On 14 June, BCI announced that its EBITDA guidance from Iron Valley for FY19 is now right at the top of the range of prior expectations. During the first nine months of the year, BCI’s EBITDA from Iron Valley was A$6.0m from 5.5Mt of material shipped (ie A$1.09 per tonne). In the light of the continued strength of the iron ore price in the aftermath of the Brazilian tailings dams’ disasters, it has now revised its guidance for the full year from A$6–12m to A$11–12m (or c A$1.57 per tonne, given our FY19 production estimates), implying EBITDA of A$5–6m (or c A$2.66–3.19/t) in Q419 alone. As a result, we have upgraded our EBITDA forecasts for BCI’s Iron Valley stream of income for FY19 and FY20. Consistent with the strong iron ore price environment, between March and May, BCI’s cash position declined by only A$0.6m, despite continued investment into Mardie.
BCI Minerals |
Iron ore price continues to power ahead |
Earnings update |
Metals & mining |
5 July 2019 |
Share price performance
Business description
Next events
Analyst
BCI Minerals is a research client of Edison Investment Research Limited |
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On 14 June, BCI announced that its EBITDA guidance from Iron Valley for FY19 is now right at the top of the range of prior expectations. During the first nine months of the year, BCI’s EBITDA from Iron Valley was A$6.0m from 5.5Mt of material shipped (ie A$1.09 per tonne). In the light of the continued strength of the iron ore price in the aftermath of the Brazilian tailings dams’ disasters, it has now revised its guidance for the full year from A$6–12m to A$11–12m (or c A$1.57 per tonne, given our FY19 production estimates), implying EBITDA of A$5–6m (or c A$2.66–3.19/t) in Q419 alone. As a result, we have upgraded our EBITDA forecasts for BCI’s Iron Valley stream of income for FY19 and FY20. Consistent with the strong iron ore price environment, between March and May, BCI’s cash position declined by only A$0.6m, despite continued investment into Mardie.
Year end |
Revenue (A$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/17 |
64.3 |
6.0 |
1.9 |
0.0 |
10.0 |
N/A |
06/18 |
33.0 |
(16.9) |
(4.3) |
0.0 |
N/A |
N/A |
06/19e |
63.8 |
(6.0) |
(1.1) |
0.0 |
N/A |
N/A |
06/20e |
85.6 |
(13.1) |
(3.3) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Full effect of higher iron ore prices in FY20 & beyond
While the effect of the increase in iron ore prices in Q419 will have had a relatively modest A$0.9m effect on earnings for the year as a whole, the effect on earnings in FY20 is much larger. Hitherto, we have assumed an average price for 58% CFR iron ore of US$49.00/t for FY20. With the current price of standard grade 58% CFR iron ore around US$105/t, however, such an outcome for FY20 now appears extremely unlikely. In recognition of this, we have formally adjusted our price forecasts for 58% CFR iron ore, so that we assume it will decline steadily from current levels to reach our FY21 price by the end of June 2020, such that the average price for FY20 will be US$71.53/t (ie a discount of only 16.2% compared with the likely average price of US$85.35/t in Q419 and a 69.4% premium compared to the H119 average price of US$42.23/t). As a result, our forecast for Iron Valley EBITDA in FY20 has increased by 36.6% to A$15.3m.
Northern Australia Infrastructure Facility (NAIF)
Further to its Iron Valley earnings update, on 1 July, BCI also announced that the NAIF had advised that the Mardie project can proceed to the next (due diligence) phase of the assessment process for potential, concessional debt funding.
Valuation: Still 2x current share price
In the wake of its announcement, we value BCI at 35.60c (cf 35.13 previously). However, this increases to as much as 47.45c in the event that iron ore prices remain at current levels until the end of the life of operations at Iron Valley. Note that a further 2.43c should be added to all of these valuations to account for the value of BCI’s Buckland iron ore assets.
Iron Valley earnings update
Not wholly surprisingly, given the recent strength in the iron ore market, on 14 June, BCI issued an earnings update for Iron Valley to the effect that its EBITDA expectations from that operation are now right at the top of the prior range for the company’s financial year to end-June 2019. During the first nine months of the year, BCI’s EBITDA from Iron Valley was A$6.0m from 5.5Mt of material shipped (equivalent to A$1.09 per tonne) and, until the announcement, BCI’s formal EBITDA guidance for the full year had been in the range A$6–12m. In light of the continued strength of the iron ore price since March, BCI has revised its EBITDA guidance for FY19 to the top of the range, at A$11–12m, which (given our FY19 production estimate of 7.33Mt for the full year) equates to c A$1.57 per tonne).
