Latest Research

Gold Sector - The More You Drill The More You Find

Argonaut LimitedGold prices have risen by 10% in AUD terms and 7% in USD terms in FY18YTD. Funds flow has been predominantly into grass roots explorers evident in the surge of the ASX Small Resources (XSR) index which has risen by 36% FY18 YTD vs the ASX Gold Index (XGD) up just +14% FY18YTD. Equity valuations of the mid-tier producers continue to look stretched and we struggle to identify significant value. Emerging developers have recorded only incremental gains which presents an opportunity for investors looking for companies that screen cheaply with short timelines to production. Our key picks include Regis Resources (RRL) in the producers and Dacian Gold (DCN), Gascoyne Resources (GCY), Gold Road (GOR) and West African Resources (WAF) in the emerging developers. We also identify the next tier of potential development plays including Explaurum (EXU), Genesis Minerals (GMD) and Alice Queen Ltd (AQX) who look to make the transition into production. Catalyst Metals (CYL) is also attractive with a belt scale play in proximity to Kirkland Lake (KLA) Fosterville operations.

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SCEE (SXE) - Full Run-Rate

SCEE LogoSXE’s 1H18 revenue was broadly in-line with our forecast, although costs were higher than expected resulting in softer than anticipated earnings. The substantially increased revenue highlights the transformational nature of the Heyday acquisition. SXE now operates in the key growth areas of commercial and infrastructure construction, whilst maintaining its presence in resources (which should be seeing increased capex in coming years). Despite an unchanged positive view on SXE’s future growth potential, limited upside to our $0.80 valuation causes us to maintain a hold recommendation.

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Austin Engineering (ANG) - Into The Replacement Cycle

Austin Engineering LogoMuch improved market conditions in 2H17 extended into 1H18, where ANG delivered $155m revenue and $12.2m normalised EBITDA, slightly ahead of the $10-12m guidance range. We expect the environment to continue to support further gains in coming years, noting ANG points to a large number of pipeline opportunities in outlook commentary. Our blended valuation of $0.270 (prior $0.265) suggests a hold call remains appropriate pending conversion of opportunities at suitable margins to backfill our FY19+ forecasts.

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Swick Mining Services (SWK) - Margins Ticking Up

Swick Mining Services LogoSWK’s 1H18 results were in-line with our forecasts and importantly showed margin improvement from FY17 lows. Guidance for full-year FY18 EBITDA for the drilling business of $17.5-19.5m on $135-145m revenue implies further margin expansion on the back of multiple exited underperforming contracts. Focus on working with clients who show a willingness to work with SWK on reaching agreeable terms of contract renewals should provide the potential for SWK to generate more appropriate returns on capital. We maintain our view that SWK’s current EV is largely supported by its core drilling business, with investors essentially buying an option on Orexplore at current prices. Buy maintained on a $0.40 valuation.

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GR Engineering (GNG) - Moving Forward

GR Engineering LogoGNG’s 1H18 underlying EBITDA of $12.5m on $177.2m revenue was slightly ahead of our forecasts, although the Company has peeled back 2H expectations reducing revenue guidance to $270-300m (previously $300-330m). We would expect stronger margins in the 2H as more profit may be recognised at the back end of the soon to be concluded Mt Morgan and Dalgaranga projects. We believe investors can begin to look beyond customer disputes with EGS and WLF and focus on long-term growth prospects in an improving resources sector. Therefore, we maintain our BUY call on a $1.60 valuation.

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