Stelco Holdings Inc.

Stelco Holdings Inc. (TSX: STLC) is a steel company and is engaged in the production and selling of steel products to customers in the construction, automotive, appliance and energy, pipe and tube industries in North America. 

The Company has entered into an agreement with DTE Energy Services, Inc. for the development, construction and operation of a 65 MW cogeneration facility at Stelco's Lake Erie facility in Nanticoke, Ontario. The construction activity is likely to start in FY20, and the plant is expected to be operational in the first half of FY22. 

Q1FY20 Income Statement Highlights: STLC came up with its quarterly results, wherein the Company reported revenue of CAD 445 million, reflecting a decline of 14% on y-o-y basis. The decline was primarily attributable to lower steel selling prices and lower non-steel sales. The average selling price of the steel products declined from CAD 824/nt in Q1FY19 to CAD 705/nt in Q1FY20, due to a decrease in market prices for flat steel products. Operating income slide to CAD 7 million, as compared to CAD 44 million in the previous corresponding period (pcp). The Company reported a net loss of CAD 24 million, as compared to a net income of CAD 43 million in pcp. The decline was majorly attributed to lower gross profit, higher finance costs and an increase in restructuring and other costs, partly offset by CAD 5 million in lower selling, general and administrative expenses and a rise in finance and other income. The Company reported adjusted net loss of CAD 26 million, as compared to net income of CAD 60 million in Q1FY19.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV to Sales based Relative Valuation (illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Risks: The company’s revenue is directly related to the demand and prices of steel. Any fluctuation in commodity prices or a decline in demand would impact the group’s financial performance.

Stock Recommendation: The stock of STLC corrected ~32% so far this year due to a lower demand scenario across the steel industry coupled with shutdown of several manufacturing plants across the globe on account of COVID 19 pandemic. The Company seek to complete the blast furnace upgrade, which would enhance the capacity and improve the cost structure, this augurs well for margin expansion. The Company entered into an 8-year iron ore pellet purchase agreement with United States Steel Corporation, which boosts the long-term supply of high-quality iron ore pellets and is a key positive. Amidst the challenging environment, the Company reported higher shipment, up from 612 thousand nt in Q1FY19 to 621 thousand nt in Q1FY20, aided by higher coated and cold rolled steel product shipments, which is encouraging. Going forward, we expect demand to increase as industrial and manufacturing activities are coming back on track, which in turn would support the steel prices. The stock has witnessed a pullback rally and ~35% in the last three months. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). For the said purpose, we have considered peers like Warrior Met Coal Inc, TimkenSteel Corp, SunCoke Energy Inc etc. Hence, we recommend a ‘Speculative Buy’ on the stock at the closing market price of CAD 7.46 on July 10, 2020.

STLC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Largo Resources Ltd

Largo Resources Ltd (TSX: LGO) is a natural resource development and exploration company and is engaged in the acquisition, exploration, development, and operation of mining and exploration properties located in Brazil and Canada. 

Q1FY20 Financial Highlights: LGO reported its quarterly results, wherein the company reported revenue of CAD 58.18 million as compared to CAD 44.31 million in pcp. The increase was driven by higher vanadium sales of 3,170 tonnes as compared to 2,100 tonnes in pcp; however, significantly lower realization price (USD 6.07/tonne versus USD 16.34/ tonne in Q1FY19) remained a drag. The Company improved on operational efficiency front and reported cash operating costs (excluding royalties) at USD 2.79 per pound, as compared to USD 3.41 per pound in Q1FY19. The quarter was marked by higher operating expenses, an extended foreign exchange loss, while recorded a decline in finance costs, share-based payments and professional, consulting and management fees. Net income, during the quarter stood at CAD 5.73 million as compared to a loss of CAD 2.17 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of LGO corrected ~56% and ~14% in the last one year and six-months amid a correction in equity markets across the globe. The Company derives the majority of its revenue from the mining and selling of vanadium, and the price of vanadium has corrected significantly in the recent past, which is a key challenge for the Company. The management also highlighted that the Company is likely to struggle with liquidity due to the sharp corrections in the commodity prices. Furthermore, the Group encountered a higher liability from its trade payables amounting to CAD 75.84 million and is expected to put pressure on the working capital. Vanadium is widely used as an important ingredient for making alloys which are widely used for making axles, auto-ancillary parts used for automobile manufacturing and parts of jet engines etc. The fall in the auto demand coupled with lower alloy demand across the major industries weighs on the Vanadium prices, which is a major setback for the Vanadium producers. Meanwhile, we do not foresee any significant growth in the Vanadium demand in the near-term and expect the commodity prices to hover around the same price range. In the recent past, the stock made a pullback rally and appreciated ~17% in the last three months, outperforming the index by ~7%. On the valuation front, the stock of LGO is trading at a higher valuation compared to the industry median. The stock is available at an EV/EBITDA of 5.9x on TTM basis compared to the industry (energy) median 4.3x. Hence, considering the aforesaid factors, industry outlook and recent price movement, we recommend a ‘Watch’ stance on the stock at the closing price of CAD 0.86 on July 10, 2020.

LGO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.