing a bottom, according to the company.
• The company’s 10-year outlook looks good after record profits this quarter. It has been offered as an alternative to U.S.

• Exxon Mobil delivered a mixed set of results for the last quarter.
• The company’s cash flow performance was solid.
• Exxon merged its downstream and chemical businesses to create Product Solutions, one of the world’s biggest fuels, chemicals, and lubricants companies.

• Despite high inflation and declining demand in the second half of the year, International Paper managed a fair result.
• Despite the strong marketing efforts, the company failed to meet the revenue expectations of Wall Street.
• International Paper has made strategic investments to support the profitable development potential across its Industrial Packaging business.

• Barrick Gold Corporation’s stock is bearish on the premise of underwhelming operational performance and an overblown gold price outlook.
• However, ramp-ups of critical assets are yet to be realized, according to the company.
• Barrick is committed to a substantial share buyback program and promises solid dividends.

We have raised our near-term lithium price expectations to reflect the current supply/demand cycle and upgraded our long-run (post 2031) price forecasts (from US$17,000/t to US$22,500/t LCE) to reflect lithium’s high demand growth and highly concentrated supply fundamentals. On the back of this, our valuation of Lithium Power International (LPI) has increased from A$1.24/share to A$1.42/share assuming the full project equity dilution. We have also updated our model to reflect 100% consolidation of the Maricunga project as well as LPI’s (now somewhat more dilutive) lower share price.

Tata Steel has reported significantly weaker than expected Q3/22-23 results. This was driven by a material loss in the European business. Meanwhile, the Indian operations remained reasonable. The consolidated financial risk profile deteriorated significantly, albeit Net Debt/EBITDA remained within the company’s long-term target. Liquidity is adequate.

The next few quarters are likely to be weaker for Tata Steel in Europe, as markets remain subdued. Steel prices are projected to weaken in Q4/22-23, with the drop likely to be steeper than the decline in coking coal and iron ore prices.

Nanoco Group has signed the final agreements to settle the litigation with Samsung on a no-fault basis for the alleged infringement of the group’s intellectual property (IP), with Samsung paying Nanoco $150m (£125m) in cash. Nanoco’s H123 performance relating to the organic activities was slightly ahead of management’s expectations. We have revised our estimates to reflect both the settlement, which includes £3.0m in licence revenues recognisable in H223 and takes the group from negative to positive EBITDA for FY23, and the H123 trading update.

• The Sprott Junior Gold Miners ETF’s investment strategy provides underwhelming value additivity.
• The ETF is experiencing cross-sectional momentum and hosts an alluring dividend.
• However, such features might not be enough to entice further gains. We do not think the ETF is a sell.