Energy & Materials Sector

• Newmont Mining (NEM US), the world’s largest gold miner, has pitched a non-binding, all-scrip proposal for Newcrest Mining (NCM AU), Australia’s largest listed gold company.  
• The proposal offers 0.38 Newmont shares for every Newcrest share, or an indicative Offer price of A$27.16/share, a 21% premium to last close. An earlier proposal from Newmont was rejected.
• The proposal is subject to a raft of conditions, including granting of exclusivity to Newmont, due diligence, Newmont shareholder approval, and regulatory approvals, including FIRB.

• Newcrest Mining (NCM AU) confirmed a non-binding indicative privatisation proposal from Newmont Mining (NEM US) at 0.380 Newmont shares per Newcrest share. 
• The offer values Newcrest at a discount to Tier 1 gold producer EV/Resource multiples. Also, the offer carries the volatility risk around Newmont shares and FX rates.
• The offer underscores Newcrest’s value and helps the Board seek better terms. There is a possibility of a counterbid from other Tier 1 producers such as Barrick Gold (GOLD US).

• Cement sector is witnessing a margin recovery and valuations are reasonable. 
• Ambuja Cements, the second largest in the sector provides a tactical opportunity for a valuation pop. 
• Avoid | as any inclusion amounts to adding to the risk rather than to the return of the portfolio. 

• Glencore said last week that its copper production fell 12% in 2022.
• The miner and trader said it produced 1.06 million tonnes of copper last year and kept its 2023 outlook unchanged at around 1.04 million tonnes.
• Many miners revise their copper output lower, as extreme weather, labor issues, or lower grades have caused companies to deal with problems and limit the output accordingly.

• Greatpower Nickel & Cobalt Materials (1919613D CH) is looking to raise about US$300m in its upcoming Hong Kong IPO.
• Greatpower Nickel and Cobalt Materials (GNCM) is a supplier of new energy battery materials in China, with a dual focus on nickel and cobalt for the production of cathode materials. 
• The firm has made itself one of the top Chinese players in terms of cobalt refining by sales volume and nickel by trading volume. However, its profitability was significantly impacted. 

• Newmont Mining (NEM US) has made an indicative, non-binding and conditional proposal to acquire Newcrest Mining (NCM AU). The exchange ratio is 0.38 Newmont shares for each Newcrest share.
• At Newmont Mining (NEM US)‘s last close, this values Newcrest Mining (NCM AU) at A$27.4/share and at an equity value of A$17.3bn, a 22% premium to the last close.
• Newmont Mining (NEM US) intends to list CDIs on the ASX following the acquisition and that will have implications for changes in the S&P/ASX family of indices.

• Pertamina Geothermal (0125738D IJ)/PGE, a subsidiary of PT Pertamina (Persero) (PERT IJ), is seeking to raise up to US$600 million at a narrowed price range of IDR875-880 per share.
• We previously discussed the IPO in Pertamina Geothermal IPO: The Investment Case. 
• PGE is attractively valued at the IPO price range. We would participate. Books will be closed on 10 February and the shares will start trading on 24 February.

• ARIRANG K-Defense Industry Fn ETF (449450 KS) shows the fastest AUM/ADV growth among recently listed sector ETFs. It is virtually the only one enjoying the influx of local retail investors.
• The increasing trend of ETF AUM, coupled with the growing interest of local retail investors in the defense sector, will likely lead to flow improvement in each constituent.
• The passive impact of some stocks in the upcoming rebalancing is expected to expand to 0.4-0.5x ADTV. Notable names in this regard are Hanwha Corporation and SNT Motiv.

• Pertamina Geothermal (0125738D IJ)/PGE, a subsidiary of PT Pertamina (Persero) (PERT IJ), is seeking to raise up to US$657 million at a price range of IDR820-945 per share.
• PGE is the largest geothermal concession holder in Indonesia, in terms of capacity installed, according to Wood Mackenzie.
• The investment case rest on steady growth, high margins, strong cash generation, manageable leverage, ambitious growth plans and attractive dividend payout.

• Gold had strong start to the year rising over $100/oz to $1928/oz in January.
• As we anticipated from our December note, the mining sector had a strong start to the year with gold and copper breaking out to near-term highs up 6% to $1928/oz and 12% to $4.20/lb, respectively, during the month of January.
• The explorers, despite having a strong January, remain inexpensive and continue to trade at an average of ~$33/oz (in the ground), down ~50% from 2020 highs.

• Sherwin-Williams’ fourth quarter results were mixed as the company failed to meet the revenue expectations of Wall Street despite a high single-digit percentage sales growth.
• The company managed an earnings beat as a result of the significant year-over-year gross margin improvement.
• Sales in North and Latin America increased by double-digit percentages in the industrial sector, offsetting some of the weaker circumstances in Europe and Asia.

