Energy & Materials Sector

• Huarui Offer has been approved by SAMR, which marks a solid step forward.Meanwhile, ORG’s management stated that the reduction of Huangshan Novel shares is to raise funds to acquire CPMC.
• While Baosteel may want to “test the waters”, the signals ORG is sending is it will make every effort to advance the acquisition of CPMC and is accelerating the process. 
• The return on Huarui Offer isn’t attractive.We recommend waiting for Baosteel to raise its Offer, or simply choosing to add more positions in China TCM, whose privatization is more lucrative.

• S&P 500 bull flagging and looks for break to upside.
• US Dollar bounces off par. More room in the tank?
• Copper and Natural Gas at interesting junctures. Bulls on notice. 

• Fortescue Metals (FMG AU) reported a revenue/profit number of 8%/15%, with profits 8% lower than our expectations because of higher depreciation. 
• The company guided a mid-point iron ore shipment of 195 million tons (Vs. 192 in FY24) and a capex of 3.2 bn USD in metals/500 mn USD in Green Energy.
• Trading at 6.7x PE with a 10% dividend yield (trailing) with iron ore prices averaging 118 USD in FY24, the focus shifts to a scenario analysis for FY25. 

• ORG Technology (002701 CH), via the Offeror Huarui Fengquan Development Limited, has announced SAMR has given its approval. ORG still requires MOFCOM, NDRC, and SAFE to sign off. 
• Interestingly, SASAC/NCSSF-backed Champion Holdings, the competing/initial bidder for CPMC (906 HK), secured MOFCOM, NDRC, and SAFE before SAMR clearance. Champion’s regulatory pre-conditions took a little over seven months to secure.
• What now? SAMR is China’s primary antitrust regulator (overlapping with NDRC). So this is positive for ORG. However, I’d still stick to ORG’s pre-condition long stop in terms of timing. 

• The arbitrage is clear: it’s the difference between stock rights/subscription costs and short hedge price. Kumyang’s high market interest and volatility amplify this, suggesting unusual trading angles.
• Kumyang’s futures also show extreme volatility, likely causing excessive backwardation around the ex-rights date and stock rights window, affecting futures-based short hedge positions.
• This opens up the possibility that, depending on entry points, our futures-based short hedge position might temporarily enter an unusual profitable zone relative to the stock rights and subscription costs.

• In the past week, there were numerous local news accounts about a rights offering of nearly 800 billion won by Kum Yang. This has not been confirmed by the company. 
• Although Kum Yang has not committed to a rights offering, there is a high probability of such capital raise in 4Q24 which is likely to dilute existing shareholders. 
• Kum Yang remains a highly speculative stock. The management has lost so much credibility in the past year. We would stay away from it as far as possible.

• We discuss the end of the mandatory lock-up periods for 49 stocks in Korea in September 2024, among which 3 are in KOSPI and 46 are in KOSDAQ.
• These 49 stocks on average could be subject to further selling pressures in September and could underperform relative to the market.
• The top three market cap stocks including those of which at least 1% of outstanding shares could be sold in September include LS Materials, CIS, and Kyobo Securities.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We assess Sasol’s ESG as “Adequate”, in line with its Environmental and Social scores. The company’s Governance is “Strong”. Controversies are “Material”, but Disclosure is “Strong”. 

The group aspires to be included in the DJSI.

• Trigon announced high-grade drill results from the new zone near Shaft#3 of the Kombat Mine.
• The results confirm strong copper results previously discovered in a 2023 surface drill program that lie outside the proven and probable reserves.
• Today’s release is important as it shows strong resource growth potential in the area around Shaft #3 which would open up more mining faces, reducing operational risk and allowing for future production growth.

• On 29 August, LG Corp announced that it plans to purchase about 200 billion won worth of LG Electronics and about 300 billion won worth of LG Chem.
• After these share purchases, LG Corp’s stake in LG Electronics will increase from 30.47% to 31.59%, and its stake in LG Chem will increase from 30.06% to 31.29%.
• LG Corp plans to purchases these shares starting 1 November 2024. The share purchases will be conducted in two stages and will be completed by 31 March 2025. 

• ORG Technology Co., Ltd. A (002701 CH) has received SAMR clearance, the key regulatory hurdle, for its HK$7.21 voluntary offer for CPMC Holdings (906 HK).
• SAMR approval paves the way for the ORG precondition to be satisfied in September. Changping Industrial’s HK$6.87 offer first close is on 3 September.
• Changping Industrial has little choice but to revise its terms. It has a short window to seize the initiative by bumping its offer before ORG’s competing and higher offer opens. 

• LG Corp has announced it will buy ₩300B of LG Chem shares during trading hours, marking the first use of the new 30-day advance notice rule.
• LG Corp will buy LG Chem shares in two stages with 30-day advance notices. So, today’s announcement is a preliminary notice ahead of these 30-day advance notices.
• This transaction’s flow impact on LG Chem doesn’t seem substantial. But this first two-stage advance notice could provide key insights into price impact patterns.

