Daily Brief Energy/Materials: Tietto Minerals Ltd, Liontown Resources, Medco Energi and more

• Filo Mining (FIL CN) and Tietto Minerals (TIE AU) are adds while Fresnillo (FRES LN), Galiano Gold (GAU US), Jaguar Mining (JAG CN) and Novo Resources (NVO CN) are deletes.
• One way turnover is estimated at 4.3% resulting in a one-way trade of US$163m. There is over 1 day of ADV to trade on 24 stocks.
• Largest inflows are on Filo Mining (FIL CN) and Tietto Minerals Ltd (TIE AU) while largest outflows are on Fresnillo PLC (FRES LN) and Centerra Gold (CG CN). 

• As expected, there are no adds or deletes for the MVIS Global Rare Earth/Strategic Metals Index at the December rebalance.
• There are free float and capping changes that will be implemented at the close on 16 December.
• One way turnover is estimated at 4.26% and will result in a one-way trade of US$31.5m.

We view Medco Energi as “High Risk” on the LARA scale, owing to its limited size, somewhat short 1P and 2P reserve life, appetite for acquisitions, and moderate (albeit improving) leverage. The company has a history of negative FCF generation, due to acquisitions and heavy exploratory capex to increase reserve life. In addition, Medco’s earnings are exposed to oil-price volatility, though the risks are mitigated to a degree by its heavy use of fixed-price gas contracts. Positively, production cash costs are low, which reduces the break-even price. The company also appears to have good access to financing from domestic banks, as well as bond and equity markets.

Our fundamental Credit Bias on Medco is “Stable”. This is due to the continued high oil-price environment, which should support earnings and cash flow. Leverage has improved significantly since FY 2021. That said, we are cautious on the possibility of a substantial increase in the company’s capex over the next few years, or another significant debt-funded acquisition that could weaken its financial profile. Over the medium term, the credit profile should remain driven by the development of oil prices.

Controversies are “Immaterial”. While Medco is in the fossil fuel industry, we note that its O&G business segment is more heavily involved in natural gas, which has a lower carbon footprint than crude oil and coal. We expect gas demand to be well-supported over the next decade in the company’s key markets (Indonesia and Southeast Asia), as the region transitions away from coal. The company is also involved in renewable energy, which accounts for c. 30% of installed capacity for its power business. Overall, we view the ESG Impact on Credit as “Neutral”.