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Like everyone, I’ll be glued to the US Election results on Wednesday our time. While the election result could potentially roil the share markets – especially if the count doesn’t give a clear-cut decision – investors will also be on the hunt for individual companies that could benefit one way or the other.
In that light, here are two potential beneficiaries of a win for each candidate.
Market capitalisation: $2.5 billion
Three-year total return: 16.8% a year
FY21 projected yield: no dividend expected
FY21 projected price/earnings ratio: 47.2 times earnings
Analysts’ consensus valuation: $3.35 (Thomson Reuters), $3.725 (FN Arena)
Australian company Lynas is a unique beast on the stock market: it mines and produces the so-called “rare earths,” which are a basket of minerals that are crucial to the manufacture of high-tech products. They include neodymium and praseodymium, which are in strong demand for the manufacture of permanent magnets that are essential for fighter jets, electric motors, batteries, lasers and wind power generators – as well as consumer electronics and COVID-19 ventilators.
Lynas expects areas such as electric vehicles, green technologies, consumer electronics, robotics and medical devices to boost demand for some other elements from its rare earths menu, such as dysprosium, cerium, terbium and lanthanum.
Lynas mines its rare earths at Mt Weld in Western Australia, which is a low-cost, long-life, high-quality deposit, and processes the concentrate at its separation plant in Malaysia, the world’s largest. Lynas has grown to supply 20% of the world’s demand for separated rare earth products: the only other source in the market at present is China.
In April, Lynas won a contract to help design a new heavy rare earths (HREE) separation plant in the US: there are no HREE separation plants outside China, and the US wants to rebuild its rare earth processing industry to escape its dependence on China. (The only producing US rare earth mine, Mountain Pass in California, sends its ore to China for processing!) The contract with the Pentagon was signed in July.
Lynas is planning a second processing facility, in Kalgoorlie, to be operating by July 2023, producing mixed rare earth carbonate that will undergo further processing at the Lynas Malaysia Plant.
At this point, Lynas is the only significant producer of separated rare earths outside of China. You could say it is a Trump stock: last month, Trump signed an executive order to boost domestic production of the crucial metals, and Lynas is helping the US secure a reliable supply. But the US doesn’t have a producer of the scale of Lynas.
However, Lynas is more of a Biden stock, given that Biden promises to spend roughly US$2 trillion ($2.8 trillion) on clean energy and to tackle climate change. This includes the installation of 500 million solar panels within five years. A Biden win would likely see the renewable-energy applications of rare earths become even more important than the defence applications.
Market capitalisation: $4.7 billion
Three-year total return: 15.5% a year
FY21 projected yield: 6%, fully franked (grossed-up, 8.6%)
FY21 projected price/earnings ratio: 8.2 times earnings
Analysts’ consensus valuation: $26 (Thomson Reuters), $26.567 (FN Arena)
As a commodity essential for battery storage, lithium will also receive a huge boost from the Biden agenda, and investors are looking around for lithium stocks. In September, the market got excited when ASX-listed minnow Piedmont Lithium announced an agreement to supply spodumene (lithium ore) concentrate to Tesla for five years, starting in July 2022: Piedmont will supply Tesla from its eponymous Piedmont deposit in North Carolina, meaning that the deal represents the start of the first domestic lithium supply chain in the US. But it’s not up and running yet.
An alternative exposure is Mineral Resources Limited, which operates two hard-rock lithium mines in Western Australia, and is one of the world’s largest owners of hard-rock lithium deposits.
This is important because, last year, when car giant Volkswagen described lithium as the “irreplaceable element of the electric era,” it also described hard-rock lithium mining as the “future-proof solution, both commercially and in terms of sustainability,” compared to the brine method of pumping briny salts to the surface and extracting the lithium by evaporation.
MinRes operates the Wodgina mine (in a 40% joint venture with US company Albemarle, the world’s biggest lithium producer), which was mothballed last November, and won’t reopen until prices improve. The partners remain confident in lithium’s long-term positive fundamentals, and in Wodgina’s future, saying it is a world-class asset with a mine life of more than 30 years. MinRes also operates the Mt Marion lithium mine near Kalgoorlie, which is still operating.
The other great attribute of MinRes is that until lithium’s potential starts to be realised, you have the diversification of the company’s iron ore mines and global mining services contracting business to sustain your investment.