• For the week ending 23/Aug, US crude inventories fell by 846k barrels, while analysts expected a 2.7 mb drawdown. Gasoline stocks dropped more than expected, while distillate inventories unexpectedly rose.
• US natural gas inventories rise 35 bcf for the week ending 23/Aug, exceeding analyst expectations of a 33 bcf buildup. Inventories are 12.1% above the 5-year seasonal average
• Exxon expects global crude oil demand to remain around 100m bpd through 2050. Brokerages lowered target prices on Occidental and Halliburton.

Anton Oilfield’s H1/24 numbers were softer than expected in our view, with profitability growth lagging revenue improvement. Positively, there was a surge in new orders. This is the third consecutive quarter showing a significant rise in new orders. We expect the business’ positive momentum to continue in FY 2024. The large (3x revenue) and growing backlog support revenue visibility. The financial risk profile remains stable.

• ORG Technology (002701 CH), via the Offeror Huarui Fengquan Development Limited, has announced SAMR has given its approval. ORG still requires MOFCOM, NDRC, and SAFE to sign off. 
• Interestingly, SASAC/NCSSF-backed Champion Holdings, the competing/initial bidder for CPMC (906 HK), secured MOFCOM, NDRC, and SAFE before SAMR clearance. Champion’s regulatory pre-conditions took a little over seven months to secure.
• What now? SAMR is China’s primary antitrust regulator (overlapping with NDRC). So this is positive for ORG. However, I’d still stick to ORG’s pre-condition long stop in terms of timing. 

• Arrow has now drilled 3 horizontal wells in Carrizales Norte.
• The flow rates of the wells are exceeding our expectations.
• The first CN horizontal well (CNB HZ-1) is being restricted to a current oil flow rate of 2,090 bbl/d with approximately 41% water cut.

• New Fortress Energy (NFE) in its second quarter 2024 earnings, ended up performing below expectations, achieving $120 million in EBITDA against a targeted $275 million, primarily due to delays in deploying its FLNG 1 asset.
• This delay had a substantial impact on the quarterly results but was offset by the project’s completion in July, which is now fully operational and expected to generate considerable free cash flow annually.
• Baptista Research looks to evaluate the different factors that could influence the company’s price in the near future and attempts to carry out an independent valuation of the company using a Discounted Cash Flow (DCF) methodology.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• MGM China Holdings
• New World Development
• Nickel Industries
• Tata Steel Thailand

• Paladin and Fission uranium corp are in the process of trying to lock in a script merger
• The date of the Paladin Fission scheme vote has been extended to September 9
• Two thirds of votes cast in favor are needed for the merger to proceed

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• Business continues to grow as sales, profits and margins rise
• The overall industry supply demand dynamics continue to be supportive
• Key business drivers such as capacity utilisation and rates moving in the right direction

• Net production at Nong Yao has reached a stable level of ~12.1 mbbl/d. This compares with 6.3 mbbl/d in 2Q24.
• This production, when combined with the Wassana field being back online, has resulted in stable aggregate WI oil production over the past week of 26.2 mbbl/d.
• We are assuming only 20.4 mbbl/d for 3Q24, which might be too conservative.

• The momentum for getting ahead on positions with KOSPI 200 rebalancing is holding steady. With around 60% of the screening period behind us, it’s time to start preparing our positions.
• The current rebalancing’s screened changes have a relatively lower price volatility, suggesting a stronger chance for more aggressive position build-up now compared to previous rebalancings.
• Trading volumes vary greatly among these changes, affecting their passive impact sizes. Consider using different weights in basket trading instead of equal weights.

• Kazatomprom announced their first half 2024 results and updated 2024 guidance, with production numbers and inventory levels dropping significantly year on year.
• Kazatomprom’s inventory levels are at nine-year lows, with only about four months of production in inventory.
• If Kazatomprom does not hit their production targets, they may need to purchase pounds of uranium in the spot market to maintain inventory levels.

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• The review period for the Nifty 100 Low Volatility 30 Index ends on 30 August. The changes will be announced mid-September and implemented at the close on 27 September.
• Four potential constituent changes, volatility changes and capping changes will result in one-way turnover of 16.05% resulting in a round-trip trade of INR 14.4bn (US$172m).
• Three of the four potential deletions will have sell flows from the NSE Nifty Next 50 Index and Nifty 100 Index trackers as well.

