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PC WONG

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IRON ORE MINERS


Image Source: www.911metallurgist.com

IRON ORE: 10 YEAR CHART


Iron ore is rebounding off its bottom in December 2015

Image Source: www.indexmundi.com

WHY IRON ORE DEMAND WILL GROW


• Global monetary policy not working to stimulate the economy

• Governments are expected to ramp up fiscal stimulus in the coming years

• Listen to the language of politicians:

China – One Belt, One Road will boost the economies of 65 nations, consisting of 4.4B people by US$2.5T a year. The biggest portion of funding will go towards infrastructure development

US. Both Trump and Hilary promise huge infrastructure development upon being elected

Japan recently unveiled a fiscal stimulus aimed at improving and upgrading her infrastructure

All would require steel which iron ore is the main raw material

WHAT ARE THE ANALYSTS SAYING


• Morgan Stanley raises iron ore outlook after surprise rally (Bloomberg - June 28, 2016)

• Goldman lifts outlook for price of iron ore (Financial Review – July 28, 2016)

AND HERE’S WHYChina, which consumes more than 70% of the world's seaborne iron ore trade, imported 93 million tonnes in September, only slightly below the record 96.3 million tonnes hit in December last year. Shipments for the first nine months are up more than 9% from 2015's record setting pace and on track to breach 1 billion tonnes for the first time (Source: MINING.com)


FORTESCUE METALS GROUP

Image Source: FMG website

FORTESCUE METALS GROUP


• Listed on the ASX under code FMG. Singular unit

• Listed on the US OTCMKTS under code FSUMF. Singular unit

• Main asset in the iron ore rich region of Pilbara, Western Australia

• 4th largest iron ore producer in the world

• Produces 165M tonnes of iron ore per annum

• Currently prospecting for copper near Orange in Central NSW through a JV. Total land area: 320 sq km

PROJECT LOCATIONS



RESOURCES


• Hematite Ore Reserves (Proven & Probable) total 2.17 billion tonnes (bt) at an average iron (Fe) grade of 57.2 per cent

• Combined Hematite Mineral Resources Measured, Inferred & Indicated) total 11.6bt at an average Fe of 56.8 per cent

• Magnetite Ore Reserves (Proven & Probable) total 0.7bt at an average mass recovery of 27.2 per cent.

• Magnetite Mineral Resources (Measured, Inferred & Indicated) total 6.7bt at an average mass recovery of 24.1 per cent

SUMMARY OF FINANCIALS FY 2016

• Revenue US$7,083M in 2016 vs US$8,574M in 2015

• Net Profit US$985M in 2016 vs US$316M in 2015

• Current Assets US$2,423M

• Non Current Assets US$16,914M

• Total Assets US$19,337M

• Current Liabilities US$1,634M

• Non Current Liabilities US$9,297M

• Total Liabilities US$10,931M

• Total Equity US$8,406M


BENCHMARK AGAINST KPIs


Actual KPI

• Revenue Growth -17.4% +5%

• Net Profit Growth +203.1% +10%

• Current Ratio 1.48 >1.0

• Debt to Equity Ratio 1.30 <1.5

• Payback Period 6.8 <5.0 yrs

• Dividend Yield (based on A$5.25) 2.9% 7.5%

• NAVPS A$3.57

• SP/NAVPS 1.47x <3x

KEY TAKEAWAYS 1 - PRODUCTION



KEY TAKEAWAYS 2


• Improved production and cost savings allowed Net Profit to soar 203.1%despite Revenue dropping 17.4%


C1 Cost has been dropping steadily since 2012. This is a good sign as it means the company is on course to deliver a better bottom line going forward

C1 = Mining and processing costs + rail costs + port costs + operating leases

KEY TAKEAWAYS 3


• Balance Sheet ratios were marginally better than the KPIs but the Payback Period was longer than the KPI of 5 years

• Cash flow from operating activities improved to US$3,023M in 2016 from US$2,037M in 2015

• Cash at hand at US$1,583M

• Management to continue to lower debt level going into the next financial year

DIVIDEND


2010

2011

2012

2013

2014 A$0.10

2015 A$0.05

2016 A$0.15

SHARE PRICE PERFORMANCE – 10 YEAR CHART


52 Week Low of A$1.44 and 52 Week High of A$5.62. 10 Year High at A$12.13Current price of A$5.25 is 6.6% discounted of its 52 Week High and 56.7% discounted off its 10 Year High

Chart Source: Morningstar


• Weakness in the price of iron ore

• Slump in global demand due to over capacity in the market

EVENTS WHICH COULD IMPACT THE STOCK NEGATIVELY

IFS ASSESSMENT


• BUY. FMG has arrested their cost deficiencies. The company is also expecting to lower their costs further going forward

• This could be a boon if iron ore price move upwards

• The share price is trading close to its 52 week high. Prefer to buy below the 52 week high level

• Non Syariah compliant

BHP BILLITON


Image Source: BHP website

BHP BLLITON


• Listed on the ASX under code BHP. Singular unit

• Listed on the FTSE under code BLT. Singular unit

• BHP is a leading producer of major commodities including iron ore, metallurgical coal, copper and uranium. It also has substantial interests in oil, gas and energy coal

• Global company with minerals resources across Australia, Indonesia, Chile, Peru, Brazil, US, Colombia and Canada

• Petroleum resources are located across, the US, Australia, Trinidad & Tobago, Algeria, UK and Pakistan

