Stanmore Resources: Resilience pays

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

24 January 2023, 7:00 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• Stanmore Resources' (ASX:SMR) 4Q sales beat our expectations despite 2022 wet weather.
• End-CY22 net debt materially beat our forecasts, and we forecast strong de-gearing to a net cash position in 2HCY23.
• The January deluge impacting port operations is a short-term risk to CY23 sales/costs although HCC prices/ realisations again prove to be a strong net offset.
• SMR enjoys M&A advantages in the Bowen Basin and we think positioning for further acquisitions in 2023 will out-rank dividends in the near term.
• SMR looks too cheap to us trading on a +25% free cash flow yield and with near 30% capital upside potential.

Events

4Q production, pricing upgrades, QLD wet weather impacts.

Analysis

Impressive 4Q: 4Q sales (3.47Mt) were 300kt (~10%) above our forecasts despite ongoing wet weather. High ROM/product stocks, additional mining capacity/ flexibility and opportunistic use of available logistics explained the resilience. Strong volume and the lower AUD helped SMR to beat cost guidance at SWC and Poitrel; however, both tailwinds are now abating.

Rain impacts: Mackay received ~650mm of rain (nearly 2.4x the January average) in the 7 days from Jan-12. While the mines and rail network have fared better, the trade press suggests port operations at DBCT may take up to 3-4 weeks to fully recover (coal dewatering) significantly slowing exports for all users. We reduce our CY23 sales forecasts but do see further possible downside. Importantly, lost sales are a basin-wide phenomenon contributing to significant HCC tightness/ pricing.

De-gearing on track: End CY22 net debt of $182m (cash $433m, debt ex-leases $615m) was $179m better than our forecast. The higher volume at better than forecast realisations (PCI tracking close to PHCC) likely explains much of the delta, along with higher tax accruals as the business re-bases to a higher NPAT.

CY22 result preview late February: We expect wider-than-usual CY23 guidance and with some risk to volumes/costs versus market expectations (wet weather uncertainty). We don’t expect a final dividend as we expect SMR to preference de-gearing (senior debt cash sweep due in February, possibly +$300m) and to build funding capacity for potential M&A. 

M&A focus: The trade press reports that BHP’s Daunia and Blackwater mines may soon come to market. Operating synergies with Daunia are obvious (adjoining leases, shared infrastructure) and we expect SMR to be a key bidder. Peabody appears to be a logical rival for QLD assets (recent appetite, strategic imperative, ~3Mtpa of unused DBCT capacity).

Forecast and valuation update

We lower forecast CY23 sales by 4% (to 12.6Mt).

We also adjust for:

1. Materially higher CY24-25 PHCC assumptions (+20%).
2. Higher CY23 PCI realisations (to 84% with ongoing upside).
3. Higher cost assumptions. Price more than offsets short-term weather.

Our base case valuation/target adjusts to (login to view).

Investment view

SMR looks far too cheap to us offering ~30% upside potential to our base case valuation.

We’re attracted to:

1. Higher capital upside vs peers.
2. Strong cashflow/valuation leverage.
3. Low-cost “BHP-like” cost structures at SWC and ED.
4. Clear M&A advantages/ opportunities in QLD met coal.

Price catalysts

• Potential external M&A.

Risks

• Production disruption, cost inflation, logistics interruption/ availability.
• Macro-economic weakness.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.