• Pertamina Geothermal Energy (PGE) is looking to raise around US$650m in its upcoming 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 this note, we talk about the company’s financial performance and other issues, based on its recent filings. 

• Pertamina Geothermal (0125738D IJ) is offering 10.35bn shares in its IPO at a price range of IDR 820-945/share to raise between US$567-653m and valuing the company between US$2.27-2.61bn.
• The stock will not get fast entry to the MSCI, FTSE or local Indonesia indices (IDX30 Index/ LQ45 Index/ IDX80 Index).
• The stock should be added to MSCI Small Cap in May and to the FTSE All-Cap in September bringing in some passive flow.

The Asia Monthly focuses on providing updates on recent events, information on new issues and spread movements, as well as summarising our top picks. The Asia Monthly is intended to broaden investors’ understanding of the Asian USD high-yield market.

• HWKN reported fiscal third quarter (January 1) results where sales benefited from price increases while the firm dealt with supply bottleneck for sourcing fertilizer.
• HWKN has been relying on price increases to drive sales higher and generate gross profit dollars. Volumes have not increased as much as sales prices have.
• The water treatment business is seasonally soft in FYQ3. However, the segment reported sales greater than we were expecting. We believe this is mostly to HWKN renewing its annual contracts.

• 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.
• Friday’s weekly close is setting up to confirm a high probability bearish outlook when all 3 pillars are definitively triggered.
• A weekly close below 6077 will confirm a high probability multi-week to multi-month correction target in the 5415/5650 range.

• LyondellBasell continued to outperform the broader equity market as declining margins seem largely priced-in.
• The company remains well-positioned to weather increased risk of recession in 2023 and geopolitical tensions in the future.
• The firm is well- positioned to weather an increased risk to recession in the 2023.

Newmont will update guidance for 2023 when it releases Q4 results on 23 February 2023. We anticipate a strong close to 2022 (production up 6% quarter on quarter and costs down 13% in Q4) and believe a dividend recalibration is possible, albeit reflecting industry inflation rather than a reassessment of capital allocation policy in general. In this context, we see Newmont as a sustainable choice among gold producers, not only in an ESG sense, but also in its ability to maintain 6Moz pa of low-cost production.

Pan American Silver (PAAS) has reported that its shareholders approved the proposed share issue to acquire all outstanding Yamana Gold shares as part of its recently announced plan of arrangement to buy all non-Canadian assets of Yamana. At the same time, Yamana shareholders voted in favour of the special resolution approving the acquisition by PAAS of all the issued and outstanding shares in the company following the sale of all Canadian assets to Agnico Eagle. The transaction is expected to be completed in Q123 subject to receiving a number of regulatory approvals.

• After Greatview Aseptic (468 HK) was suspended on the 30 January, it emerged that Shandong Xinjufeng (301296 CH) had entered a SPA to acquire Jardine Matheson (JM SP)‘s 28.22% stake
• Greatview has now confirmed the transaction. Shares were supposed to resume trading this afternoon but were immediately suspended again.
• Importantly, Inner Mongolia Yili Industrial Group (A) (600887 CH), Xinjufeng’s largest customer is a main competitor of Greatview’s largest customer. That may be an untenable situation, according to the announcement.

• We expect a 10,000-12,000 Rph dividend for FY22 (div yield 28%-33%) from Indo Tambangraya Megah (ITMG IJ) as earnings are set to improve >70% HoH (H1 dividend – 4128 Rph/share).
• With coal prices remaining elevated, if volumes remain flat YoY, we could see >50% of the stock price returned in dividends throughout FY22e/23e.
• There is an excellent margin of safety, with almost 40% of the market capitalization in net cash. With a >65% payout ratio, we will see cash levels build further. 

• This was a strong quarter for Freeport with the company managing an all-around beat.
• Indonesia’s operations by PT Freeport Indonesia are characterized by very low costs due to the gold content and the grades, large volumes, and the world’s largest goldmine is a byproduct.
• In the quarter, gold and copper sales exceeded the guidance of the company and the company generated strong margins.

• MMP Industries (MMP IN)  is mainly engaged in the business of manufacturing, selling and distribution and trading of aluminum products such as powder, pyro and flake, paste, foils etc.
• The company has been on the main board of NSE since F20 but however, its financials are plagued with several forensic concerns.
• We highlight takeaways mainly related to negative cash flows and their misrepresentation in reporting standards. Additionally, the company is also engaged in various secretarial audit woes.

• Alcoa made progress in 2022 with strategic capacity restarts and efforts to lessen the effects of high energy prices.
• Global events impacted the price of energy and raw commodities.
• The company successfully finished the safe restart of its Portland Aluminum Joint Venture smelter in the Australian state of Victoria.