In its announcement, BCI observed that the price of 62% Fe cost freight (CFR) iron ore had averaged US$96 per dry metric tonne (dmt) in April and May compared with an average of US$74/dmt for the first nine months of the year (a 29.7% increase). In addition, the discount of the price of 58% CFR iron ore (a close proxy to the price received by Iron Valley for its product) to the 62% product had narrowed ‘materially’; the price has continued to strengthen to in excess of US$120/t at the time of writing.
Graphs of the prices of standard grade 62% and 58% CFR iron ore (and the discount of the latter to the former) are provided in Exhibits 1 and 2, below, which bear out BCI’s analysis.
|
Exhibit 1: 62% iron ore price (US$/t) vs 58% iron ore price, July 2014 to present |
Exhibit 2: Discount of 58% iron ore price vs 62% iron ore price, July 2014 to present (%) |
|
|
|
Source: Refinitiv, Edison Investment Research |
Source: Refinitiv, Edison Investment Research |
|
Exhibit 1: 62% iron ore price (US$/t) vs 58% iron ore price, July 2014 to present |
|
|
Source: Refinitiv, Edison Investment Research |
|
Exhibit 2: Discount of 58% iron ore price vs 62% iron ore price, July 2014 to present (%) |
|
|
Source: Refinitiv, Edison Investment Research |
Consequences – Q419 and FY19
While our erstwhile forecasts for Q419 had largely discounted the higher iron ore prices, they had not done so completely in that they assumed an average 58% iron ore price of US$78.54/t during the quarter, whereas (on current trends) the price actually looks likely to have averaged US$85.35/t, as the shortage of iron ore supply in the wake of the Brazilian mines’ tailings dams’ disasters continues to squeeze prices higher. Over approximately the same timeframe, the Australian dollar also weakened, which has accentuated the effect of the rising iron ore prices. Adjusting for these two effects alone increases our June 2019 quarter estimate of EBITDA for Iron Valley to A$5.6m (equivalent to A$2.98 per tonne of product) and our earnings expectations for the company for the full year, as follows:
Exhibit 3: Revised Edison estimates of BCI’s FY19 income statement
Year end June (A$000s) |
H118 |
H218 |
H119 |
H219e |
FY19e |
FY19e |
Revenue from continuing operations |
||||||
Sale of goods |
17,192 |
15,778 |
20,222 |
44,049 |
64,271 |
61,194 |
Other revenue |
366 |
(307) |
(457) |
0 |
(457) |
(457) |
Total revenue from continuing operations |
17,558 |
15,471 |
19,765 |
44,049 |
63,814 |
60,737 |
Forex gain/(loss) |
0 |
0 |
||||
Cost of sales (estimate) |
(14,146) |
(12,972) |
(16,254) |
(35,674) |
(51,927) |
(49,796) |
Depreciation and amortisation (estimate) |
(1,459) |
(1,459) |
(1,459) |
(1,459) |
(2,917) |
(2,918) |
Selling and marketing |
0 |
0 |
0 |
0 |
0 |
|
Administration expenses |
(3,698) |
(3,340) |
(2,409) |
(2,409) |
(4,818) |
(4,818) |
Exploration and evaluation expenditure |
(4,310) |
(8,977) |
(3,374) |
(6,924) |
(10,298) |
(10,298) |
Gain on disposal of mine property and other assets |
0 |
0 |
17,818 |
0 |
17,818 |
17,818 |
Profit/(loss) before finance cost and income tax |
(6,054) |
(11,276) |
14,088 |
(2,416) |
11,672 |
10,725 |
Finance income |
0 |
420 |
0 |
0 |
||
Finance costs |
(27) |
27 |
0 |
0 |
||
Net finance income |
(27) |
447 |
0 |
98 |
98 |
98 |
Profit/(loss) before income tax |
(6,081) |
(10,829) |
14,088 |
(2,318) |
11,770 |
10,823 |
Income tax/(credit) |
0 |
0 |
(1,510) |
0 |
(1,510) |
(1,510) |
Marginal tax rate (%) |
0.0 |
0.0 |
(10.7) |
0.0 |
(12.8) |
(14.0) |
Profit after income tax from continuing operations |
(6,081) |
(10,829) |
15,598 |
(2,318) |
13,280 |
12,333 |
Weighted average number of ordinary shares (000s) |
394,597.863 |
394,597.863 |
397,608.910 |
397,600.000 |
397,604.455 |
396,063.455 |
Derivatives (000s) |
19,752.271 |
19,752.271 |
19,752.271 |
|||
Fully diluted weighted average number of ordinary shares (000s) |
394,597.863 |
394,597.863 |
397,608.910 |
417,352.271 |
417,356.726 |
415,815.726 |
EPS (cents) |
(1.54) |
(2.74) |
3.92 |
(0.58) |
3.34 |
3.11 |
Fully diluted EPS (cents) |
(1.54) |
(2.74) |
3.92 |
(0.56) |
3.18 |
2.97 |
Source: Edison Investment Research, BCI Minerals. Note: Company reported basis.
