Finders Resources Limited (FND) BUY Share Price:

Transcription

1 Finders Resources Limited (FND) BUY Share Price: A$0.17 The cheapest copper stock on the ASX? Target Price: A$0.42 Finders Resources is the cheapest ASX listed copper producer on P/E, FCF yield and EV/EBITDA ratios in its peer group of AVB, MLX, OZL and SFR. We forecast attributable free cash flow of over A$74m will be sustained for 4+ years from CY18. This means Finders is trading on an attributable FCF yield of 46% in FY18 compared to 20% for its peer group. Now that Finders is operating at nameplate capacity and delivering robust quarterly EBITDA results, we expect the stock to begin to re-rate. We believe the visibility of consistent production and rapid deleveraging are key catalysts. We have a BUY rating and a target price of A$0.42/sh. Free Cash Flow Finders Resources is a standout amongst its copper producing peers on P/E and EV/EBITDA, and especially so on FCF yield. The Finders Wetar Copper Project (WCP) is a low cost, mid-sized copper producer benefiting from low strip ratio, open pits and C1 cash costs of ~US$1/lb. We expect the consolidated operation to generate annual FCF of over A$100m on a sustained basis from CY18, with project debt of A$106m (31-Mar-2017) to be fully repaid by 2H CY18. On an attributable basis, our Finders FCF forecasts are similar to consensus for Metals X in FY18 and roughly half of consensus for Sandfire. Despite this, Finders trades at half the enterprise value of Metals X and a quarter of Sandfire. Resource / Reserve The resource at WCP is the highest grade, exclusively open pit resource on the ASX. The high conversion (96%) to reserve is testament to the economic robustness of the deposit. On an EV/reserve ratio, Finders is placed between OZ Minerals and Sandfire and is 22% below the average for this peer group. On an EV/resource ratio, Finders is the second most expensive stock, after Sandfire. However, we expect exploration drilling to start this year which should expand the resource at Lerokis and allow the identification and testing of new targets on the island. P/E and EV/EBITDA Traditional ratios such as P/E and EV/EBITDA continue to demonstrate compelling value. Finders is trading on a FY18 P/E of 3.7x versus the consensus peer average of 13.6x and is on a FY18 EV/EBITDA of 2.4x versus the consensus peer average of 4.2x. Company Data Shares ordinary (M) 761 Market capitalisation ($M) month low/high ($) 13 / 20 Average monthly turnover ($M) 1.7 GICS Industry Materials / Metals & Mining Financial Summary (consolidated) Year end Dec 2016A 2017F 2018F 2019F 2020F Revenue ($M) Costs ($M) EBITDA ($M) NPAT ($M) EPS ( ps) PER (x) na Cashflow ($M) CFPS ( ps) PCFPS (x) Enterprise Value ($M) EV / EBITDA (x) Dividends ( ps) Yield (%) FND performance over one year Disclosure and Disclaimer This report must be read with the disclosure and disclaimer on the final page of this document. Matthew Schembri

