Is China getting serious? Rheinmetall and Almonty Industries profit! Varta share on the brink?

Almonty Industries: Why is China buying on the global market?

"The price of tungsten is currently at a high level. There are several reasons for this. One that I cannot explain is China. The fact is that there are currently huge imports into China, including from Australia and Europe. This has dramatically changed their approach," reported Lewis Black, CEO of Almonty Industries, last week at the IIF virtual investor conference (Link to recording). The fact that China is buying on the global market is so surprising because the country, together with Russia, dominates global production. According to Lewis Black, one reason could be that tungsten is increasingly used in the semiconductor industry. Due to growing tensions with the US, China has announced that it will massively expand its domestic chip industry. In addition, tungsten is also used in the defense and solar industries, among others, and is vital in the production of batteries for electric vehicles. These are all areas where China is one of many players.

How does Almonty benefit from these developments? Firstly, the Company already has established tungsten mines in Spain and Portugal. They also ensured that the Company achieved a positive EBITDA of EUR 2.2 million in 2023 - despite significant investments. The driver for the share is in South Korea, where the Sangdong mine is due to be ramped up this year. With the opening of the new mine in South Korea, Almonty is set to become one of the major players, which should lead to a revaluation of the share. Incidentally, the project is being co-financed by the German KfW to the tune of EUR 70 million, emphasizing the global significance of tungsten. According to Almonty's CEO, talks are also being held with European governments, and representatives from the US Department of Commerce have already inspected Almonty's activities on the Iberian Peninsula.

For a personal impression of the management, we recommend watching the recording of the presentation from the IIF investor conference (here).

Rheinmetall: Are new highs possible?

The arms industry is a major beneficiary of the war in Ukraine and global tensions. In the current year alone, the shares of Rheinmetall, Hensoldt & Co. have posted significant double-digit gains. After some profit-taking in the meantime, and it looked as if the rally was over, Rheinmetall shares are already working their way up again. One of the reasons for this is presumably the fact that the US has now approved an aid package worth billions to rearm Ukraine. Yesterday, the share climbed back above EUR 517. Are new highs possible? JP Morgan sees further upside potential of more than 20%. For the analysts, Rheinmetall's long-term prospects are bright, even if there should be a weaker quarter. After all, capacities have to be built up in the defense industry, and that takes time. The analysts, therefore, recommend the shares of Germany's largest defense company with an "Overweight" rating and a price target of EUR 600. The Company will report on its performance in the first quarter of 2024 on May 14.

Varta share without upside?

While Rheinmetall will soon be reporting on the first quarter, Varta shareholders are still waiting for the figures for 2023. However, the delay in the annual financial statements is one of the more minor problems for the former German battery hopeful. The collapse of the core business, a failed attempt to expand into electric vehicle batteries, and financing problems weigh heavily on the Company and its shares. And then a cyberattack further delayed the preparation of the annual financial statements, making exclusion from the SDax likely. It is, therefore, not surprising that the share price has plummeted from EUR 20 to EUR 9 since January alone. To put this in perspective, in August 2021, the share stood at around EUR 160.

But even at the current level, analysts see no upside potential. Warburg recently reduced the price target from EUR 15 to EUR 8. The recommendation is consequently "Sell". DZ Bank also rates Varta as a "Sell". The target price here is EUR 8.80. The analysts currently see no way out of the muddled situation of weak demand, strong competition, and uncertain financing.

The Varta share is likely only for gamblers, even if financing is secured. Operational success is anything but assured, and the Company is still valued at EUR 380 million. On the other hand, things are getting really exciting for Almonty this year. The closer it gets to the opening of Sangdong, the more likely it is that the share price will rise significantly. Rheinmetall now boasts a hefty market capitalization of EUR 22.5 billion. However, the geopolitical environment offers the Company the opportunity for sustainable growth. However, there can always be price setbacks, as seen last week, or even a major correction. However, the long-term prospects remain favorable.