Market Update & Important Indicators
US stocks have given up late gains after the European Central Bank put fresh pressure on Athens by lifting its waiver on the use of Greek bonds as collateral. The move darkened hopes that Greece's new government could quickly reach a deal on modifying their bailout and avoiding a new eurozone crisis. The Dow Jones Industrial Average finished at 17,637 on Wednesday, up 7 points (0.04 per cent). The S&P 500 lost 9 points, or 0.4%, to 2,042.
The roaring U.S. government bond market is suffering a mild setback. Bond prices dropped Wednesday, following the biggest one-day selloff since November 2013 in the prior session. Investors took chips off the table after a steep rally over the past month. Traders said that the recent decline in bond yields has priced in lots of downbeat news on global growth and that fresh monetary stimulus from a number of global central banks so far this year may provide a boost to the economy in the coming months.
Europe's main stock markets wobbled as traders tracked crude oil prices and Greece's efforts to renegotiate its vast international bailout deal. Frankfurt's DAX 30 index advanced to a 0.19 per cent gain to a record high close of 10,911.32 points, and in Paris the CAC 40 rose 0.39 per cent to 4,696.30 points. However London's FTSE 100 slid 0.17 per cent to 6,860.02 points as a drop in oil prices weighed on energy stocks.
Asia extended a global stocks rally but Shanghai shares fell before an announcement after the market close that China would cut the reserve-requirement ratio for banks. Tokyo surged 1.98 per cent, or 342.89 points to 17,678.74. Seoul ended 0.55 per cent higher, putting on 10.83 points to 1,962.79, while Hong Kong was 0.51 per cent higher, adding 124.98 points to 24,679.76. However, profit-taking hit Shanghai, with the benchmark index closing 0.96 per cent, or 30.78 points, lower at 3,174.13.
Base metals on the LME were mixed, with lead the best performer, up 1.0%. Gold advanced 0.7% to US$1,268.8/oz and WTI crude sank 8.7% to US$48.45/bbl. The AUD is buying US$0.776.
Thought for the Day
ASX Gold Sector | Good as Gold
The ASX gold sector finished CY14 strongly, delivering higher production and lower costs. The average “all-in” sustaining cost (AISC) of A$1,099/oz (ex-NCM) and normalised FCF margin of A$268/oz were the best in the last seven Qs (the six Q prior averaged AISC A$1,250/oz and FCF margin of A$113/oz). This coincided with a period where the AUD gold price moved favourably, translating into boosted margins. Given recent gold price, fuel price and exchange movements, these margins are likely to expand in the near term, particularly amongst the domestic gold producers. Several producers have taken advantage of the increased gold price with additional hedging.
Lowest cost, highest margin in seven Qs: The strong performances were the result of elevated grades, as well as operational / cost improvements resulting from ongoing cost rationalisation and reduction in contractor / supplier costs. Looking ahead, this margin (A$268/oz) is likely to expand given favourable gold and exchange rate movements (spot gold A$1,618/oz, v December Q average A$1,404/oz), as well as reducing fuel costs.
Well positioned stocks: Although short term gold price volatility may continue, stocks with quality assets and / or management, as well as expanding margins through reducing costs are well positioned. Key selections include (alphabetical order):
• Doray Minerals (DRM) – Improving operational performance, better mined grades and the high grade open pit (16g/t) underpins medium term production / costs. Recent acquisition of MYG is accretive on several fronts.
• Northern Star (NST) – The stock features expanding margins and FCF heading into H2 FY15, and a A$50m exploration program will ensure news flow. Although the stock is now trading above Argonaut’s target price, given scale, liquidity, margins, FCF and exploration upside, the stock arguably deserves a premium.
• Saracen (SAR) – Margin expansion from rising grades and falling strip at Whirling Dervish. FY16 FCF is assured by a 1.8Mt surface stockpile. The exploration campaign could highlight a high grade, bulk tonnage underground operation at Karari.
• Troy Resources (TRY) – TRY’s margin expansion is underpinned by improving grades from Casposo and the coming online of Karouni (~US$602/oz). The stock trades at a significant discount to Argonaut’s A$1.40 valuation.
M&A activities and capital raising: This Q saw ongoing M&A activities with SEMAFO (SMF:CN) bidding for Orbis (OBS) and DRM bidding for Mutiny Gold (MYG). Although equity capital market actions remained subdued on the ASX, the TSX gold sector has seen financing activities from Romarco, Detour, Osisko, Premier, Asanko, Richmond and Yamana, raising a total of ~A$1.2b in the last three months.
In This Issue
Gage Roads (GRB)
Disappointing sales and increased working capital requirements (partly due to the implementation of the warehousing strategy) strained cash flow in 1H15. Taken with an outlook for lower 2H15 volumes than previously expected and the probability of weak full year earnings, we expect the share price to be capped in the near term. Despite valuation upside, we downgrade our recommendation to hold until we see evidence of improved sales and operating cash flow.
Recent Contacts & Presentations
Northern Star (NST), Doray Minerals (DRM), Troy Resources (TRY), Gold Road Resources (GOR), Saracen Mineral Holdings Limited (SAR), Beadell Resources Limited (BDR), Resolute Mining Limited (RSG), RTG Mining (RTG), Otto Energy Limited (OEL), Peninsula Energy Limited (PEN), Sandfire Resources NL (SFR), Atrum Coal (ATU), Empired (EPD), DTI Group (DTI), Austal (ASB), TFS Corporation (TFC), Pioneer Credit (PNC), IMF Bentham (IMF)