Market Update & Important Indicators
U.S. stock markets were closed Monday for the Independence Day public holiday. In Europe, stocks slipped on Monday despite a rebound in Asian markets, as a holiday in the U.S. kept trading volumes suppressed. The Stoxx Europe 600 closed down 0.7%, falling for the first time in five sessions as auto and bank shares declined. Italian banks were hit hardest, grappling with economic uncertainty and the prospect of lower interest rates as they stand on more than $400 billion in combined bad debts. Markets in Asia closed higher, however, while U.S. futures inched upward for much of the day, as the prospect of loose monetary policy continued to help stocks outside Europe recover from a Brexit-induced selloff.
China led gains across Asian stock markets on Monday as investors bet that global central banks would loosen policies to encourage economic growth. China's Shanghai Composite Index gained 1.9%, while the smaller Shenzhen Composite Index gained 1.6%. Elsewhere, Japan's Nikkei Stock Average ended up 0.6, Korea's Kospi added 0.4% and Hong Kong's Hang Seng Index ended up 1.3%. In China, commodities futures surged. The main futures contracts for silver, nickel and tin traded in Shanghai hit the 6% daily price-movement limit within the first trading hour Monday, and cotton futures traded in Zhengzhou hit their price limit as well. China's CSI 300 Materials subindex, which is strongly correlated with commodities prices, also gained 3.5%. In Hong Kong, property stocks that were perceived to be undervalued led gains. Investors focused on a report last Friday from Daiwa Capital Markets that argued shares of Hong Kong-focused real-estate developers are collectively worth US$200 billion more than they are priced by the market.
Australian shares shrugged off a weak start to push higher Monday, driven by the resources sector after crude prices edged up in Asia to build on recent gains and copper hit a fresh two-month high. The local market initially stumbled on worries of a hung parliament and policy stalemate after Saturday's federal election failed to provide a decisive win for any party. That was brushed aside as other markets across the region picked up, partly as investors look for global monetary policy to remain easy for longer. A late surge saw the S&P/ASX 200 finish at its high of the day, up 35.2 points, or 0.7%, at 5281.8. Following on from last week's 2.6% rise, the index now sits slightly above where it was trading immediately before Britain's vote to leave the European Union. The mining-heavy materials sector led the day with a gain of 2.6% and the basket of energy stocks added 1.4%. The major banks held the market back, together knocking 9.5 points off the ASX 200.
Copper prices closed down in Europe on Monday as commodities and markets dipped in tandem. The London Metal Exchange's three-month copper contract was down $4,893/t, after climbing to a fresh two-month high earlier in the day. The other base metals were mixed. Aluminium closed down 0.9% at $1,641/t, zinc was down 1.8% at $2,113/t, nickel was up 2.3% at $10,151/t, and lead was down 0.3% at $1,842/t.
In this Issue
Austal Limited (ASB) |Aftershock | BUY
Market cap $386.7m | Current Price $1.11 | Valuation $1.50
ASB reported the costs of the ~US$4b LCS programme were underestimated, and thus recognition of prior profit overstated. As a result, a one off $156m WIP write-off will be recognised in FY16. ASB pulled back FY16 and FY17 earnings expectations but, importantly, indicated US ship construction margins of 5-7%. Our concern has centred on this programme, which dominates the order book, so greater margin clarity post a comprehensive review is positive. We have more confidence in our revised, albeit lower, numbers, which support a valuation of $1.50 (prior $1.70). ASB has a significant opportunity pipeline and we upgrade our recommendation to buy (prior hold).
Thought of the Day:
Argonaut Metals & Mining
Commodity price revision
Argonaut has revised its commodity prices (tabled on page 3) with changes to Iron ore, gold, nickel, uranium and zinc forecasts. Zinc remains our preferred base metal based upon steeply declining inventories in H1 FY16 and a growing tightness in the concentrate market. Global macro themes including the UK exit of the European Union (EU) have driven higher near to medium term gold forecasts. While iron ore has performed better than expected in H1 2016, we see stagnating Chinese demand and increased seaborne supply putting downward pressure on the price through 2016/2017.
