April 6th, 2022 | 10:08 CEST
K+S, Barsele Minerals, Shell - Which commodity stocks belong in the portfolio?
Table of contents:
"[...] I wouldn't be surprised if the project ends up showing more than 5 million ounces. [...]" Gary Cope, President and CEO, Barsele Minerals
K+S - Share is overbought
Already in 2021, the price of potash reached a new 13-year high. One of the reasons for these high prices is the sanctions against Belarus, or more precisely Belaruskali, which covered 20% of the world market before the sanctions. The Kassel-based fertilizer producer K+S has significantly benefited from this. While high debts and low margins were still squeezing the Group at the beginning of 2021, the steadily rising potash price has made the Company the top performer in the MDAX. If it wants to at least partially offset the loss of wheat exports from Russia and Ukraine, fertilizer is needed to boost the harvest.
The annual financial statements presented on March 10 show just how well things went for the Kassel-based company in 2021. Sales climbed 32% to EUR 3.2 billion. EBITDA shot up 262% to EUR 969 million. With debt so high, the Group has restructured to cut costs. Debt was significantly reduced by selling the American salt business for USD 3.2 billion. The Group also intends to pay a dividend of EUR 0.20 again. According to management, the Company is targeting EBITDA of between EUR 1.6 and 1.9 billion this year.
Since the beginning of the year, the share price has almost doubled again. The share is currently trading at EUR 28.51, just below the high for the year of EUR 30.07. The share is clearly overbought, but every minor setback is currently used to enter the market. Analysts are also slowly becoming more cautious about the share and advise holding rather than buying. Baader Bank has issued the latest buy recommendation with a price target of EUR 30.00. There does not seem to be much upside potential left at the moment.
Barsele Minerals - Clearly undervalued
Gold has served as a safe haven against inflation for decades. The breakout of the gold price helps gold producers to increase their earnings significantly. Barsele Minerals is a gold explorer that has not yet been able to benefit from the increased gold price. Yet the Barsele project, which is over 34,500 hectares in size, is located in politically secure Sweden in a mining region with cheap electricity, water, rail access and roads. As of 2019, there is a mineral resource estimate of 2.4 million ounces of gold under the NI 43-101 standard. The project is 45% owned by Barsele Minerals, with Agnico Eagle holding the other 55%.
The Company wanted to buy Agnico Eagle's shares last year, but due to Corona issues, the project was put on hold for the time being. Negotiations on the acquisition of the project by Barsele Minerals continue in the background. The cooperation between the two parties remains for the time being, and in January, a gold discovery of 90.8 g/t gold was announced. Only 3km of the 8km long gold-bearing shear zone has been explored. Management plans to initiate another 30,000m drill program over the next 1.5 years and believes this will increase the mineral resource estimate to 3.5 million ounces of gold.
Management believes in the project's success and has a 25% interest in the Company. 50% is in institutional hands, and 14.9% is in the hands of Agnico Eagle. The market capitalization is just 59 million Canadian dollars (CAD). If a value per ounce of gold in the ground of USD 200 is assumed, the total project has a value of USD 480 million or about CAD 600 million. The share of Barsele Minerals is, therefore, CAD 270 million. One can see how undervalued the project is at the moment. The large gold deposit and existing potential could tempt other gold producers into an acquisition. The share is currently trading at CAD 0.45, which is below the price of the last private placement of CAD 0.50.
Shell - Good news operationally
The oil price already climbed decently in 2021. But since the beginning of the year, oil has entered turbo mode, pushing WTI, for example, up to almost USD 130. The main reason for the price explosion is the Ukraine conflict and the associated sanctions against Russia. Shell is benefiting from the high energy prices. The Company will not continue its business in Russia in the future, and Shell service stations in Russia have also been closed. However, the high oil price will continue to boost the Group's earnings despite the Russia outage.
Last year, adjusted earnings were USD 6.4 billion. Most recently, there has also been good news operationally. Working with Atlantic Shores, the Group won a tender for an offshore wind farm in the New York Bight. On March 29, it announced the start of production from a subsea project in the Gulf of Mexico. Peak production is 20,000 barrels of oil equivalent per day. In late March, the Colibri project in Trinidad and Tobago delivered gas for the first time. Peak production here is expected to be around 43,000 barrels of oil equivalent.
Adding to all the good news is a USD 8.5 billion share buyback program and a 4% dividend increase. Analysts are all positive about the stock. The price targets range from EUR 25.46 to EUR 32.95. The Royal Bank of Canada has even included the Company's stock on its "Top 30 Global Ideas 2022" list. Currently, the share is trading at EUR 25.16. Even if oil is considered dirty, there will be no getting around black gold in the coming years.
The producers of raw materials benefit significantly from the high prices. But the potentials are not always equally good. In the case of K+S, the share has risen sharply in the past year and continued the trend this year. Here, one should wait for a real setback. Barsele Minerals is currently significantly undervalued, which fuels takeover fantasies. Pay attention to the news here. Shell is currently earning a golden nose and can use this strong position to drive the transformation to a sustainable company.
Conflict of interest
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