Energy & Materials Sector

• In this insight, we take a look at the potential index changes for S&P ASX 300, 200, 100, 50, and 20 in the run up to the March 2023 Rebalance.
• Pendal Group (PDL AU)‘s deletion is expected in early-January 2023 and this could trigger an intra-review addition to the ASX 200 index. 
• I expect there to be one, two, and four changes, respectively, for the ASX 20, ASX 100, and ASX 200 indices in the March 2023 Rebalance. 

• One name is screened to newly join the index. That is Kum Yang (001570 KS). With a YTD performance of over 400%, it is currently in very safe territory.
• Two constituents stand out as likely deletes at this point: Zinus (013890 KS) and Hwaseung Enterprise (241590 KS). The market cap gap with the next ones in line isn’t small.
• Kum Yang’s passive impact is substantially low due to the recent surge in TV. But if it moves sideways and TV stabilizes downward, we should build preemptive flow trade setups. 

• The exercise price is the arithmetic average of weighted average prices for the past two months, the past month, and the past week from the day before the board resolution.  
• Considering the governance structure of most local companies, a split-off will still be more likely to be preferred than a spin-off. Split-offs will emerge despite the mandate of appraisal rights.
• We should look into staggering spread openings, with the pricing done on a two-month window, as a downward price revision will likely intensify toward the announcement with mandatory appraisal rights.

• Strike Energy (STX AU)’s revised off-market takeover is 1 STX share per Warrego Energy (WGO AU) share, a 29.0% premium to its previous offer and a 21.4% premium to Hancock’s offer.
• Hancock has the war chest to comfortably outbid STX. However, the smart move for Hancock is to be disciplined on price and instead bid for the combined STX/WGO post-completion.
• The Board’s view will be sent in Target’s statement to be despatched by 29 December. At the last close, the gross spread to STX’s offer is 6.3%. 

• Commodities will be the best-performing asset class once again in 2023, handing investors returns of more than 40%, according to Goldman Sachs.
• The Wall Street bank said that while the first quarter may be “bumpy” due to economic weakness in the US and China, scarcities of raw materials from oil to natural gas and metals will boost prices after that.
• The bank forecasts that Brent crude will climb to $105 a barrel in the final quarter of 2023, up from $82 today.

• Mineral Resources (MIN AU) has launched an all-scrip off-market takeover offer at 1 MIN share for every 1,367 Norwest Energy Nl (NWE AU) shares, a 33.3% premium to undisturbed price.
• There is no minimum acceptance condition, and the offer is only subject to prescribed occurrences. The timing is opportunistic and motivated by recent Perth Basin consolidation activity. 
• While the offer implies a premium to historical prices, the gross exchange ratio is unattractive. MIN’s key aim is privatisation, and a bump is likely required to achieve that goal.

• Iron ore and lithium play Mineral Resources (MIN AU) is offering one new share for every 1,367 Norwest Energy (NWE AU), an onshore O&G play, in an off-market takeover.
• The implied value of A$0.06/share under the Offer represents a 27% premium to NWE’s one-month VWAP.
• MinRes currently owns 19.9% in Norwest. There is no minimum acceptance condition. This is done and will trade tight.

• This insight provides the details of how a local asset management company called Truston Asset Mgmt has been able to win a corporate activism battle against Taekwang Industrial.
• Taekwang Industrial has repeatedly been boggled down by numerous corporate governance related issues for more than a couple of decades.
• The overall result should be a modest positive sentiment on Taekwang Industrial’s shares in the near term which still trades at dirt cheap P/B multiple of 0.2x.

• On the 10 November, Brookfield and EIG/MidOcean offered Origin Energy (ORG AU) shareholders $9.00/share, a 54.9% premium to last close, by way of a Scheme. The Offer is non-binding.
• On the 9 December, the Aussie government said it would take action to limit the worst impacts of the forecast gas price increases to protect Australian households, industry, and manufacturers.
• This includes a temporary price cap on new domestic wholesale gas contracts by east coast producers, such as Origin, for 12 months.

• Company holds pole position in corn starch processing in India with ~ 25% market share; but accounts for a significant share of industry’s profit pool. 
• Further expanded capacity by 40% (1200tpd) just last week and another 25% expansion is planned for Q4FY24E, the 60%+ capacity expansion will drive volume led growth forward.
• Cost pressures (commodity, energy) to abate in FY24E. Formidable player, capital efficient business, cost leadership, net cash stature, low valuations(<10x PER, <1x EV/Sales), favors investment.

• St Barbara Ltd (SBM AU) and Genesis Minerals (GMD AU) will merge via a scheme at a gross exchange ratio of 2.0338 SBM shares per GMD share. 
• The deal metrics are favourable for GMD shareholders. The gross exchange ratio is attractive and values GMD at a slight premium to mid-cap ASX peers on an EV/Resource basis. 
• The likely pushback from SMB shareholders is that the terms were struck from a position of share price weakness. However, the low SMB shareholder voting threshold (50%) will help.

• Gold miners St Barbara Ltd (SBM AU) and Genesis Minerals (GMD AU) have agreed to merge via a Scheme. Inter-conditionally, SBM will demerge Atlantic, Simberi, and other assets.
• SBM will issue 2.0338 of its own shares for each GMD share. Conditional on the Scheme and asset demerger, Genesis will raise $275m to fund the merged entity.
• At completion, SBM shareholders will hold 38% in the combined group, current Genesis shareholders 41%, with the remaining 22% held by participants in the capital raising.