Gold: Argonaut increases its gold price assumption from H2 FY16 to 2018 with a view that equity market and currency instability will continue to favour gold as a defensive investment. The vote by the UK to exit the EU is likely to drive volatility, and as prescribed in Article 50 (the formal legal process supporting the EU), the exiting process could take up to two years. Negative bond yields in major economies including Japan, Germany and Switzerland are also supportive for gold. In addition, Chinese purchasing remains strong with net gold imports increasing 80% month-on-month to 3.6Moz in May.
Base Metals: Argonaut revises down it outlook for nickel. Both LME and SHFE inventories continue to track down, however global inventories (in all forms) remain high at ~25 weeks of global consumption. Historically, 20 weeks inventory has been the level which prompts a positive price inflection. Given the current supply deficit of ~70-80ktpa, the market will remain above 20 weeks inventory for ~2 years unless there is further supply curtailment. For this reason, we have tempered our medium term outlook for nickel. With an increasing view that zinc supply will be in deficit through 2017 to 2018, Argonaut lifts its zinc price forecasts, peaking in 2018 (US$1.10/lb). Copper prices remain unchanged.
Iron ore: In light of strong Chinese steel production in H1 CY16, Argonaut raises its H2 iron ore price by US$5/dmt to US$45/dmt (62% fines basis). Long term, we decrease our iron ore price to US$55/dmt from US$60/dmt, with view that Chinese steel industry consolidation and central Government reform will both decrease Chinese demand and increase the purchasing power of major steel producers. Significant new projects, including Roy Hill and Vale’s S11D, along with low cost growth from the majors, will maintain seaborne oversupply in the medium term.
Uranium: Supply curtailments by the world largest listed supplier Cameco (TSX:CCO) is perhaps the most positive catalyst for uranium prices in the past 12 months. However, despite the removal of up to 4.4% of global supply by CCO, U3O8 remains in surplus with considerable global inventories (est. ~200Mlb in China and ~120Mlb in Japan). Whilst we maintain a bullish long term view, we have reduced our near term outlook to US$30/lb. Longer term, we maintain US$65/lb.
Dacian Gold (DCN): BUY with a $3.25 price target (previously $3.10) – Strong newsflow for the Mount Morgans Gold Project will continue through CY16. Resource updates, expected in the current month, should increase both ounces and confidence levels.
Gold Road Resources (GOR): BUY with a $0.87 price target (previously $0.84) – The Gruyere project is greatly de-risked with a high density drill-out for first two years of production, Native Title agreements reached and a strong cash balance. Belt scale exploration offers significant upside.
Jiangxi Copper (358 HK). BUY with target price of HK$11.92, previously HK$9.61. Bigger target price upgrade than its peers is due to earnings sensitivity. We maintain a positive outlook on copper.
Maanshan (323 HK). BUY with target price of HK$2.13, previously HOLD with target price of HK$2.07. Steel price increase in China is to be supported by low inventory, and accelerating industry consolidation in 2H16, while we remain negative on iron ore prices.
Sandfire Resources (SFR): BUY with a $6.05 price target (previously $6.00) – Exploration of the wider Doolgunna region has recommenced after the Monty drill out. SFR is expected to achieve production and cost guidance at DeGrussa for FY16.
Table 1: Valuation and recommendation changes
Source: Argonaut (Key picks highlighted in grey)
Table 2: Argonaut’s commodity price forecasts
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Evolution Mining (EVN), LWP Technologies (LWP), Walkabout Resources (WKT), Minotaur Exploration (MEP), Peet Limited (PPC), Parmelia Resources (PML), Venturex (VXR), Dacian Gold (DCN), Cudeco (CDU), Resolute Mining (RSG), Echo Resources (EAR), Altech Chemicals (ATC), TFS Corporation Limited (TFC), Noxopharm (NOX), OBJ Limited (OBJ), Kibaran (KNL)