2 Analysis Finders Resources Share Price ($) A$0.17 (FND) 14-Jul-17 Options / Con. Notes (M) 54.3 Iss. Shares (M) Year End December Mkt Cap. ($M) A$129M PROFIT & LOSS 2016A 2017F 2018F 2019F 2020F 2021F 2016A 2017F 2018F 2019F 2020F 2021F Revenue A$M Resource Reserve Operating Costs A$M Wetar (Dec-16) Exploration A$M Tonnes Mt Other A$M (13.3) Copper grade % 2.39% 2.41% EBITDA A$M Contained copper t 174, ,180 Depreciation & Amort. A$M EBIT A$M (13.1) Wetar Net Interest A$M (2.4) (4.9) (8.0) Production Pre-Tax Profit A$M (17.8) Ore stacked Mt Tax A$M (4.7) Grade - copper % 2.20% 2.21% 2.47% 2.47% 2.47% 2.47% Net Profit A$M (13.1) Metal in ore stacked Mt Abnormal A$M Reported Profit A$M (13.1) Copper stripped t Dividends Paid A$M C1 US$/lb Adjustments A$M CASHFLOW Net Op Cash Flow A$M (16.4) Net Interest A$M (8.0) (11.2) (4.5) Tax Paid A$M (20.4) (21.1) (22.7) Gross Op Cash Flow A$M (24.4) Net Capex A$M (75.7) (16.2) (11.0) (14.1) (10.5) (9.0) Exploration A$M 0.0 (3.0) (5.0) (5.0) (5.0) (5.0) Investing Cash Flow A$M (75.7) (19.2) (16.0) (19.1) (15.5) (14.0) Free cash flow A$M (100.0) Net Borrowings A$M 0.7 (41.8) (54.1) (30.3) Dividends A$M Equity Issues A$M Other A$M Financing Cash Flow A$M 71.2 (41.8) (54.1) (30.3) Net IncreaseCash A$M (28.8) Operating Cash Flow New Equity -100 Change in Borrowings Capex & Exp BALANCE SHEET -125 Cash Added Cash A$M Other Current A$M Current Assets A$M Fixed Assets A$M Exploration A$M Other A$M REVENUE Non Current Assets A$M Wetar US$M Total Assets A$M Borrowings A$M Total US$M Payables A$M COSTS Other A$M Wetar US$M Current Liab A$M Borrowings A$M Total US$M Provisions A$M CAPEX Other A$M Wetar US$M Non Current Liab A$M Total Liabilities A$M Total US$M Total Equity A$M RATIO ANALYSIS A$ A$ A$ A$ A$ A$ ASSUMPTIONS EPS (1.7) Exchange Rate A$/US$ PER x na Copper price US$/lb EPS Growth % (55.5) (418.1) Copper price US$/t CFPS (3.2) PCFR x na DPS Yield % 0% 0% 0% 0% 0% 0% Payout Ratio % 0% 0% 0% 0% 0% 0% Gearing ND/E % 166% 38% -17% -47% -68% -83% NPV (+1Yr) A$M A$/sh. Interest Cover x na na na na Wetar (74.1%) 299 $ 0.39 EBITDA Margin % Exploration 50 $ 0.07 EBIT Margin % (17.8) Corporate costs -11 $ (0.02) Return On Assets % (4.2) Net Cash (Debt) (74.1%) -15 $ (0.02) Eff Tax rate % Total 322 $ 0.42 Source: Petra Capital A$m

3 Introduction We benchmark Finders against other ASX listed copper peers including OZ Minerals, Sandfire Resources, Metals X and Avanco Resources. Aeris Copper, Hillgrove Resources and Tiger Resources are included where the data is available. Key industry metrics are used to demonstrate the relative discount Finders trades compared to this peer group. Methodology We use Bloomberg consensus data, as of 13-July 2017, for OZ Minerals, Sandfire and Metals X, utilising Petra forecasts for Finders and Avanco. Aeris Copper, Hillgrove Resources and Tiger do not have sufficient broker coverage to include in most financial and production metrics. We standardise and adjust fiscal periods to June year end. Companies reporting in US$ are converted to A$ at 77. Finders report financial and production metrics on a consolidated basis, but for the purposes of comparing the peer group, we display these metrics on an attributable basis (74.1%). Enterprise values used throughout the report are detailed in Figure 1. We do acknowledge that the market does place value on growth projects such as Avanco s Pedra Branca and OZ Minerals Carrapateena, which is captured in enterprise value, but not in short term metrics we present throughout this report. Figure 1: Enterprise Value Calculations Company Ticker EV (A$m) Mkt Cap (A$m) Cash (A$m) Debt (A$m) Date of B/S items Hillgrove Resources HGO Dec-16 Aeris Resources AIS Dec-16 Finders Resources FND Mar-17 Avanco AVB Mar-17 Tiger Resources TGS Mar-17 Metals X MLX Dec-16 Sandfire Resources SFR Mar-17 OZ Minerals OZL 1,626 2, Dec-16, Petra Capital Production and Financial Metrics Copper Production and EV/Production Finders is the second smallest copper producer after Avanco (Figure 2) however on an EV/production ratio, it is the cheapest stock heading into FY18 (Figure 3). Our analysis is simplified to focus on copper, the production of other commodities is excluded. Figure 2: Copper Production (attributable) Figure 3: EV / Copper Production (attributable)

