Investment Matters

Company News

Australian Equities sub-portfolio

Hastings Technology Metals (positive impact) received conditional approval from the Western Australian Government to construct a hydrometallurgical plant just outside of Onslow.

The plant will be used to extract rare earth elements from ore sourced at the nearby Yangibana Rare Earth Project.

The company had previously looked to process ore at Port Hedland; however, the location outside of Onslow is near the project and eliminates the need to build a new gas pipeline. This will result in an estimated cost saving of $68m.

Rare earth elements are critical inputs in permanent magnets used in electric vehicles and wind turbines.

Clients’ holding in Hastings forms part of a basket of green metals in their portfolios and is positioned to benefit from rising demand for rare earth elements as the world looks to de-carbonize and strengthen its supply chains.

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Jervois Mining is a new addition to client portfolios.

We were able to add the position as part of a recent Institutional Placement – which were able to access through our relationship with the lead broker. This enabled clients to establish a position at a 23% discount to the previously traded share price.

Jervois is positioning itself to be a vertically integrated cobalt and nickel producer. 

Cobalt is currently a component in the cathode of lithium-ion batteries and is relatively rare, with supply concentrated in a few regions.

More than 70% of Cobalt production is thought to originate from the Democratic Republic of the Congo (DRC) which is home to approximately 50% of the world’s reserves (Source: USGS).

The DRC is a politically volatile region with strong links to China. In addition, it is estimated that 15-30% of Cobalt ore is sourced from artisanal miners – small scale mining that leaves labourers mining by hand, with very little pricing power that can push them to take great risks (including the use of child labour).

Jervois is looking to create a company with an integrated supply chain that is independent of artisanal mining in the Congo and Chinese refining operations.

Its operations span the production of ore in Idaho (Idaho Cobalt Operations or ICO), the processing and refining of ore in Brazil (its Sao Miguel Paulista or SMP operations) as well as refining and downstream production of cobalt products in Finland (Freeport Cobalt Operations).

Jervois is a small position and adds to the basket of green metals in client portfolios. It provides exposure to the growing demand for Cobalt (including ethically sourced supply), as well as potential future volatility in the commodity’s price.

We see owning a “basket”, 4 to 6 stocks of relatively small individual positions (less than 1 per cent of the portfolio) as an efficient way to invest in the development batteries and emerging materials.

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Origin Energy (neutral impact) released its report for the June quarter last week.

The company expects to be on track to meet its guidance for profits in FY-21.

However, it expects earnings in its Energy Markets business (electricity and gas retailing) to be lower in FY-22. This will however be offset by stronger earnings from APLNG (Queensland based LNG export joint venture) which is expected to produce greater than $1b of cash flow in FY-22.

Earnings from the company’s Energy Markets business are expected to be weak in line with anticipated future electricity prices, which will squeeze Origin’s margins as its existing contracts related to electricity and gas supply are fixed at relatively higher levels.

However, the company expects a significant uplift in earnings, with electricity prices are expected to lift in FY-23.

In line with lower electricity pricing, the company looked to reduce the carrying value of some of its generation assets, largely Eraring, its coal fire power station. The change is largely accounting based and does not impact the cash generated by the business.

The company’s earnings from Energy Markets have now largely bottomed – with the market attributing little value to this business.

With strong cash flows from APLNG, we see the company as well-positioned to transition its electricity generation assets and continue to play a large role in the national electricity market.

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Property sub-portfolio

First cab off the rank Centuria Office REIT (neutral impact) released its profit result for FY-21.

The result was largely in line with our expectations, with portfolio values supported by strong valuations and foreign demand in the sector. We remain wary of the office sector in general, choosing to exploit valuation arbitrage in city fringe offices, and in portfolios with redevelopment options. We continue to avoid excess exposure to CBD buildings.

There remains room for improvement in occupancy, 818 Bourke St and 576 Swan Street accounting for approximately 60% of vacancies (currently 7.9% of the portfolio).

It was pleasing that in the current environment Centuria had the confidence to provide guidance for next year’s funds from operations.

However, in doing so, management employed some conservativism.

Guidance for next year’s funds from operations (which can be thought of as a property equivalent of operating profit) is for at least 18 cents per unit – a forecast which has been tempered by the potential impact of further COVID associated lockdowns.

Of this, 16.6c per unit is expected to be distributed – which represents a distribution of yield 6.8% at current prices.

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Centuria Industrial REIT (neutral impact) also released its result for FY-21.

Industrial property valuations have continued to strengthen, in light of strong demand, which recently has seen an increase in the book value (NTA) of Centuria’s properties by more than 15%.

Our shift to industrial property in the Property sub-portfolio in April 2020 has proven very profitable with Centuria Industrial REIT up more than 60%. The fundamental changes driven by COViD have seen rapid convergence between the prices (per unit of income) paid for industrial property, and previously much more expensive retail and office sectors.

Similar to the Office REIT, guidance for next year’s funds from operations was conservative and on a “no less than” basis is 18.1 cents per unit.

Management are forecasting a forecast distribution of 17.3 cents per unit in FY-22 – which represents a distribution yield of approximately 4.5% at current prices.

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The above market commentary represents the views and opinions of First Samuel Pty Ltd. Such market commentary contains information of a general nature only. Such market commentary is not intended to provide a sufficient basis on which to make any investment decision and should not be taken as such. It has not taken into consideration your objectives, needs or financial situation. Before making decisions in relation to any financial product, you should always obtain and read any relevant Product Disclosure Statement or information statement and seek personal financial advice.