• Nucor had a mediocre quarter as its earnings dropped compared to the previous two quarters due to reduced shipping volumes and metal margin contraction, particularly at the company’s plate and sheet mills.
• The startup and construction of the company’s Nucor Stell Brandenburg mill continue progressing incredibly great with respect to schedule, budget, and safety.
• Lastly, at the end of this quarter, the company announced the approval of the construction of the galvanizing line at its Nucor Steel Berkeley 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.

• JSW Infrastructure
• Road King Infrastructure
• UPL Ltd
• Vedanta Resources

• Shandong Xinjufeng Technology Packaging (301296 CH) agreed to acquire Jardine Matheson Holdings (JM SP)’s 28.22% stake in Greatview Aseptic Packaging (468 HK) at HK$2.65 per share.
• Post-Completion, Xinjufeng will be the largest shareholder. As Xinjufeng’s shareholding will remain below the 30% voting threshold, the transaction will NOT result in a mandatory general offer. 
• The transaction price, which is a 22.7% premium to the last close, highlights Greatview’s value. Greatview’s forward P/E multiple is undemanding in comparison to peer P/E multiples.

• The general market consensus going into the new year was that commodity prices would continue to correct.
• We also positioned ourselves in this camp, as we predicted the turnaround story a few months later.
• While some commodities such as wheat or natural gas (both commodities that had been priced in a risk bonus for a long time due to the Ukraine war) fell sharply, other commodities such as corn, soybeans, orange juice, or soybean meal remain not far from their highs.

Vedanta Ltd’s (VEDL) Q3/22-23 results were weaker than expected, with thin profitability at the aluminium segment due to higher energy and commodity costs. However, we note positively the sale of Zinc International to Hindustan Zinc​ (HZL) and the fourth interim dividend (USD 570 mn). The financial risk metrics remain modest. The key risk remains the weak debt maturity profile, with large maturities in FY 2023-24.

Vedanta as a group has demonstrated a strong willingness to repay debt, and the capacity to do so by upstreaming cash as quickly as possible. In addition, we note the group’s creative methods to upstream cash efficiently, such as: [1] the sale of Zinc International to HZL; and [2] the merger between Cairn India and VEDL in 2017, when oil prices were low, with the deal partly funded by preference shares to Cairn India’s minority shareholders. We believe that the huge dividends by VEDL in FY 2022-23 (USD 3.7 bn) are the highest possible and will likely decline subsequently, given the correction in commodity prices. Still, this could offer comfort to lenders as it would support VRL’s refinancing needs (i.e. gap between the maturing debt and cash inflows).

• Kinder Morgan had a mixed quarter as the company failed to meet the revenue expectations of Wall Street but managed an earnings beat.
• The quarter also saw a good increase in their tankers business due to higher rates and more utilization.
• Although Kinder Morgan benefited from increased commodity prices, its core business, specialty natural gas, performed remarkably well, and the fundamentals remain solid in the future.

Treatt’s AGM trading update suggests a more normal and steady pattern of trading has resumed, following the setbacks that caused the profit warning last August. Management has clearly taken rapid steps to address the issues that were identified, and indeed this was already evident in October’s FY22 pre-close trading update. Performance remains in line with management expectations and our forecasts are unchanged.

• In this insight, we take a look at the potential index changes and the resultant capping flows for the Hang Seng China Enterprises Index (HSCEI INDEX) in March 2023.
• According to our estimation, there could be one change for the HSCEI in March 2023 and there could be one-way index flows of US$440mn.
• The final index changes along with indicative capping and index weights could be published in Mid/Late-February 2023 and implemented in early-March 2023.

• Thungela’s Goedehoop mine continues to deliver robust results, but most of its assets are underperforming.
• The stock’s more than 35% ex-post dividend yield had many investors excited.
• Nevertheless, cyclicality could play its hand soon, according to the canary.

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.

• Adani Ports & Special Economic Zone
• Vedanta Resources

• Schlumberger maintained its growth momentum throughout the fourth quarter, producing significant revenue growth and additional sequential and annual margin increase.
• They had sequential revenue growth and margin expansion in North America and internationally.
• On the other hand, exploration data sales, INNOVATION FACTORI, and AI solutions saw a significant increase in the digital sector.

• This model seeks companies that are potentially “overearning”, defined as companies with unusually high margins relative to their own history or relative to the industry. 
• The reasons for the margin increases are sometimes unsustainable or fraudulent. The  critical judgement involves to what extent unsustainable margins are embedded in a company’s forecasts and/or the stock’s valuation. 
• These shorts tend to have moderate to higher betas, higher valuations due to recent strong results and good short responses to subsequently disappointing earnings.