ESG Focus: ASX300’s Green Revenue Boom

ESG Focus | Oct 28 2022

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ESG Focus: ASX300’s Green Revenue Boom

Green revenue provided one of the few highlights in an otherwise dour, interest-rate hampered August reporting season, and this article checks out the season’s darlings: green commodities and mining services.

-Green revenue investment scaling up
-Future-facing commodities take off
-A tale of two green commodities markets 
-New investments and capital expenditure
-Mining services having a ball
-Outlook – will FY23 be the year of geopolitics?

By Sarah Mills

The ASX300 reporting season revealed a sharp escalation in the focus on green revenue streams.

So sharp, in fact, that one article could not do the subject justice, so we have split this subject into three focus areas: green commodities and mining services; green energy; and “other”, which includes property and building, automotive and fleets and service stations, recycling, retailers, small caps and IPOs.

This article relies heavily on research from Macquarie, Jarden, Morgan Stanley, Citi, and Goldman Sachs.

It’s all about the e-word (energy)

The Ukraine invasion and spiralling energy and supply-chain inflation triggered a global interest rate-tightening cycle in the June half of FY22, threatening recession.

The upshot was a de-rating of the technology sector and growth stocks in favour of value, and investors flocked to companies with proven green revenue streams as a safe haven.

So the ASX300 reporting season proved a tale of two green markets – companies with proven green revenue streams, particularly those skewed to energy markets in the wake of the Ukraine conflict, attracting masses of capital while green growth companies without immediate revenue streams floundered.

This was also the case in the IPO market, where capital dried up for nearly all but lithium, nickel and gold miners (gold remaining the perennial speculative commodity despite global market weakness during the period).

The mining sector pivoted sharply to future-facing commodities during the August reporting season – and this was the case for big, medium and small caps.

Green commodities, mining services, and industrial materials companies all posted strong growth in green revenue.

There was also a divide in the green commodities market, with companies producing supply-constrained battery metals such lithium, nickel, platinum and cobalt gaining favour over other commodities such as iron ore, copper and rare earths.

Those fortunate enough to catch the green commodities tide are now drunk with capital and those that missed it have been floundering on the shores, starved of capital, waiting for the next tide. 

Gas and nuclear energy producers, while hardly green, technically count as green for now, given their inclusion in the European green taxonomy.

Gas and uranium stocks rallied (as did pariah fossil-fuel stocks such as coal) in response to Russia’s invasion of the Ukraine. We cover developments in this sector in a separate story.

Otherwise, the big winners this year were mining services as big capital supported companies they considered to be integral cogs in the transition.

Any sign that a company can and will facilitate the green transition going forward (and why not), either through innovation or service, is likely to continue to attract capital.

The introduction of Scope 3 emissions reporting was also one of the most significant developments in the season, given this should accelerate the push to emissions reduction and increase demand for green products throughout supply chains, generating green revenue streams.

[Scope 3 reflects emissions by customers]

Suncorp ((SUN)), QBE Insurance Group ((QBE)), Mirvac Group ((MGR)), Charter Hall Group ((CHC)), Woolworths ((WOW)), Auckland International Airport ((AIA)), and Spark Energy ((SPK)) were among the many to set Scope-3 targets.

Green Commodities Steal The Show

Green commodities, particularly battery-metals and chemicals, proved the star performers in the ASX300 reporting season, lithium miners in particular being forgiven guidance misses in an otherwise unforgiving market.

As interest rates rose, investors flocked to large companies with proven projects, leaving growth companies, particularly in less immediately demanding ones such as rare earths, scrounging for capital, unable to get projects off the ground.

This was exacerbated by the fact that construction inputs for new developments had, in some cases, nearly doubled. For example, Australian Strategic Minerals ((ASM)) forecast capital expenditure bill likely nearly doubled over the period.

Demand for green commodities splits

Despite demand remaining strong for all green commodities, some fared better than others in the June half, the batteries mineral complex tending to fare better than base metals due largely to supply constraints for the former.

It also likely reflects the fact that for electric vehicles to be competitive with internal combustion engines, the combined cost of green commodities can’t exceed a certain amount.

Lithium prices have soared and remain elevated. Cobalt prices also took off before retreating in the September quarter. 

Nickel prices spiked soon after the invasion of Ukraine, before beating a hasty retreat, but remained generally elevated.

Copper prices took a backseat before retreating sharply in June. Iron ore prices held up before following nickel down in June.

Rare earths companies and others did not receive the support of big capital over the period. 

Rare earths prices such as for neodymium spiked post the invasion, before retreating sharply, and the share price of graphite producers such as Syrah Resources ((SYR)), while retaining gains, were volatile and failed to make headway.

Lynas Rare Earths’ ((LYC)) share price, for example, fell -25% in the June half despite posting record sales, after the neodymium and praseodymium prices jumped 75% over the previous June quarter.

Major Capital Expenditure And Investment In Batteries Inputs

During the June half and up to the August reporting season, several major projects were announced.

Lynas Rare Earths provided an August update on its processing facility in Kalgoorlie “the world’s only significant producer of separated rare earths outside of China”, and says it is planning large mine capacity expansions.

In May, the company started construction on the facility and announced a capital expenditure bill of roughly $500m.

Production is expected to be shipped to its Malaysia facility or to the company’s proposed US Rare Earths Separation Facility

Iluka Resources ((ILU)) in April 2022 reached a final investment decision on its development of Australia’s first fully integrated rare earths refinery at Eneabba at a cost of $1.2bn.

BHP Group ((BHP)) upgraded its Nickel West Smelter at Kwinana and BHP’s August bid for OZ Minerals ((OZL)) was the talk of the town.

