Amidst dynamic commodity pricing scenario, the lucrative metals and mining space is focussed on extraction and exploration of metal and minerals including gold, iron, copper, zinc, coal, base metals as well as precious stones across the world. These materials are source of inputs/raw materials for various industries and are needed to construct roads and hospitals, generate electricity, computers, automobiles, satellites, along with several goods and services that consumers enjoy.
The above graph depicts the YTD return of ~17% offered by S&P/ASX 200 Resources (XJR) sectoral index.
Technology is becoming an important differentiator for the world’s leading miners. Automation and digitisation continue to gain momentum while explorers continue to focus on harnessing technology in order to reduce the cost of extraction and maintenance. Metals and Mining companies are increasingly focussed on growing their markets and product lines with significant opportunity to put various research as well as recycling methods into the downstream product.
In this regard, metal and electronics recycling is another market opportunity that market competition is offering. It is to be noted that Trade wars, geopolitical crises and climate change continue to create industry volatility. Most of the companies are fighting off intense competition from low-cost imports in their domestic market and reduced demand from the emerging market.
The future success of metal recycling players need not solely depend on the ability to adapt but also ability to sell its output as a primary provider of raw materials to many essential industries.
Let us look at Sims Metal Management Limited (ASX: SGM), a leading publicly listed metal recycler. The company operates in buying and selling of non-ferrous and ferrous recycle metals.
SGM operates in five continents with operations in Australasia, UK and US. Sims Metal buys ferrous metal from peddlers, metal dealers, demolition firm and others who generate obsolete metals, while non-Ferrous metals are sourced through generators of electricity, telecommunication service provider, manufacturers of production offcuts and wells as others who generate obsolete metals.
Sims Metal recently announced that Mike Kane has decided not to contest for elections at the 2019 AGM and retires from the Board effective 4 November 2019, given investors’ concerns questioning his role as a sitting CEO.
Trading Update for 1H FY20
On 28 October 2019, the company announced the trading update for 1H FY20 with expected Underlying 1H FY20 EBIT loss of ~ $20 million - $30 million while it still projects full year EBIT profit to remain between $20 million - $50 million, provided market conditions do not deteriorate further.
According to Alistair Field (CEO and Managing Director), there are three inter-related issues that contributed broadly to the expected first half-Underlying EBIT loss:
As per Sims Metals, the volumes and margins are significantly lower across all metals recycling operating regions, that is expected to continue to impact the business results.
The CEO further commented that the low Automobile sales, lower world growth and China’s sales, low manufacturing, and unresolved trade wars are responsible for a significant drop in demand for steel and Zorba products.
These are expected to be resolved in the second half of the financial year when the Chinese authorities have indicated to classify Zorba-related products as a new metal rather than waste. In the meantime, the products going to China are being sold to other markets at reduced prices.
The company, however, believes that its strong balance sheet along with disciplined approach to cost management and capital expenditure will allow them to sail through this challenging period of market volatility.
FY19 Annual Results (for the period ending June 2019)
Despite challenging market conditions in FY19, the company delivered resilient earnings and strong cash flow. The company reported that the performance was challenged by low Turkish demand and volatile purchasing behaviours, a fall in ferrous and non-ferrous pricing which compressed margins and geopolitical disruption from tariffs and China/US trade tensions impacting global economic sentiment.
On 28 August 2019, the company has released the financial update for full year ending 30 June 2019, below is the snippet of the results:
- Sales revenue increased by 3 per cent to $6,640 million compared to the previous year (FY 18).
- Net cash in hand of the company stood at $348 million as compared to $298.1 million in FY18.
- The underlying EBITDA decreased by 7.4 per cent to $363.4 million while Underlying EBIT dipped by 16.3 per cent to $230.3 million.
- The underlying net profit after tax dipped by 14.2 per cent to $161.9 million.
- The company declared a final dividend of 19.0 cents per share (100 per cent franked) for FY 2019.
The stock of SGM last traded at $9.885, up by 1.28% on 4 November 2019 with ~203 million outstanding shares and a market cap of $1.98 billion. The 52 weeks low and high value of the stock is at $8.530 and $13.390 respectively. The stock has generated a negative return of ~4.7 % in the last six months.