Singapore-listed Golden Energy & Resources, as a holding company, has a key subsidiary, 64%-owned Stanmore Resources (SMR) which is listed on the Australian Exchange. A$2.5 billion-market cap Stanmore produces coking coal used in steel production.

Excerpts from Morgans report

Analyst: Tom SARTOR

Stanmore Resources -- What if 40% margins are the worst this cycle has?!

SMR’s 3Q production proved resilient despite industry challenges.

Stanmore 

Share price: 
A$2.76

Target: 
A$4.10

Our upgraded forecasts now support de-gearing to a net cash position in 2HCY23.

SMR looks compelling on an absolute basis, and particularly relative to thermal coal peers (trading closer to NPV) offering ~50% upside to our base case NPV.

HCC (hard coking coal) above US$300/t defies a weaker steel outlook but prompts us to recall SMR’s incredible cashflow leverage (+65% 1H22 margins) for when HCC’s chronic supply issues inevitably crash into heathier demand.

Buy for this upside/ optionality.


Stanmore pic
Events
3Q production, HCC pricing at US$300/t, acquisition completion.

Key observations
3Q production: 3Q sales ~100kt below our forecast was resilient in the face of wet weather and lower rail availability (demand, labour). SMR expects a solid 4Q, supporting retained guidance but forecast La Nina is an obvious risk.

"Stanmore looks far too cheap offering ~50/100% upside to our base/bull case valuations respectively."

Note the lower AUD is likely masking inflation in A$ costs. We do note that lost volumes are an industry-wide phenomenon contributing to significant HCC market tightness.

20% BMC stake/ accretion: Distributed BMC JV cash was well above expectations, lowering the effective acquisition price to only US$270m. We currently value this stake at ~US$600m (ungeared, pre-corporate) so SMR’s purchase looks stunning, providing strong equity value accretion.

De-gearing profile: 3Q cash of US$701m was ~$50m ahead of our forecast (full cashflows not disclosed) and we infer 3Q EBITDA of +US$210m (41% margin), rising to a forecast US$305m in 4Q on 100% BMC ownership and higher prices.

Chunky 2H outflows including the Mitsui consideration plus US$100m to BHP (BMC instalment) sees forecast CY22 net debt of ~US$350m depending on cash tax/ timing. Our updated forecasts suggest SMR will reach net cash in 2H CY23.

Realisations upside: The PCI (pulverised coal injection) market has significantly tightened, threatening to again price at or above PHCC, supporting upside to our assumed 4Q (90%) and CY23 (77%) PCI realisation assumptions (LT 73%).

Forecast and valuation update
▪ Adjusting for:
1) higher CY22-23 PHCC (premium hard coking coal) assumptions (+3-7%);
2) materially higher PCI realisations;
3) higher cost assumptions;
3) earlier than expected full BMC ownership; and
4) the lower effective acquisition consideration.

▪ Our base case valuation adjusts to $4.10ps (from $3.45) and equates to our target.


Investment view
▪ SMR looks far too cheap offering ~50/100% upside to our base/bull case valuations respectively.

We’re attracted to: 1) higher capital upside versus peers; 2) superior upside cashflow/valuation leverage to price; and 3) a clear M&A advantage in the northern Bowen Basin where further acquisitions are likely in our view.

▪ Global steel production has been in recession for well over 12 months. We’re surprised that the worst pricing that QLD PHCC has managed in this time is US$216/t, far above prior cycle lows of US$101 in Dec-20 and US$77 in Jan-16 (4wk averages).

Demand side risks are elevated short term, but they don’t solve for HCC’s chronic longer-lasting constraints to supply. Tight supply will eventually collide into healthier demand again, with 1H22 a reminder of the earnings power in SMR’s assets (66% 1H22 margins) when HCC prices spike.

▪ While the short term could still be bumpy, we see SMR as a clear buy for earnings upside risk in time. Importantly, investors are protected from the downside price scenario by low-cost “BHP-like” cost structures at SWC and ED.

Price catalysts
▪ November 8-9 investor/analyst site visit should materially improve market understanding/ profile.
▪ Global steel activity/ directional HCC moves.

Risks
▪ Production disruption, cost inflation, logistics availability.
▪ Economic downturn.

Full report here.


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