Assumption of elevated iron ore prices extended into FY20
While the effect of the increase in iron ore prices for the remainder of FY19 has a relatively modest A$0.9m effect on earnings for FY19 as a whole, the effect on earnings in FY20 is much larger. Hitherto, we have maintained our forecasts for FY20 based on the analysis set out in our Outlook/initiation note, Salt plus potash plus iron equals value, published on 7 February, which predicted an average price for 58% CFR iron ore of US$49.00/t for FY20. With the current price of standard grade 58% CFR iron ore around US$105/t, however, and with no end in sight to the disruption caused by the interruption of Brazilian supply in the market, such an outcome for FY20 is extremely unlikely. In recognition of this, we have now formally adjusted our price forecasts for 58% CFR iron ore, so that we assume the price will decline steadily from its current level to reach our FY21 price by the end of June 2020 (thus allowing us to leave our FY21 average price assumption unchanged at US$45.95/t). Under these circumstances, the average price for 58% CFR iron ore in FY20 will be US$71.53/t (ie a discount of only 16.2% compared with the likely average price of US$85.35/t in Q419 and an 69.4% premium compared to the H119 average price of US$42.23/t), with a profile over the year as follows:
|
Exhibit 4: Price of standard grade 58% CFR iron ore, July 2014 to July 2020e |
|
|
Source: Refinitiv, Edison Investment Research |
The effect of this change to our forecast price increases our forecast for Iron Valley EBITDA in FY20 by 36.6% to A$15.3m (albeit this will be reinvested into Mardie such that BCI itself will remain loss making, on an underlying basis during the year – see Exhibit 8). Self-evidently, to the extent that iron ore prices remain stronger for longer than anticipated, both our forecasts for FY20 and our valuation (see the Sensitivities section, below) will be subject to potential future upgrades.
Consequences – valuation
We have left the remainder of our assumptions unchanged other than the fact that we now expect funding and capex to occur early in FY21, rather than late in FY20. That being the case, our long-term estimates of BCI’s earnings, (maximum potential) dividends per share and valuation trajectory are then as follows:
|
Exhibit 5: BCI EPS and (maximum potential) DPS forecasts, FY18–83e |
|
|
Source: Edison Investment Research. Note: Income derived from Iron Valley and Mardie, combined; no contribution assumed from Buckland or any other assets. |
Discounting at our customary discount rate of 10% per year, the (fully diluted) value of these cash flows to shareholders is 35.60 Australian cents (cf 35.13c previously) as at 1 July 2019, of which 18.79c may be attributable to BCI’s non-Mardie assets and 16.81 to Mardie. This compares with our valuations at the time of our Outlook/initiation note (see Salt plus potash plus iron equals value, published on 7 February) of 19.51c and 11.15c, respectively as follows:
Exhibit 6: BCI discounted dividend valuation, by component
June 2019 |
February 2019 |
||||
Component |
Australian cents per share |
Percent of total |
Australian cents per share |
Percent of total |
Change |
Iron Valley, cash and corporate |
18.79 |
52.8 |
19.51 |
63.6 |
+3.9 |
Mardie |
16.81 |
47.2 |
11.15 |
36.4 |
+68.9 |
Total |
35.60 |
100.0 |
30.66 |
100.0 |
+27.6 |
Source: Edison Investment Research
Investors should note that the increase in the value per share of Mardie derives not only from its intervening PFS optimisation study (announced on 17 May 2019), but also from the reinvestment of Iron Valley cash flows into the project.
To this should then be added a further 2.43c for BCI’s Buckland iron ore assets to take the total to 41.54c.
