Investment Matters

Reporting season kicks off (in earnest)

This week marked the beginning of reporting season (in earnest).  Three summaries of results released by companies in your Australian Equities portfolio are provided below.

Newcrest Mining

Newcrest Mining’s operating profit for 1HFY-20 was US$756 million, 3% higher than the previous half.

The company experienced higher costs over the half, producing 1.1 million ounces of gold (-12% vs the previous comparative period) at an All-In Sustaining Cost (AISC) of $880 per ounce (+18% vs the previous comparative period).

Production was lower due to a reduction in milled tonnes (the result of maintenance projects completed during the period) as well as anticipated grade declines, which translated to a higher AISC.

However, given the price of gold has remained at high levels (greater than US$1400 per ounce) the company was able to achieve an AISC margin of $566 per ounce.

The company is currently in a period of major capital projects and new developments. As such, a majority of operating cash flow over the half was invested in the acquisition of interests in new mines as well as major capital projects completed during the period.

With a growing resource base as well as large, low-cost production assets, we see the company as continuing to serve as a leveraged exposure to gold in the portfolio.

Challenger

Challenger experienced a significant rally in its share price (+27% on the day of its announcement), after achieving a normalised net profit after tax (NPAT) of $191.4m and upgrading its guidance.

Its Life business (which provides both fixed term and lifetime annuities) grew sales by 15% in total. This was largely driven by an increase in Other Life sales (sales of index-linked products to superannuation and institutional clients).

Annuity sales were down 9%, with domestic annuity sales down 16%, which the company attributes to the disruption of the Australian financial advice market (migration of advisors from wealth hubs such as AMP to independent practices) as well as new age pension means test rules in effect since the 1st of July 2019. However, sales to the Japanese market continue to remain strong after the company signed an agreement with Japanese insurer MS&AD to provide US dollar-denominated annuities. Over the period the company launched a direct to consumer campaign and will be investing up to $15m across FY20 to drive long-term annuity sales growth.

As a result of elevated distribution, product and marketing costs, the company had a cost to income ratio of 33.5% - at the higher end of its 30% to 34% target.

The COE (cash operating earnings) margin was 3.53% (down 31bps), driven by lower investment yields.  Overall, Life earnings (EBIT) increased by 2.8% to $285.8.

The company’s fund management business continues to add more boutique fund managers and investment strategies. Average funds under management grew by 6.2% as a result of mark to market gains on investments and net inflows over the period.

Overall, fund management earnings were 7% higher at $27.9m.

The company has guided towards a NPAT at the upper end of its $500-550m target in FY-20.

Mineral Resources

Mineral Resources’ result and subsequent guidance was above market expectations. The company’s share price has subsequently rallied (+11% over the week).

The company’s headline operating profit of $1.6 billion was largely reflective of the sale of 60% of its interest in Wodgina (lithium project) to partner Abermale Corporation. Excluding sale proceeds the company’s underlying operating profit was $330m, which was approximately 20% ahead of market estimates.

In particular, volumes (given the ramping of production at Koolyanobbing) and realised prices for iron ore were significantly higher than the previous comparative period (an average price of $103/t in 1H-FY20 vs $65/t in 1H-FY19). The company’s iron ore projects delivered an operating profit (EBITDA) of $185m, $183m higher than the previous comparative period.

The company showed strong growth in its mining services – particularly external sales. Revenue from mining services was $613m, 31% higher than the previous comparative period, with internal and external sales growing by 23% and 47% respectively. Operating profit (EBITDA) from mining services was $172 m, $84m higher than the previous comparative period.

Earnings from its exposure to lithium remain subdued, given a recent fall in prices. Mt Marion produced an operating profit (EBITDA) of $16m for the group, down 67% compared to the previous comparative period. However, the company remains well-positioned to benefit from demand and a price recovery in the medium term, particularly given the quality of its asset in Wodgina.

The company has guided towards an operating profit from mining services of between $280-$300m, however, given the result in the first half, this may be conservative.