Privately held Sun Metals green zinc refinery (fired entirely by renewable energy), in Townsville, is on track to become the world’s first fully green zinc refinery committed to run on renewable energy by 2025. 

Wesfarmers ((WES)) announced development capital expenditure of $304m and capitalised interest relating to its Mt Holland lithium project and Kwinana refinery.

IGO ((IGO)) announced a lithium joint venture at Kwinana, in which it holds a 49% stake, a combined mining a processing project.

In July, US-listed Albermarle Resources commissioned a lithium hydroxide refinery in Kemerton in Western Australia.

Mining Services Having A Heyday

The green-revenue spotlight also fell on mining services during the August reporting season, as the sector followed the money.

Many providers pointed to partnerships with technology companies and set market share targets.

Worley ((WOR)) stole the show in the February reporting season, announcing a green revenue target of 75% of all businesses, and then continued to press this advantage in the August season, reporting that its factored sales pipeline rose 30%.

Says Worley’s Annual Report:

“80% of our customers by revenue have net-zero commitments and they are turning to us to provide the expertise, agility and scale to bring efficiency and commercial viability to their decarbonisation projects.

“And we’re starting to see our business scale up in line with increasing investment across all our sectors”.

Worley estimates $131trn in total capital expenditure will be needed to reach net zero by 2050, requiring a four-fold increase in global energy investment. 

“We have strong capacity in areas like hydrogen, battery materials, low-carbon fuels and carbon capture, use and storage,” says the report.

Worley CEO Chris Ashton says:

“We’re uniquely positioned across high-growth markets. A wave of sustainability spend is coming, and we are in a leadership position.

He added that a four-fold increase in global energy investment will be required over 30 years.

Other listed mining services companies followed Worley’s December lead in the June half, nearly all announcing green revenue initiatives and targets – some more ambitious than others.

The sector enjoyed a sharp uptick in share prices across the board as investors realised all mining services boats are likely to rise with the renewable energy tide (and even green laggards given the Ukraine invasion fired demand for fossil fuels).

Lycopodium ((LYL)) reported it had secured a strong pipeline of green contracts, after being awarded several lithium projects during the year, particularly in the lithium processing space, including the Goulamina Lithium Project in Mali, one of the largest deposits in the world. 

It is also participating in several battery storage research projects and the Hydrogen Energy Supply Chainproject (a world-first pilot to convert locally produced hydrogen for international transport).

Parenti Global ((PRN)) announced it was reducing its focus on the gold industry and increasing its exposure to battery minerals from 18% in FY20 to 23% (a relatively mild ambition compared with Worley).

Emeco Holdings ((EHL)) announced it was shifting from coal to nickel and copper.

DDH1 ((DDH)) advised it aimed to be a leader in battery mineral mining investment in coming years, spying a golden age for minerals, noting that its drilling equipment was commodities agnostic.

Ventia Services ((VNT)) pointed to a global study from Arcadi, which estimates Australia will spend $165bn on clean energy projects (renewable energy and storage) over the next years, if it plans to meet 2050 net-zero commitments.

NRW Holdings ((NWH)) announced a path towards attracting green tech and iron-ore revenue by 2025.

Downer EDI’s ((DOW)) annual report was pretty low on details in terms of revenue streams, saying its greatest challenge was to decouple its greenhouse gas emissions from revenue growth (‘nuff said). Nevertheless, its share price rose strongly, reflecting the broad-based demand spike in energy markets.

Meanwhile, analysts note that many mining services companies delayed fleet upgrades, waiting for more or low-emission equipment technology, which could increase their capital expenditure bill.

Renewables and Batteries

While resources typically stole the show, renewables and battery storage also made an appearance in the August reporting season.

Mineral Resources ((MIN)) announced it plans to extend the battery value chain, building a battery manufacturing facility in Western Australia, and is seeking partners in the venture.

Lynas announced a $500m production capacity expansion at Mt Weld, stating growth in wind turbines had kicked up demand.

Outlook For Battery Metals

Goldman Sachs declared in a recent research report that the battery metals bull market has peaked. 

The analyst forecasts that lithium prices will moderate over the next couple of years as global supply grows to meet demand, particularly Chinese supply.  

But it expects the impending oversupply to sow the seeds of a new bull market.

Now, much depends on policy incentives says the analyst, particularly in relation to geopolitics, and notes that cobalt has a more constrained supply path. 

UBS and Citi disagree, expecting demand to remain strong over the next couple of years.

FY23 The Year Of Geopolitics

Should Goldman Sach’s assessment prove correct, FNArena suspects FY23 may be the year of geopolitics. 

Should battery metals prices come off the boil as supply increases, we theorise that geopolitically sensitive stocks may receive large cash injections from governments and big capital. We cover this in a separate story on battery inputs.

Those green commodities expected to benefit from geopolitical tension, include rare earths — given China has a stranglehold on rare earths production — graphite and battery anodes.

For example, Syrah Resources ((SYR)) this week received a US$200m grant (no small change) from the US Department of Energy to develop its Vidalia graphite mine.

Meanwhile, Goldman Sachs sees a recovery in China’s property development in 2023, which may increase demand for iron ore, which is also a key input to renewable infrastructure.

That wraps ups the reporting season sustainability round-up for green commodities and mining services (just a sample of the bigger picture).

In Part 2 of its series on green revenue streams, FNArena checks out developments on the energy front.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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CHARTS

AIA ASM BHP CHC DDH DOW EHL IGO ILU LYC LYL MGR MIN NWH OZL PRN QBE SPK SUN SYR VNT WES WOR WOW

For more info SHARE ANALYSIS: AIA - AUCKLAND INTERNATIONAL AIRPORT LIMITED

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For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP

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