Market capitalisation: $973 million
Three-year total return: 17.6% a year
FY21 projected yield: 3.3%, unfranked
FY21 projected price/earnings ratio: 11.3 times earnings
Analysts’ consensus valuation: $4.34 (Thomson Reuters), $3.90 (FN Arena)
In general, US military spending has risen under Trump, with budgeted defence spending of US$700 billion in 2018, US$716 billion in 2019 and US$733 billion in 2020 – although he balked at an increase to US$750 billion, calling it “crazy.” Although the Trump administration has not committed the US to any new military conflicts, it has certainly been keen to match China in brinkmanship, especially in Asian waters: that is going to keep the US military on its toes, and require plenty of spending on new kit – more spending than the Democrats, traditionally, can stomach.
Perth-based Australian shipbuilder Austal should stand to benefit. It has a major operation in the US, at its shipyard in Mobile, Alabama, where it has primary contracts to design and build two classes of combat vessels for the US Navy (it is the only foreign company ever to be prime contractor in building USN ships). Its flagship vessel is the Littoral Combat Ship (LCS), which is a high-speed, agile and multi-mission combatant that delivers superior seakeeping and performance. Its second class of ship is the Spearhead-class Expeditionary Fast Transport (EPF) ships. Austal has delivered 12 of the Independence-class LCS class and 12 of the Spearhead-class to the USN, making a total of 24 ships in just over ten years, including three this year. The company has 45 vessels under construction or scheduled, with 31 ships to be delivered to the US and Australian Navies (and Australian Customs) over the next three years.
Austal actually lost a ship from its order book earlier in the year, when EPF-15, the next vessel in the Spearhead-class, was removed from the defence budget, with the money transferred to the President’s budget for building the wall between the United States and Mexico. Austal expects it to be reinstated in the next Budget – that may rely on the election result.
In October, the future USS Mobile (LCS 26) successfully completed acceptance trials in the Gulf of Mexico: it is the third Austal-built ship to complete acceptance trials for the USN this year.
The company’s LCS program has five ships currently under construction in Mobile, and only last week, Austal held a keel-laying ceremony for the 16th LCS Independence-class vessel, the USS Santa Barbara.
Austal has committed to a US$100 million ($139 million) extension to its Mobile, Alabama shipyard to build steel warships (an investment 50% funded by the US Government) and the company says this will increase its naval shipbuilding opportunities threefold. It is also expanding into repair and maintenance work. With an order book of $4.3 billion, Austal looks to have a very strong business outlook, based on no revisions to orders coming out of a new Democrat administration.
Market capitalisation: $7.4 billion
Three-year total return: 5.7% a year
FY21 projected yield: 0.9%, unfranked
FY21 projected price/earnings ratio: 16.1 times earnings
Analysts’ consensus valuation: $16.43 (Thomson Reuters), $16.40 (FN Arena)
US and Australia-based steel manufacturer BlueScope Steel was an original beneficiary of Donald Trump’s election, through its wholly owned North Star steel mill. Being located in the heart of America’s manufacturing sector, in Ohio, North Star sells 95% of what it makes to customers within a 350-kilometre radius of the plant, mainly to automotive and construction customers.
BlueScope also benefited initially from the Trump administration’s trade war with China, which saw steel imports to the US slapped with 25% tariffs. In 2018 the company won a White House deal to exempt the 300,000 tonnes of steel it ships to the US annually from Australia, while also benefiting from a dramatic lift in profits at its US operations as the tariffs sent the price of US-made steel surging to seven-year highs (in July 2018).
But US steel prices then retreated to where they were before the tariffs were announced, as slumping demand, including from China, rising US steel-making-capacity and pressure on steel customers in the US – including the big carmakers, General Motors and Ford – weighed on them. Then came the trade wars and then COVID.
In August 2019, BlueScope pushed the button on a $1 billion expansion at North Star: it’s targeting commissioning during the June 2022 half year, with full ramp-up approximately 18 months later. The company says North Star is a best-in-class asset, that is much better placed that many of its ‘legacy’ blast-furnace competitors in North America, and mill closures look likely to lead to regional under-supply in the medium term – when a larger North Star reaches full capacity. In fact, US steel prices have definitely begun to recover, as the US economy is rebounding,
The company says it is well-positioned for changes in societal trends in the wake of COVID, for example Government infrastructure spending Localisation of supply chains, and logistics and data centre growth. Thus, the beauty of BSL is that it would also benefit from Biden stimulus!