Sensitivities
All other things being equal, our earnings forecasts and Iron Valley valuation will be affected by the extent to which iron ore prices remain high beyond FY20, which is quantified in Exhibit 7 for a number of future iron ore pricing scenarios. However, the major benefit to BCI of a higher, future iron ore pricing environment will be the increased funding contribution made by Iron Valley earnings retained within BCI towards Mardie – thereby either reducing the amount of financial risk associated with the project (shown here in the form of a decreased net debt funding requirement) or, alternatively, reducing the amount of future equity dilution required to achieve a maximum leverage ratio of 50% and thereby increasing the value of subsequent dividends to equity shareholders (not shown here):
Exhibit 7: BCI Minerals valuation sensitivity to future Iron Valley iron ore pricing scenarios
Scenario |
Valuation (Australian cents per share) |
Incremental change (cps) |
Incremental change (%) |
Maximum net debt funding requirement (A$m) |
Maximum leverage* (%) |
Base case |
35.60 |
272.4 |
50.0 |
||
Iron ore price remains at FY20 level until end of life of mine |
38.95 |
+3.35 |
+9.4 |
239.0 |
43.7 |
Iron ore price remains at Q419 level until end of life of mine |
43.99 |
+5.04 |
+12.9 |
179.3 |
32.6 |
Iron ore price remains at US$105/t until end of life of mine |
47.45 |
+3.46 |
+7.9 |
138.2 |
25.1 |
Source: Edison Investment Research. Note: *Defined as (net debt)/(net debt+equity).
NAIF (Northern Australia Infrastructure Facility)
Further to its Iron Valley earnings update (and also its Mardie PFS optimisation announcement in mid-May which confirmed the viability of a dedicated port at Mardie), on 1 July, BCI announced that the NAIF had completed its assessment of the Mardie project and advised that it has proceeded to the due diligence phase of the assessment process.
NAIF is a A$5bn facility set up by the federal Australian government to provide loans (which may be of a concessional nature – eg lower coupon, longer tenor, subordinated etc) to projects that, among other things, develop and improve the infrastructure of northern Australia. This initial term of the fund is for the five years until end-June 2021 and, anecdotally, it is therefore thought to be keen to deploy its funds under management expeditiously. Mardie is located entirely within the definition of Northern Australia under the NAIF Act 2016. In addition, at least A$227m of its total capex of A$498m (ie 46%) can be immediately identified as relating to infrastructure.
The fund has a formal, staged assessment process and a range of eligibility criteria before its board will consider making an investment decision to grant financial assistance to any project. Within this context however, the Mardie project may be said to have cleared the second stage of the process and will now work with the NAIF during the Due Diligence stage, during which BCI will develop a formal Investment Proposal for the fund to consider. At the same time, BCI’s Managing Director, Alwyn Vorster, has been quoted as saying that BCI is also making “solid progress” in developing product off-take support, including a number of non-binding Memoranda of Understanding with several “credible” salt end users in Asia.
Exhibit 8: Financial summary
A$'000s |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
||
June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
281,211 |
151,279 |
64,324 |
33,029 |
63,814 |
85,645 |
Cost of Sales |
(278,465) |
(158,210) |
(55,190) |
(47,442) |
(67,043) |
(96,298) |
||
Gross Profit |
2,746 |
(6,931) |
9,134 |
(14,413) |
(3,229) |
(10,653) |
||
EBITDA |
|
|
2,746 |
(6,931) |
9,134 |
(14,413) |
(3,229) |
(10,653) |
Operating Profit (before amort. and except.) |
(26,090) |
(12,622) |
5,665 |
(17,330) |
(6,146) |
(13,570) |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
(170,881) |
(40,108) |
(302) |
0 |
17,818 |
0 |
||
Other |
(2,935) |
812 |
(5) |
0 |
0 |
0 |
||
Operating Profit |
(199,906) |
(51,918) |
5,358 |
(17,330) |
11,672 |
(13,570) |
||
Net Interest |
(3,505) |
(951) |
311 |
420 |
98 |
510 |
