Morning Notes

12/01/2015 Argonaut Morning Note

Market Update & Important Indicators

US stocks have dropped, following European equity markets lower, after a mixed jobs report and another decline in oil prices. The Dow Jones Industrial Average sank 170.50 points (0.95 per cent) to 17,737.37, concluding a volatile week in which the blue-chip index registered triple-digit moves all five days. The broad-based S&P 500 fell 17.33 (0.84 per cent) to 2,044.81, while the tech-rich Nasdaq Composite Index lost 32.12 (0.68 per cent) at 4,704.07. The US economy added a solid 252,000 jobs in December, but analysts expressed worries at weak wage growth.

Europe's equities sank on disappointment over the reported size of potential bond purchases from the European Central Bank, while Madrid was rocked by giant bank Santander's massive capital hike. Most European markets gave up at least half of the gains from the day before. London's FTSE 100 shed 1.05 per cent to close at 6,501.14 points, while Frankfurt's DAX 30 lost 1.92 per cent to 9,648.50 points and the CAC 40 in Paris dropped 1.90 per cent to 4,178.07. Madrid's IBEX 35 felt the heaviest losses, plunging 3.91 per cent to 9,719 points, with shares in Spanish banking titan Santander collapsing on shock news of a 7.5 billion euros ($A11.25 billion) capital raising

Asian shares mostly climbed for a third straight day. Tokyo gave back most of its early gains but ended marginally higher, adding 0.18 per cent, or 30.63 points, to 17,197.73, while Seoul surged 1.05 per cent, or 20.05 points, to 1,924.70 and Sydney rose 1.56 per cent, or 84.15 points, to close at 5,465.6. Hong Kong rose 0.35 per cent, or 84.42 points, to 23,919.95 but Shanghai slipped 0.24 per cent, or 8.05 points, to 3,285.41. The mainland Chinese market swung wildly through the day, at one point adding 3.38 per cent following news that Chinese inflation for December edged up from the previous month but fell well short of the government's target for the full year.

The market on Friday closed higher for a second session in a row, boosted by a positive lead from US markets and a steady oil price. The benchmark S&P/ASX200 index was up 81.40 points, or 1.56 per cent, at 5,465.6 points, while the broader All Ordinaries index was up 80.7 points, or 1.51 per cent, to 5,440.1 points. The Australian market looks set to open lower after falls on Wall Street following a mixed jobs report. At 0750 AEST on Monday, the March share price index futures contract was down 40 points at 5,382. The Australian Bureau of Statistics releases housing finance figures for November, while the ANZ job advertisements series for December is also due out.

Talk of $US40-a-barrel oil has picked up pace as crude prices again fall, to their lowest point since April 2009. The US benchmark, WTI crude for February delivery, on Friday lost US43 cents to end at $US48.36 a barrel on the New York Mercantile Exchange. In London, the Brent benchmark for February finished off US85 cents at $US50.11, after falling as low as $US48.90 early in the day.

Base metals on the LME were mostly lower with the exception of Lead which ended 1.0% higher. Gold stepped up 1.2% to US$1,223.4/oz and Brent crude sank another 0.85% to US$50.11/bbl. The AUD is buying US$0.821.

In This Issue

Argonaut Metals and Mining – December Quarter preview

Argonaut provides a preview for the December Q 2014. The Q was marked by a distinct decline in Resource equities amidst relatively stable pricing in AUD terms. The focus by producers remains strongly upon performance and cost optimisation as opposed to growth. Most key commodities fell in USD terms, but rose in AUD terms (with the exception of iron ore). However resource equities underperformed commodity prices with gold, copper and nickel producers falling 4%, 13% and 20% respectively. During the Q Argonaut visited Atrum Coal’s (ATU) Groundhog, Fortescue Metals’ (FMG) operations, Kingsrose Mining’s (KRM) Way Linggo and Paringa Resources’ (PNL) Buck Creek Coal.