• Iron ore prices rebounded strongly last week and continued rising this week, reversing losses from the previous week’s 9% decline
• Chinese portside inventories of iron ore fell by 2.48 million tons in August, signaling strong demand despite slower drawdowns in the final weeks
• SGX Iron Ore options saw a 20.7% decline in volume last week, with a sharp increase in the put/call ratio from 1.56 to 2.35, indicating increased bearish sentiment

• US oil and gas rig count fell by one to 585 for the week ending 23/Aug, marking a decline in rig count for the second straight week.
• US oil rig count was unchanged at 483, after falling by two the week prior. Gas rigs fell by one to 97, after rising by one the previous week.
• For the week ending 16/Aug, US crude oil production rose back to its record high of 13.4m bpd, after slipping down to 13.3m bpd the week prior.  

• Commencement of drilling operating at the high impact Tariki field is likely to be delayed by two weeks.
• This has no impact on our valuation.
• Our unrisked NAV for the Tariki-5 well is C$4.90 per share, including C$2.50 per share for the oil target and the balance for the low risk gas target (2P reserves).

• Premier Energies Limited (0377949D IN) is looking to raise up to US$337m in its India IPO, after upsizing from an earlier reported float of US$300m.
• The firm manufactures solar photovoltaic (PV) cells, and solar modules. It also executes engineering, procurement, and construction (EPC) projects and provides follow-up operation and maintenance (O&M) services.
• Previously, we talked about the company’s historical performance. In this note, we provide a summary of its RHP updates and share our quick thoughts on peer comparison and valuation.

• Hedge Funds Pushing into Commodities Markets Big trading houses like Glencore, Trafigura, Mercuria or Vitol are benefiting since years now from the increasing fluctuations on the commodities markets.
• This trend increased, especially since crude oil went negative when the Covid pandemic started and was followed by further volatility since the macro environment became even more fragile with the war in Ukraine and now the conflicts in the Middle East.
• According to Ney York based consulting firm Oliver Wyman, the gross margin of trading houses amounted to 105 billion dollars in 2023.

• Kunlun Energy (135 HK) posted a healthy 2.6% earnings growth for 1H24. If not for the expiry of two oilfields last year, its earnings growth would have reached 6.8%. 
• Natural gas sales pre-tax margin contracted 0.5pp YoY, but has recovered significantly HoH. Other businesses have all seen good margin expansion. 
• The company has further accumulated net cash which increased 8.3% in the last six months. At HK$2.76/share, this equals 35% of the share price.

• Tigus provides a clear and comprehensive view of industries and companies
• MatterCorp is a recently restructured company with a focus on materials technology and connection technologies
• MatterCorp has a strong balance sheet and growth potential, despite past cyclical business operations

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• The market is watching closely for when Hyundai Motor might sell its 5% stake in Korea Zinc, with the lockup ending on October 7th.
• Hyundai might mediate to end the lawsuit and lift the injunction, potentially agreeing to sell the stake to a third party or on the market.
• The uncertainty around Hyundai’s Korea Zinc stake sale makes trading challenging, but its actions in Q4 could significantly affect Korea Zinc’s stock price and create trading opportunities.

• After the Kim family-backed Hanwha Energy completed Hanwha Corporation‘s Partial Offer last month, Hanwha Galleria (452260 KS)‘s VP Kim Dong-seon has now launched a Partial Offer for 17.5% in Galleria. 
• Preceding my comments on Hanwha are the current setup/unwind tables for Asia-Pacific Holdcos.
• These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation >20%.

• Blackwater sell down to Nippon and Jfezenhe Steel for US 1.08 billion upfront
• Deal includes selling 30% of Blackwater, reducing net debt by 150 million and potential future contingent payments
• Transaction costs and transition costs higher than expected, but deal significantly impacts balance sheet and future cash flow

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• Packaging Corporation of America (PCA) reported second-quarter 2024 financial results with both strengths and challenges.
• The company announced a net income of $199 million, resulting in $2.21 earnings per share (EPS).
• Excluding special items, the EPS stood at $2.20, showing a slight decrease compared to the same quarter of the previous year at $2.31.

• In the second quarter of 2024, Schlumberger showcased a strong ability to capitalize on the ongoing growth cycle while driving efficiency throughout its operations.
• The company reported a 5% increase in revenue compared to the first quarter.
• Schlumberger’s adjusted EBITDA grew 11%, and its adjusted EBITDA margin expanded 142 basis points.

• NPS will vote against the merger between SK Innovation and SK E&S, mainly due to significant concerns about destroying shareholder value (especially for SK Innovation shareholders). 
• Sustinvest also recommended that institutional investors vote against this merger, citing that the merger ratio between SK Innovation and SK E&S is disadvantageous to SK Innovation’s general shareholders.
• If NPS exercises its appraisal rights, this could put a knife in the wheel of the M&A merger between SK Innovation and SK E&S. 

• NPS’s opposition suggests a likely vote against the merger, but if they plan to exercise appraisal rights, they might abstain to preserve that option.
• NPS typically exercises appraisal rights when the spread exceeds 5%, as seen in past mergers like Celltrion and Samsung. They didn’t act when the spread was below 5%.
• The key question is whether SK Innovation can boost its stock price to avoid NPS exercising rights. Otherwise, the merger may pass, but the stock could drop significantly.