||
Profit Before Tax (norm) |
|
|
(29,595) |
(13,573) |
5,976 |
(16,910) |
(6,048) |
(13,060) |
Profit Before Tax (FRS 3) |
|
|
(203,411) |
(52,869) |
5,669 |
(16,910) |
11,770 |
(13,060) |
Tax |
44,912 |
(27,086) |
0 |
0 |
1,510 |
0 |
||
Profit After Tax (norm) |
12,382 |
(39,847) |
5,971 |
(16,910) |
(4,538) |
(13,060) |
||
Profit After Tax (FRS 3) |
(158,499) |
(79,955) |
5,669 |
(16,910) |
13,280 |
(13,060) |
||
Average Number of Shares Outstanding (m) |
174.8 |
196.2 |
316.7 |
394.6 |
397.6 |
397.6 |
||
EPS - normalised (c) |
|
|
7.1 |
(20.3) |
1.9 |
(4.3) |
(1.1) |
(3.3) |
EPS - normalised and fully diluted (c) |
|
7.1 |
(19.5) |
1.9 |
(4.3) |
(1.1) |
(3.1) |
|
EPS - (IFRS) (c) |
|
|
(90.7) |
(40.8) |
1.8 |
(4.3) |
3.3 |
(3.3) |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
1.0 |
N/A |
14.2 |
N/A |
N/A |
N/A |
||
EBITDA Margin (%) |
1.0 |
N/A |
14.2 |
N/A |
N/A |
N/A |
||
Operating Margin (before GW and except.) (%) |
N/A |
N/A |
8.8 |
N/A |
N/A |
N/A |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
154,904 |
86,546 |
78,059 |
85,768 |
78,669 |
85,752 |
Intangible Assets |
60,237 |
33,618 |
33,063 |
43,615 |
39,433 |
49,433 |
||
Tangible Assets |
94,667 |
52,928 |
44,996 |
42,153 |
39,236 |
36,319 |
||
Investments |
0 |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
102,374 |
23,204 |
46,429 |
20,270 |
44,080 |
28,466 |
Stocks |
9,886 |
61 |
0 |
0 |
87 |
117 |
||
Debtors |
24,427 |
13,694 |
10,053 |
7,213 |
9,992 |
10,090 |
||
Cash |
67,671 |
9,449 |
36,376 |
13,057 |
34,000 |
18,259 |
||
Other |
390 |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(77,222) |
(21,769) |
(12,107) |
(9,373) |
(12,804) |
(17,334) |
Creditors |
(70,947) |
(19,749) |
(12,107) |
(9,373) |
(12,804) |
(17,334) |
||
Short term borrowings |
(6,275) |
(2,020) |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(20,773) |
(11,307) |
(5,225) |
(6,054) |
(6,054) |
(6,054) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(20,773) |
(11,307) |
(5,225) |
(6,054) |
(6,054) |
(6,054) |
||
Net Assets |
|
|
159,283 |
76,674 |
107,156 |
90,611 |
103,891 |
90,830 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
(77,686) |
(19,721) |
11,860 |
(11,957) |
(2,665) |
(6,251) |
Net Interest |
(1,120) |
0 |
0 |
0 |
98 |
510 |
||
Tax |
44,912 |
(27,086) |
0 |
0 |
1,510 |
0 |
||
Capex |
(10,987) |
(8,075) |
(2,220) |
(10,074) |
(5,000) |
(10,000) |
||
Acquisitions/disposals |
24,338 |
0 |
(5,151) |
(1,288) |
27,000 |
0 |
||
Financing |
6,118 |
1,510 |
24,403 |
0 |
0 |
0 |
||
Dividends |
(18,652) |
0 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
(33,077) |
(53,372) |
28,892 |
(23,319) |
20,943 |
(15,741) |
||
Opening net debt/(cash) |
|
|
(94,473) |
(61,396) |
(7,429) |
(36,376) |
(13,057) |
(34,000) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
(595) |
55 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(61,396) |
(7,429) |
(36,376) |
(13,057) |
(34,000) |
(18,259) |
Source: Company sources, Edison Investment Research
|
|
Research: Healthcare
Hutchison China MediTech (HCM) has announced positive data that key late-stage asset surufatinib met the primary endpoint of PFS in non-pancreatic at the Phase III interim analysis. This translates to an earlier than expected China NDA submission (H219) and the potential launch of HCM’s first un-partnered asset (early 2021). In China, partner Lilly has launched Elunate (fruquintinib) capsules. Early sales look promising and its potential inclusion on the China NRDL later this year will be definitive to the China opportunity. However, failure of fruquintinib monotherapy in third-line NSCLC and the changes in strategy to savolitinib in RCC has negatively affected our valuation. We forecast two further product launches on the horizon in 2021/2022 (China launch of fruquintinib in gastric cancer and global launch of savolitinib in NSCLC). HHHL has completed a secondary offering of ADSs, which has reduced its holding to 51.15% (from 60.2% previously). We see this as a significant positive for HCM as it increases the free float, potentially leading to better liquidity. We value HCM at $5.6bn (£6.72/share) vs $6.5bn previously.