Empire Oil & Gas | Refocus On the Perth Basin will reap dividends
Empire Oil & Gas (Empire ASX: EGO) is an Australian onshore gas and condensate producer located in the Perth Basin. EGO is currently supplying ~8TJ/d of gas to Alcoa of Australia Limited (Alcoa) under a Gas Supply Agreement (GSA). In addition to the gas, EGO also produces 360 bbl/d of condensate which is sold to the BP Kwinana refinery. Whilst it has had a chequered history, we believe the new board and management are putting EGO on the right track. At present, EGO is the second largest producer (behind AWE) in the Perth Basin with the largest acreage position ~12,000km2. Going forward the Company is looking to fund a well-planned, evaluation and development program to become a long term producer generating revenue of ~A$100,000 p/day at current prices.

Fleetwood (FWD) | Ceasing Coverage
We have reviewed our forecasts and introduced a 1H:2H split for FWD. Education sector demand has not been enough to offset very weak earnings elsewhere and our 1H15 forecasts reflect these subdued conditions. This extends a prolonged downward trend and we find little to offer encouragement for a near term turnaround. We are ceasing coverage after this report.

Fortescue Metals (FMG) 
Fortescue Metals (FMG) released a Resource upgrade on the Chichester hub with an increase of >300Mt equating to an additional ~3 years mine life. Revised estimations added 70Mt to Cloudbreak (CB), 46Mt to Christmas Creek (CC), 106Mt to Kutayi and 82Mt at Mount Lewin. 

Mount Gibson Iron (MGX) 
Mount Gibson Iron (MGX) has been severely impacted by the loss of its Koolan Island mine (KI) following the failure of the sea wall. Given the required cost to resurrect the mine and current suppressed iron ore price, Argonaut does not foresee the mine recommencing. Going forward, sales will be limited to the ~3Mtpa Extension Hill (EH) mine. 

NRW Holdings (NWH)
We have reviewed and updated our forecasts for NWH to factor in the expected impact of contractual issues at Roy Hill, pending impairments and more challenging market conditions. This results in significant reductions to our forecasts and target price. 

RMG Limited (RMG) 
Argonaut’s site visit confirmed copper explorer RMG (RMG) is rapidly putting together an impressive portfolio at its flagship Tuina Project, located in the prolific Antofagasta Region in northern Chile. Whilst historical small scale / artisanal operators only focused on the low‐hanging oxide material, opportunities exist for the Company to delineate a ~30‐50Mt @ ~1% Cu and ~10g/t Ag sulphide Resource. Pending further evaluation, RMG has the option to capitalise on the existing oxide 'waste material' through a modest scale heap leach operation. The Company also owns the Kamarga Zinc project in Queensland.

RTG Mining (RTG
Copper / Gold developer RTG Mining (RTG) is rapidly advancing its Mabilo project located in Luzon, Philippines. The Company has delineated an impressive open-pittable Resource of 2.0Moz @ 5.6g/t Au Eq (see page 4, Table 2). Mabilo has a high probability of becoming a ~150koz Eq pa mine given the high grades. Argonaut regards it as one of the most promising undeveloped projects on the ASX. Although Philippines sovereign risks are acknowledged, the management team, chaired by Michael Carrick, has a track record in country with CGA Mining which undertook a US$1.1b merger with B2 Gold (CN:BTO) in early 2013. The Company also owns the Bunawan Project, a highly prospective tenement package located adjacent to Medusa Mining’s (MML) Co-O Mine. Given sufficient scale, the Company could offer corporate appeal.

Ceasing Coverage
Due to expanded focus to new oil and prospects Argonaut will cease coverage on the following stocks: Drillsearch Energy Limited (DLS), Senex Energy Limited (SXY) and Sunbird Energy Limited (SNY)

Argonaut’s Stock Coverage & Recommendations

Recent Contacts & Presentations
Troy Resources (TRY), Gold Road Resources (GOR), Saracen Mineral Holdings Limited (SAR), Beadell Resources Limited (BDR), Resolute Mining Limited (RSG) , RTG Mining (RTG), MACA Limited (MLD), Alexium International Group Limited (AJX), Decmil Group Limited (ACG), Pacific Energy Limited (PEA), Otto Energy Limited (OEL), Peninsula Energy Limited (PEN), Sandfire Resources NL (SFR), Bannerman Resources Limited (BMN)

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