4 Free Cash Flow and Price to Free Cash Flow We expect Finders to generate A$60m of attributable free cash flow in FY18 (A$74m in CY18) which is similar to Metals X and approximately half of Sandfire s free cash flow for the period (Figure 4). This is despite Metals X having double, and Sandfire having an enterprise value four times larger. On a FCF yield, Finders stands out as the cheapest in FY18+ by a significant margin (Figure 5). Finders is trading on a FCF yield of 46% in FY18 compared to Metals X and Sandfire both at FCF yields of 14%. The peer group has an average FCF yield of 20% in FY18. Figure 4: FCF (attributable) Figure 5: FCF yield (attributable) Price to Earnings and EV to EBITDA On the remaining traditional ratios of P/E and EV/EBITDA, Finders remains the cheapest. In FY18 it has a P/E of 3.7x versus the peer group of 13.6x. On EV/EBITDA in FY18 it is trading at 2.4x versus the peer group of 4.2x. Figure 6: Price / Earnings Figure 7: EV / EBITDA

5 Resource Metrics Resources and Reserves Finders has a resource of 2.4% Cu for 200kt Cu (Figure 8) and a reserve of 2.3% for 200kt Cu (Figure 9) consisting of the Kali Kuning and Lerokis orebodies (100% basis). This places it as the second highest grade resource, and third highest grade reserve of its ASX peers. As an open pit, heap leach operation its resource is very robust. The resource to reserve conversion provides an indication of how economically mineable the deposit is. Finders has a very high resource to reserve conversion of 96%, vs a peer average of 60%, demonstrating a very robust deposit (Figure 10). In this analysis we display Avanco without Pedra Branca and OZ Minerals with and without Carrapateena. Figure 8: Resources of ASX copper developers and producers, bubble represents contained Cu (displayed on an attributable basis) Figure 9: Reserves of ASX copper developers and producers, bubble represents contained Cu (displayed on an attributable basis) Figure 10: Resource to Reserve conversion (Cu)

6 EV to Resource and EV to Reserve The resource and reserve at Sandfire s DeGrussa/Monty deposits is 3x and 2.5x larger than Finders, respectively, on an attributable basis. Yet, Sandfire has 4x the enterprise value of Finders. Finders does have a relatively small resource position, which reflects the early positioning of its growth pipeline. This makes it the second most expensive stock on an EV/resource ratio (Figure 11). The reverse is true for Finders EV/reserve ratio, which is one of the cheapest on the ASX as it benefits from a high resource to reserve conversion (Figure 12). We expect Finders to begin to develop its growth pipeline now it is operating at its nameplate capacity of 28ktpa Cu and is beginning to generate strong free cash. Initially we expect exploration expenditure to be focused on developing Lerokis and Meron, and over time we expect new greenfield targets to be identified and tested elsewhere on Wetar Island which should add to the resource over time. Figure 11: EV / Resource Figure 12: EV / Reserve

7 Investment Thesis Finders is a mid-sized, low cost, copper cathode producer that has constructed and commissioned the 28ktpa Wetar Copper Project in Indonesia. The project has recently hit a watershed moment by reaching nameplate capacity and has started to generate significant cash which appears to have been missed by the market. The company is the cheapest copper producing stock on the ASX using P/E, EV/EBITDA and especially FCF yield. Finders is trading on a FCF yield of 46% for FY18 compared to its peer group on 20%. We expect the production rate of ~28ktpa to be sustained at a cash cost of ~US$1/lb until CY 21, at which point mining will cease and the project will continue to extract the copper from the stacked heaps until CY 27 (Figure 13). The removal of mining costs from the project will lower the C1 cash cost, more than offsetting the fall in production as the project declines to 3kpta in the final years of its life. Figure 13: Production profile and cash costs 30.0 Cu Production (kt) C1 Cash Cost (US$/lb) Cu Production (ktpa) C1 (US$/lb) Source: Petra Capital Finders has started to generate strong EBITDA, with US$22m recorded in MQ 17. We expect quarterly operating cash flows of ~US$14m through CY 17, rising to average ~US$22m in CY 18. This will drive rapid deleveraging, with debt of A$106m (31-Mar-17) to a net cash position in 2H 18 (Figure 14). We expect this to drive a strong transition of value from debt to equity. Figure 14: Net Debt Profile A$m Source: Petra Capital Operating Cash Flow New Equity Change in Borrowings Capex & Exp Hedge book