• For the week ending 16/Aug, US crude inventories dropped by 4.6 mb, exceeding the expected 2 mb drawdown. Gasoline and distillate stocks also declined, surpassing analyst expectations.
• US natural gas inventories rise 35 bcf for the week ending 16/Aug, exceeding analyst expectations of a 26 bcf buildup. Inventories are 12.6% above the 5-year seasonal average.
• UBS cut its target prices on Halliburton and Schlumberger but raised it for ExxonMobil and Occidental. Jefferies lowered its target price on Chevron.

• After selling its coking coal business to Glencore Plc (GLEN LN), Teck Resources (TECK US) has pivoted to copper as its primary growth driver. 
• The 7.3 bn CAD cash (20% of Mkt cap) received from the sale of the coal business stake is being used for buybacks, debt repayment, and growth opportunities.  
• The stock is cheap on an EV-EBITDA basis at 7.5x, but we are not too fond of the business’s low ROCE. 

• The 1H24 production and the cash position had been reported previously.
• Panoro generated ~US$54 mm cash from operations (we expected ~US$48 mm) with a US$22 mm positive working capital movement.
• At the end of June, current accounts receivable of ~US$72 mm were well above the current payables of ~US$43 mm.

• Murphy Oil Corporation reported a solid performance in its second quarter of 2024, reflecting the ongoing execution of its fundamental strategic priorities: Delever, Execute, Explore, and Return.
• The emphasis has been on consistent debt reduction, operational enhancements, and enriched shareholder value through opportunistic share repurchases and dividends.
• During this quarter, the company notably repurchased $50 million of senior notes, and it remains on track to meet its long-term debt target of $1 billion.

• Trigon announced its Q1/25 financial results, reporting strong numbers with Q1 being the first full quarter of underground production.
• TM more than doubled its revenues from the previous quarter ($10M vs. $3.9M) and reported its first positive operating cash flow since starting production.
• The Company reported an improved adjusted EBITDA of $1.8M and a further decreasing C1 cash cost of $3.23/lb.

• With 2 trading days left in the review period, there could be 30 adds/deletes across the S&P/ASX family of indices in September.
• Passive trackers will need to trade a lot of stock in the forecast changes, with the impact being especially large for the changes to the S&P/ASX 200 and S&P/ASX 300.
• The forecast adds have hugely outperformed the forecast deletes. Borrow recall on the deletes and increased borrow availability on the adds could result in underperformance following announcement of the changes.

• Company had strong half year results with 990 million in operating EBITDA and 420 million NPAT
• They have 1.55 billion in cash and are debt-free, with majority of revenue from thermal coal production
• Despite recent 20% drop in share price, company is on track and has good long-term prospects

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• Martin Marietta’s second quarter 2024 earnings highlighted several key developments and challenges that reflect both positive and negative aspects impacting its performance and future outlook.
• The company experienced a decrease in product shipments primarily due to an unprecedented increase in rainfall, specifically in the Dallas Fort Worth area, which is a critical market for Martin Marietta.
• Furthermore, the lagging effects of restrictive monetary policy also pressured demand for private construction, exacerbating the decrease in shipments.

• Cheniere Energy’s second-quarter earnings for 2024 show a company that is navigating its growth and contractual commitments adeptly amidst a fluctuating energy market.
• The company, led by President and CEO Jack Fusco, announced exceeding expectations on financial metrics and operational execution, which bodes well for its strategic positioning as a major LNG supplier.
• Baptista Research looks to evaluate the different factors that could influence the company’s price in the near future and attempts to carry out an independent valuation of the company using a Discounted Cash Flow (DCF) methodology.

• Pembina Pipeline Corporation reported a strong second quarter, showcasing significant increases in several financial metrics, most notably achieving record adjusted EBITDA of $1.091 billion and record adjusted cash flow from operating activities of $837 million.
• These achievements were underpinned by strategic acquisitions, notably the closure of the Alliance and Aux Sable acquisition early in April, resulting in increased ownership and contributing positively to Pembina’s financial performance.
• These assets, including the full acquisition of Aux Sable’s U.S. operations, are reportedly exceeding expectations.

• In analyzing Petrobras’ earnings for the second quarter of 2024, several key factors emerge highlighting the company’s current performance and future outlook.
• The leadership, under CEO Magda Chambriard, emphasized solid quarterly results shaped mainly by a blend of recurring and nonrecurring financial activities, alongside a strategic pivot towards sustainable energy practices and robust exploration activities.
• Despite the complex overlay of global economic conditions, such as significant exchange rate volatility, Petrobras managed to navigate these with agility, thereby safeguarding its financial stability.