GLOBAL LOCATIONS



SUMMARY OF FINANCIALS H1 2016

• Revenue US$30,912M in 2016 vs US$44,636M in 2015

• Net Loss -US$6,207M in 2016 vs Net Profit US$2,878M in 2015

• Current Assets US$17,714M

• Non Current Assets US$101,239M

• Total Assets US$118,953M

• Current Liabilities US$12,340M

• Non Current Liabilities US$46,542M

• Total Liabilities US$58,882M

• Total Equity US$60,071M


BENCHMARK AGAINST KPIs


Actual KPI

• Revenue Growth -30.7% +5%

• Net Profit Growth -315.7% +10%

• Current Ratio 1.44 >1.0

• Debt to Equity Ratio 0.98 <1.5

• Payback Period NA <5.0 years

• Distribution Yield (based on A$22.66) 4.5% 7.5%

• NAVPS A$24.70

• SP/NAVPS 0.92x <3x

MAJOR REVENUE COMPONENTS


• Petroleum US$ 6,894M• Copper US$ 8,249M• Iron Ore US$10,538M• Coal US$ 4,518M

• Iron ore remains the major contributor. Upswing in the price of iron ore could benefit BHP going forward

• Petroleum could deliver better results after falling below US$30 per barrel in early 2016

• Coal and copper price remain stagnant but could trend upwards when the trades shift towards commodities

KEY TAKEAWAYS 2• Both Revenue and Net Profit fell, with the latter exploding into a Net Loss of

US$6.2B

• Mainly due to poor commodity prices from late 2015 to early 2016

• Also impairment charges across the board, especially the Samarco Project

• Key ratios are above our KPI metrics but debt level remains high at US$31.8B

• Cash and equivalents at US$10,319M

• Cash flow from operations US$10,625M

• Management embarking on cost cutting across the board


KEY TAKEAWAYS 3


Note the huge fall in price of commodities in 2016 vs 2015


KEY TAKEAWAYS 4• The Samarco incident occurred in November 2015. The Bento Rodrigues dam

burst and covered villages in mud. The Samarco project is a JV between Vale and BHP. Since then good progress is being made on community resettlement, community health and environment restoration

• Unit Cash Cost decline:

Conventional petroleum -30%

Escondida Iron Ore -22%

Western Australia Iron Ore -19%

Queensland Coal -15%

• Capital and exploration expenditure declined by 42% to US$6.4 billion and is expected to decrease further to US$5.0 billion or 22% in the 2017 financial year


DIVIDEND


2010

2011

2012

2013

2014 US$1.18

2015 US$1.24

2016 US$0.78

SHARE PRICE PERFORMANCE – 10 YEAR CHART


Chart Source: Morningstar

52 Week Low of A$14.06 and 52 Week High of A$23.87 and 10 Year High of A$48.70. Current price of A$22.66 is 5.1% off its 52 week high and 53.5% off its 10 Year High


• Continued weakness in the price of commodities. While iron ore is recovering, its Archilles heel is petroleum. As petroleum weakens, so too will be its share price. There will likely be huge build up in petroleum storage as the US refiners go into maintenance mode in November

• Copper is also oversupplied right now. This could put a lid on the share price

EVENTS WHICH COULD IMPACT THE STOCK NEGATIVELY

IFS ASSESSMENT


• BUY. BHP is a giant resource company. Best company to own when commodities trend upwards

• However on the back of petroleum build up in Cushing due to the US refineries going into maintenance mode, the best time to enter would be below the A$20 mark or 12.50 Pound (UK)

• Medum risk. The only thing keeping this stock down is the price of commodities

• Non Syariah compliant

MY DISCLOSURE


• I do not own shares of FMG or BHP

BOND MARKET THREAT


• Bond interest rates are fixed. Higher price, lower yield. Lower price higher yield

• More than US$13T bonds are having negative yields but yields have been spiking lately. This means that there is a sell off in bonds

• A 10 year note that pays 1.8% interest does not take into consideration of inflation. Investors fear inflation spiking suddenly due to potential rates increase. That 1.8% will not be able to cover if inflation spike more than 2%

• The bond market is worth US$100T

• A massive sell off could spark a bond market crisis, leading to a stock market crash

INVERSE ETFs AND STRATEGIC PLAY 1


• Based on the historic crash of 2008, inverse ETFs could yield 4x to 6x returns if a same like crash happens. Inverse ETFs are like an insurance policy. Recommended to hold 10% - 15% of your portfolio value

• The S&P 500 Index has broken below the 2130 support level

• This is an indication that the index could call further

• The S&P 500 companies are running at a PE ratio that is 60% overvalued vs historic average

• S&P 500 companies earnings have fallen for 6 consecutive quarters

• Meanwhile global debt continues to pile up

• Bonds yields are rising. Bonds interests are fixed. If yield rises that means the bond value is falling. This is an indication that bonds are being sold off. This would put pressure on interest rates and on stocks to deliver better yield

INVERSE ETFs AND STRATEGIC PLAY 2


• Assume you have RM100K invested. 90% in stocks and 10% in inverse ETFs

• The market crashes 50%

• So your portfolio now has RM45K (50% loss) in stocks and RM40K (4x gain) in inverse ETFs

• Total portfolio value is RM85K. The loss in value is only 15% even though the market crashes 50%

• If you hold 15% in inverse ETFs, the value will be RM45K + RM60K = RM105K

• You still make 5% even though the market crashes 50%

• Ideal to cash out these ETFs to pick stocks which have crashed in value. Provide the means of capital to buy during a stock market crash

pc wong - s3.amazonaws.com · was longer than the kpi of 5 years ... •bhp is a leading producer...

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