| 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$3.4 billion-market cap Stanmore produces coking coal used in steel production. |
Excerpts from Morgans report
Analyst: Tom SARTOR
| Resilience pays • 4Q sales beat our expectations despite 2022 wet weather.
• The January deluge impacting port operations is a short-term risk to CY23 sales/costs although HCC (hard coking coal) prices/ realisations again prove to be a strong net offset. • SMR enjoys M&A advantages in the Bowen Basin and we think positioning for further acquisitions in 2023 will out-rank dividends in the near term. • SMR looks too cheap to us trading on a +25% free cash flow yield and with near 30% capital upside potential. |
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Events
▪ 4Q production, pricing upgrades, QLD wet weather impacts.
Analysis
▪ Impressive 4Q: 4Q sales (3.47Mt) were 300kt (~10%) above our forecasts despite ongoing wet weather. High ROM/product stocks, additional mining capacity/flexibility and opportunistic use of available logistics explained the resilience.
Strong volume and the lower AUD helped SMR to beat cost guidance at SWC and Poitrel; however, both tailwinds are now abating.
▪ Rain impacts: Mackay received ~650mm of rain (nearly 2.4x the January average) in the 7 days from Jan-12. While the mines and rail network have fared better, the trade press suggests port operations at DBCT may take up to 3-4 weeks to fully recover (coal dewatering) significantly slowing exports for all users.
We reduce our CY23 sales forecasts but do see further possible downside. Importantly, lost sales are a basin-wide phenomenon contributing to significant HCC tightness/ pricing.
▪ De-gearing on track: End CY22 net debt of $182m (cash $433m, debt ex-leases $615m) was $179m better than our forecast. The higher volume at better than forecast realisations (PCI tracking close to PHCC) likely explains much of the delta, along with higher tax accruals as the business re-bases to a higher NPAT.
▪ CY22 result preview late February: We expect wider-than-usual CY23 guidance and with some risk to volumes/costs versus market expectations (wet weather
uncertainty).
 "SMR looks far too cheap to us offering ~30% upside potential to our base case valuation."-- Tom Sartor |
We don’t expect a final dividend as we expect SMR to preference de-gearing (senior debt cash sweep due in February, possibly +$300m) and to build funding capacity for potential M&A.
▪ M&A focus: The trade press reports that BHP’s Daunia and Blackwater mines may soon come to market. Operating synergies with Daunia are obvious (adjoining leases, shared infrastructure) and we expect SMR to be a key bidder.
Peabody appears to be a logical rival for QLD assets (recent appetite, strategic imperative, ~3Mtpa of unused DBCT capacity).
Forecast and valuation update
▪ We lower forecast CY23 sales by 4% (to 12.6Mt). We also adjust for:
1) materially higher CY24-25 PHCC assumptions (+20%);
2) higher CY23 PCI realisations (to 84% with ongoing upside); and
3) higher cost assumptions. Price more than offsets short-term weather.
▪ Our base case valuation/target adjusts to $4.45ps (from $3.90).
| Investment view ▪ SMR looks far too cheap to us offering ~30% upside potential to our base case valuation. We’re attracted to:
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Price catalysts
▪ Potential external M&A.
Risks
▪ Production disruption, cost inflation, logistics interruption/ availability.
▪ Macro-economic weakness.
Full report here.