Stelco Holdings Inc.

Stelco Holdings Inc. (TSX: STLC) is engaged in the production and selling of steel products for customers across the steel service center, appliance, automotive, energy, construction, pipe and tube industries within North America. 

• Strong Bullish Trend: Technical indicators are showing strength in the STLC shares on TSX. The stock closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. Moreover, the stock of STLC appreciated ~159% and ~232%, respectively in the last six months and nine months, respectively, driven by a recovery in the international iron-ore prices.                          

Source: Refinitiv (Thomson Reuters)

• Capacity addition to support future growth: Recently, the group announced that it commissioned a new pig iron caster in Lake Erie Works facility with a capacity of casting one million tons of pig iron per year. The above upgradation would likely cater to the growing demand for iron ore and related products within North America, required for the use of production of EAF steel. The above facility would help the company to produce a complete suite of products ranging from pig iron to semi-finished steel, to the hot-rolled sheet, to high value-added cold-rolled and coated products, as well as advanced high strength steels. 

• Event Update: The company would disclose it Q4FY20 results on February 17, 2020.

Q3FY20 Financial Highlights:

• STLC announced its quarterly results, wherein the company posted revenue of CAD 237 million, as compared to CAD 464 million in the previous corresponding period (pcp). The decline was primarily due to lower steel shipping volumes due to the blast furnace upgrade project.
• The group reported operating loss of CAD 69 million, as compared to an income of CAD 9 million in the previous corresponding period. Net loss stood at CAD 88 million in Q3FY20.

• The company reported a cash balance of CAD 106 million, while total assets were recorded at CAD 1,603 million.                  

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Volatility in iron ore price would dampen the company’s income, profitability and margins. 

Stock Recommendation:

With the recent capacity addition, the company would be able to offer a diversified product mix, which would support the operations across various market cycles, which is a key positive and augurs well for cash flow stability. The company is a low-cost producer of iron and steel products, and with the newly added facility, the company would be able to cater to the rising demand from the North American Geography. On the valuation front, the stock of STLC is available at an EV to EBITDA multiple of 2.1x on the next twelve months (NTM) basis, as compared to industry (Basic Materials) median of 5.8x. Hence, considering the above-mentioned facts, we recommend a ‘Hold’ rating on the stock at CAD 23.27 on February 10, 2021.

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

Copper Mountain Mining Corp

Copper Mountain Mining Corp (TSX: CMMC) is a copper producer, developer and explorer. The company’s flagship asset is the Copper Mountain mine located in southern British Columbia near the town of Princeton.

Key highlights

• The management shared preliminary numbers for Q4 2020 and Guidance for 2021: The Company exceeded 2020 production guidance of 70-75 million pounds and produced 77.6 million pounds of copper. The also achieved record quarterly production in the fourth quarter by producing 23.1 million pounds of copper, 8,959 ounces of gold and 144,934 ounces of silver. For 2021, the company expects production to increase by up to 22% to 85 to 95 million pounds of copper, gold production is expected to be in the range of 25,000 to 35,000 ounces and silver production to be in the rage 500,000 to 550,000 ounces in 2021.

• Robust production with lowering cash cost:The company has shown resiliency in maintaining its production. In Q3 2020, production was 23.8 million pounds of copper equivalent (comprised of 18.9 million pounds of copper, 6,630 ounces of gold, and 81,418 ounces of silver). On the back of some prudent steps taken by the management, the company brought down the cost. The cash cost for Q3 2020, was CAD1.27/lb copper produced, (AISC) was USD1.43/lb copper and all-in cost (AIC) was USD1.68/lb copper. This drop-in cost resulted in healthy margins.

Source: Company 

• Improving financial health: The company is entirely focused on improving its financial health. For this, the management took some prudent steps to curtail the expenses, which are helping them in achieving enhanced margins.Cash flow from operations (before working capital changes) for Q3 2020, stood at CAD 47.0 million, compared to negative CAD 2.1 million in Q3 2019. Cash and cash equivalents also increased by CAD 24.6 million to CAD 53.6 million in Q3 2020. 

• Event Update: The company would release its fourth quarter and full year 2020 financial results before markets open on Tuesday, February 16, 2021.

• Appointed new chairman: On January 14, 2021, the Company announced the appointment of Ed Dowling as the Chairman of the Copper Mountain Board.

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company posted revenue of CAD 95 million, against CAD 62.7 million in the previous corresponding period. Revenue increased significantly because of higher production and higher metal prices.
• Cost of sales in Q3 2020 stood at CAD 53.0 million, compared to CAD 64.1 million in Q3 2019. The company witnessed a decrease in the cost of sales because of its cost savings initiatives resulting from the revised operating plan, which included utilizing less equipment.
• Net income in the reported quarter stood at CAD 33.2 million, as compared to a net loss of CAD 10.6 million in pcp. Increased sales and higher realized metal prices were the reasons behind this turnaround. 

Risks associated with investment

The company’s financial performance is mostly dependent on the price of copper and gold, which directly affects the company’s profitability, margins and cash flows. The prices of these commodities are subject to volatility. It is affected by various factors, such as the strength of the US dollar, Interest rates, Inflation rates, demand and supply, all of which are beyond the company’s control. 

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The Company came out with a robust performance in top-line and bottom-line. The group is also focusing on improving its financial health, where it increased its cash balance to CAD 53.6 million. We also expect that the improvement in copper prices is likely to benefit the Company’s performance in the near to medium term. Further, copper prices are likely to remain stable as most of the governments worldwide eased the lockdown restrictions, which is expected to result in the improvement in the industrial activities. The Company surpassed its 2020 production mark of 70-75 million pounds of copper and expects the production to increase by up to 22% to 85-95 million pounds of copper, along with healthy growth in precious metals. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 2.36 as on February 10, 2021. We have considered Taseko Mines Ltd, Capstone Mining Corp, Ero Copper Corp, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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