• The size of treasury shares in the Dongkuk Steel demerger event is not too large to expect a value accretion to the combined market cap after the split.
• Based on the current market cap, all three companies will likely leave the KOSPI 200. To this end, K200 trackers must dispose of Dongkuk Steel right before the trade suspension.
• The size of rebalancing trading before trade suspension should be about ₩40T. We should consider setting our entry into flow trading as early as two weeks towards the trade suspension.

• This is our first report on global gold mining giant, Newmont Corporation.
• In Q3, they produced 1.5 million ounces of gold and nearly 300,000 gold equivalent ounces from copper, silver, lead, and zinc.
• We initiate coverage on the stock of Newmont Corporation with a ‘Hold’ rating.

• The Federal Reserve has done a spectacular job of keeping inflation expectations “anchored” in this market, despite multi-decade high levels of inflation.
• From the perspective of the Federal Reserve, it’s important to have well-anchored inflation expectations because this can help to keep actual inflation close to the central bank’s target rate.
• When inflation expectations are well-anchored, households and businesses are more likely to base their decisions on the assumption that inflation will remain stable and close to the target rate. 

• Newmont Corporation is among the global leaders in the exploration and production of gold.
• They are also stepping up development operations in Subika Underground and achieved record production drill meters while advancing the mine’s third production level’s development.
• The arrival of a second underground production drill might help deliver the fourth quarter’s anticipated development and the ensuing ore tonnes in 2023.

• The rebalance implementation of the KOSPI2, KOSDQ150, CSI 300, CSI 500, STAR50 and other indices took place on 8/9 December. Plus MSCI/FTSE deletes due to Northbound Stock Connect changes.
• Friday will see the implementation of the FTSE All-World/All-Cap, EPRA Nareit, S&P/ASX, KLCI, FTSE China and Sensex indices. The FTSE Taiwan Dividend+ Index will have the largest flows.
• Big weekly redemptions from the Mirae Asset Tiger Top 10 ETF (292150 KS), ChinaAMC China 50 ETF (510050 CH) and IShares Core MSCI Asia Ex Japan ETF (3010 HK).

• Filo Mining (FIL CN) and Tietto Minerals (TIE AU) are adds while Fresnillo (FRES LN), Galiano Gold (GAU US), Jaguar Mining (JAG CN) and Novo Resources (NVO CN) are deletes.
• One way turnover is estimated at 4.3% resulting in a one-way trade of US$163m. There is over 1 day of ADV to trade on 24 stocks.
• Largest inflows are on Filo Mining (FIL CN) and Tietto Minerals Ltd (TIE AU) while largest outflows are on Fresnillo PLC (FRES LN) and Centerra Gold (CG CN). 

• As expected, there are no adds or deletes for the MVIS Global Rare Earth/Strategic Metals Index at the December rebalance.
• There are free float and capping changes that will be implemented at the close on 16 December.
• One way turnover is estimated at 4.26% and will result in a one-way trade of US$31.5m.

We view Medco Energi as “High Risk” on the LARA scale, owing to its limited size, somewhat short 1P and 2P reserve life, appetite for acquisitions, and moderate (albeit improving) leverage. The company has a history of negative FCF generation, due to acquisitions and heavy exploratory capex to increase reserve life. In addition, Medco’s earnings are exposed to oil-price volatility, though the risks are mitigated to a degree by its heavy use of fixed-price gas contracts. Positively, production cash costs are low, which reduces the break-even price. The company also appears to have good access to financing from domestic banks, as well as bond and equity markets.

Our fundamental Credit Bias on Medco is “Stable”. This is due to the continued high oil-price environment, which should support earnings and cash flow. Leverage has improved significantly since FY 2021. That said, we are cautious on the possibility of a substantial increase in the company’s capex over the next few years, or another significant debt-funded acquisition that could weaken its financial profile. Over the medium term, the credit profile should remain driven by the development of oil prices.

Controversies are “Immaterial”. While Medco is in the fossil fuel industry, we note that its O&G business segment is more heavily involved in natural gas, which has a lower carbon footprint than crude oil and coal. We expect gas demand to be well-supported over the next decade in the company’s key markets (Indonesia and Southeast Asia), as the region transitions away from coal. The company is also involved in renewable energy, which accounts for c. 30% of installed capacity for its power business. Overall, we view the ESG Impact on Credit as “Neutral”.

• As expected, Sungeel Hitech (365340) made it to the index. And C&I System (222080) and Wonik PNE (217820) were added, whereas Ecopro (086520) and Dongwha Enterprise (025900) were deleted.
• Among the existing constituents, Samsung SDI (006400), Ecopro BM (247540), SK Innovation (096770), L&F (066970), and SKC (011790) are expected to have a relatively significant impact.
• Looking at the last rebalancing, the impact/price correlation was most significant on Day 1. So, we should consider aiming for LONG/SHORT today for those with a high relative impact.

• Growatt is a distributed energy solution provider with the #1 market share for PV inverters and energy storage inverters, allowing them strong potential to benefit from a growing market.
• In November 2022, the company received approval from the Hong Kong Stock Exchange and the IPO has a placeholder value of US$1bn, making it HKEX’s fourth largest IPO of 2022.
• In this follow-up insight, we have highlighted and discussed some of the key new data points from the company’s latest Post Hearing Information Pack (PHIP).

• Agnico Eagle Mines has already delivered outstanding results in a period of less than 6 months.
• The risk profile of Agnico remains low with an exceptionally high dividend yield.
• The company appears very attractive in spite of the inflationary headwinds, according to the company’s chief executive.