8 Petra Capital Level 17, 14 Martin Place, Sydney NSW 2000 ABN ACN AFSL Director: George Marias +61 (0) Research (Resources): Brett McKay +61 (0) Research (Resources): Matthew Schembri +61 (0) Research (Industrials): Nick Berry +61 (0) Research (Industrials): Killian Murphy +61 (0) Research (Industrials): Daniel Porter +61 (0) Research (Property): Jonathan Kriska +61 (0) Sales: Frank Barila +61 (0) Sales: Vincent Pisani +61 (0) Sales: Michael Vincent +61 (0) Sales: Colin Redmond +61 (0) Sales: Iain Gow +61 (0) Sales: Peter Veldhuizen +61 (0) Sales: Vince Barila +61 (0) Corporate (ECM): Conrad Anderson +61 (0) Corporate (ECM): David Wallis +61 (0) Administration: Krystle Garven +61 (0) Administration: Samantha Tingley +61 (0) Administration: Silvia Fratta Pasini +61 (0) Administration: Larissa Falvo +61 (0) Legal & Compliance: Stephen Newton +61 (0) Financials: Tony Christelis +61 (0) Disclosure This document has been prepared in Australia by Petra Capital Pty Ltd which holds an Australian Financial Services License AFSL Petra Capital Pty Ltd is an ASX Market Participant. Petra Capital Pty Ltd and its associates, officers, directors, employees and agents, from time to time, may receive brokerage, commissions, fees or other benefits or advantages, hold securities in companies researched by Petra Capital Pty Ltd and may trade in these securities either as principal or agent. Disclaimer The information or advice contained in this report has been obtained from sources that were accurate at the time of issue, however the information has not been independently verified and as such, Petra Capital Pty Ltd cannot warrant its accuracy or reliability. Persons relying on this information do so at their own risk. To the extent permitted by law, Petra Capital Pty Ltd disclaims all liability or responsibility for any direct or indirect loss or damage (including consequential loss or damage) caused by any error or omission within this report, or by persons relying on the contents of this report. This report is published by Petra Capital Pty Ltd by way of general information or advice only. This report does not take into account specific investment needs or other considerations that may be pertinent to individual investors. Before making any investment decisions based on this report, parties should consider, with or without an investor adviser, whether any relevant part of this report is appropriate to their financial circumstances and investment objectives. Petra Capital Pty Ltd is a licensed institutional/wholesale stockbroking firm. The report is only intended for institutional and sophisticated clients to whom Petra Capital Pty Ltd has issued the report. Petra Capital Pty Ltd is not licensed to advise retail investors retail investors should contact their own stockbroker or financial adviser/planner for advice. Key Risks Resources Companies under Coverage Key risks in relation to the resources sector and the resources companies that are the subject of research by Petra Capital s analysts include commodity price volatility, currency risk, technical/licencing/operational risks, litigation/political risk, development risk and sovereign risk for overseas assets, as well as feasibility, permitting and financing risks related to the development of growth projects. Ratings Information regarding the scope and expertise of our research services, processes for selection for coverage, and the management of conflicts of interest can be found on Petra Capital s website at Petra Capital uses the following ratings system and definitions: Buy - Forecast to outperform the Market by more than 5%; Hold - Forecast to perform up to 5% above or below the Market; Sell - Forecast to underperform the Market by more than 5%; Speculative Buy - Speculative Investment; Take Profits - Recommend taking short term profits in a stock we remain fundamentally positive on a medium term view; Accept Offer - For a company under takeover where we see the offer as a fair price with low risk of a competing offer; No Rating - No rating at this time. Market performance is relative to the S&P/ASX Small Ordinaries Index which we assume generates a neutral return on a 12 month basis. US Investors This material is intended for use by major U.S. institutional investors (as such term is defined in the U.S. Securities Exchange Act of 1934) and $100 million investors only and not the general investing public or retail customers. $100 million investors means any entity, including any investment adviser (whether or not registered under the U.S. Investment Company Act of 1940) that owns or controls (or in the case on an investment adviser has under management) in excess of US$100 million in aggregate financial assets (i.e. cash, money-market instruments, securities of unaffiliated issues, futures and options on futures and other derivative instruments). Transactions by or on behalf of any US person in any security mentioned in this document may only be effected through Global Alliance Securities, LLC ( Global Alliance ), a U.S. broker dealer. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, its accuracy is not guaranteed. Additional and supporting information is available upon request. This is not an offer or solicitation of an offer to buy or sell any security or to make any investment. Any opinion or estimate constitutes the preparer s best judgement as of the date of preparation and is subject to change without notice. Petra Capital Pty Ltd or Global Alliance and their associates or affiliates, and their respective officers, directors and employees may buy or sell securities mentioned herein as agent or principal for their own account. Other International International investors are encouraged to contact their local regulatory authorities to determine whether restrictions apply in buying/selling this investment.