November 23rd, 2022 | 12:10 CET
K+S, Defense Metals, RWE - Profiting from stocks that fight shortcomings
Table of contents:
K+S - Record year ahead
Since the sanctions against Belarus, the price of potash rose significantly in 2021. With Russia's invasion of Ukraine, 2 of the world's four largest fertilizer producers are out of business. Wheat exports from Ukraine have also come to a near standstill since the conflict began. This is further fueling the demand for fertilizers. Even though the price of potash fell in the short term, prices have been picking up again since July. Good conditions for K+S, which was the winner of the MDAX in 2021. However, increased costs are also making themselves felt at the Kassel-based company.
On November 10, the Company presented its Q3 figures. Sales for the quarter were around EUR 1.5 billion, an increase of almost 100% compared to the same period last year. EBITDA was EUR 633 million. For comparison, in 2021, the figure was just EUR 121 million. Adjusted free cash flow reached a record level of EUR 580 million. K+S intends to use the money to buy back another bond. The bond would be due in 2024, thus offering the opportunity to save the interest of 3.25%. Bondholders have until the end of November to accept the offer.
At the end of the year, EBITDA is expected to be around EUR 2.4 billion, which would break the record set in 2008. However, despite the good prospects, the share price has remained the same. It is currently paying EUR 20.53 for one share. Following the figures, analysts issued 4 buy recommendations, with only UBS recommending "hold" with a target price of EUR 22. The other price targets were between EUR 26 and EUR 29. Experts expect the Company to increase its dividend significantly. As a dividend hunter, investors can build a first position here.
Defense Metals - 7 drill holes, 7 hits
At the beginning of this article, it was mentioned that China has built up a kind of monopoly in rare earths. This raw material is considered critical because there are few substitutes for many applications. For example, there is no substitute for neodymium in the production of powerful magnets. These magnets are essential for wind power, and today's electric vehicles also require rare earths. If China cuts us off, there will be no more smartphones, LEDs, and other high-tech devices. Relief from this dependence could be provided by Defense Metals, which operates the 4244-hectare Wicheeda project in Canada. The preliminary economic feasibility study indicates that the Company could produce about 24,500 tons of the raw material per year.
The most recently completed drill program drilled 18 holes totaling over 5,500m. Since mid-October, there have been various reports of 7 successful drill holes. Each of these holes intersected high-grade rare earth oxide. The lowest value was 1.39% and ranged up to 6.7% at the peak. When taking only the lowest values from each hole, the average is still a good 2.3%. Results for 11 additional holes over 3,017m are pending and expected in the coming weeks. Craig Taylor, CEO and Director of Defense Metals stated, "We continue to advance the Wicheeda project and are confident that these results will contribute significantly to our goal of an improved resource category for a future Pre-Feasibility Study (PFS)." The preliminary feasibility study is expected to commence later this year.
In parallel with the drilling program, the Company is conducting flotation tests on various samples. The property can be divided into three distinct lithologies. 73% consists of dolomite carbonatite (DC), xenolithic carbonatite (XE) at 24% and 3% syenite. DC recoveries are over 80%, XE comes in at around 70%, and syenite is 79%.
Operationally, things are going well, and the share price has been able to break away from its lows at CAD 0.165. It has been running sideways between CAD 0.215 and CAD 0.28 since mid-September. Currently, the share price is in the middle of the range at CAD 0.25. Further positive drilling results could provide new momentum and improve the figures in the preliminary feasibility study.
RWE - Convincing figures
In a world where energy is becoming increasingly scarce, RWE is a company well-positioned to benefit. RWE is one of the world's leading power and gas companies with a strong presence in both Europe and the United States. The Company has a long track record and today is one of the few with the scale and expertise to meet the growing energy demand. In the future, the Group also wants to do without coal. The phase-out is planned for 2030.
The figures for the third quarter were presented on November 10. The Essen-based company benefited from the high demand for electricity coupled with low generation capacity. EBITDA was EUR 4.1 billion after 9 months, exceeding analysts' expectations. At year-end, adjusted EBITDA is expected to be between EUR 5 and EUR 5.5 billion. The Company pays municipalities 0.2 cents per kilowatt hour from renewables. In this way, the Group wants to encourage municipalities to install renewable energies on site.
Fears of an excess profits tax on renewables in the UK, on the other hand, appear to be unfounded. The impact will be limited. A higher tax rate will apply from GBP 75 per megawatt hour. After the quarterly figures, there were, without exception, buy recommendations with price targets between EUR 49 and EUR 54. The share is currently trading at EUR 41.44. As long as the energy crisis persists, RWE will continue to earn well. However, the dividend yield is only slightly above 2%.
At times when many things are becoming scarce, it is worthwhile to invest in companies that can eliminate these shortcomings. It is the only way to become more independent of China and Russia. K+S benefits from the sanctions against Belarus and Russia. At the same time, it helps to ensure food production. Defense Metals could at least partially solve a possible shortage of rare earths. Rare earths are enormously important for the future. RWE supplies electricity and gas, both of which are currently in short supply and are likely to remain so for some time to come.
Conflict of interest
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