Volatile markets often present outstanding opportunities, and this year’s have no exception. During the sell-off earlier this year, we took the opportunity to add two stocks to our portfolio that are being driven by powerful tailwinds such as the rise of electric vehicles and urbanisation in China. I outline these stocks and why we like them in this short wire.
Significant de-risking in a key growth project
We took a new position in OZ Minerals Limited (ASX: OZL) at what we considered a very attractive valuation entry point. We find the copper market compelling due to China’s increased rate of urbanisation and therefore demand for mineral resources including copper. The growing shift to electric vehicles over the coming years will also see an increase in global demand for copper as copper forms a significant component of electric vehicles compared to traditional vehicles. From the supply side, grades at the major global copper mines are declining which may also mean production is expected to decline without new projects. As the grades of the new projects are lower, and/or the capital cost is higher due to infrastructure requirements, higher prices will be required for these new projects to be compelling.
There are limited copper-focused companies in Australia that operate projects with a long mine life and low cash costs.
While this is an advantage for OZL, we were also conscious of the risk faced by OZL on their key growth project in Carrapateena which is located in South Australia. Specifically, commissioning new mines, in particular underground mines like Carrapateena, are complex and often result in delays to construction. This has flow-on effects to first production and cash flow. We were encouraged earlier this year to see that the initial teething issues with the project had been overcome and commissioning was progressing back on target. This signalled that the project had been significantly de-risked. Recently, Carrapateena achieved throughput capacity of the processing mill, which has further de-risked the project. The final de-risking event is the mine reaching full capacity. This is expected by the end of the year.
OZL is also a significant gold producer with approximately 40% of revenue at spot prices. Gold is produced as a by-product of copper, which can generate credits to drive down costs of production. This means higher by-product credits can offset the impact of copper cash production costs, which would be negative at spot prices. As a result, the balance sheet is in a far better position than the market had expected at the completion of such a large project and is still net cash. We believe that with a strong balance sheet and cash flow generation from the two key mines in South Australia, OZL is very well placed to fund other key growth projects. This includes projects in the Carrapateena Block Cave and Prominent Hill shaft that will increase production, reduce cash costs, and increase the mine life of these operations. We expect the advancement of these projects to unlock further value for shareholders.
Riding the return of motorsports
We added PWR Holdings Ltd (ASX: PWH) to the PIC portfolio during the market-sell off when the stock fell by approximately 50% from its highs on news of global motorsport cancellations. For example, the highest closing price for PWH in January was $5.08 and the lowest closing price in March was $2.60. While we didn’t quite buy at the share price low during the extreme volatility in March, we were able to build a healthy position for the portfolio as the price fell.
PWR designs and manufactures high performance cooling systems for the automotive and aerospace industries. This includes the production of aluminium radiators, intercoolers and oil coolers for elite motorsport teams that participate in Formula One, NASCAR,V8 Supercars, DTM, IndyCar and the WRC. Their products represent vital components in motorsport supply chains, leading to very loyal customers and a sticky revenue base.
Over the last few years, the company has been investing heavily to expand its cooling products into new markets including electric and autonomous vehicles as well as military applications.
Recent client wins suggest that these industries could one day be as meaningful to PWR as motorsports is today.
Founder and CEO Kees Weel owns just under 30% of the company and runs it with the passion and focus of a family business. We believe this approach, combined with an excellent engineering pedigree and minimal competition, will continue to provide a highly attractive set of financials. The business is generating an impressive 20% net profit margin, a 30% return on equity and consistent double-digit earnings per share growth. PWH has no net debt and generates reliable free cash flow.
As COVID-19 spread across the world, motorsport event cancellations created fear for PWR investors who were worried about future product sales to racing teams. Motorsport events have since resumed with many series looking to “catch up” on the lost races with a packed schedule through the rest of 2020. As a result, PWR’s pipeline is looking its strongest in years.
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