Market Update & Important Indicators
U.S. stocks held steady after minutes from the Federal Reserve's June meeting revealed a split among officials about the health of the economy and how to proceed on interest rate decisions. Stocks were already trading slightly higher Wednesday, following a fresh sign that the U.S. economy appears to be on solid ground. Some analysts and traders said the June reading on U.S. service-sector activity helped lift the S&P 500, which opened lower. The Institute for Supply Management's nonmanufacturing purchasing managers index rose in June to its highest reading since November, a turnaround from earlier in the year. The next big economic datapoint will come Friday in the form of the June jobs report. Many investors are hoping for a solid reading that suggests May's lackluster report, which was the weakest since 2010, was just a blip.
The Stoxx Europe 600 fell 1.7% on the back of recent falls in European bank shares and a spate of U.K. property fund suspensions have exacerbated uncertainty following Britain's June 23 referendum, puncturing a fragile recovery in risky assets such as stocks and oil.
Japanese stocks fell sharply, leading shares across Asia sharply lower as a fresh bout of anxiety over Brexit risks rattled investors. Japan's Nikkei Stock Average ended down 1.9% Wednesday, the loss having narrowed as the yen weakened slightly in the afternoon. Elsewhere, South Korea's Kospi dropped 1.9%, Hong Kong's Hang Seng Index was last down 1.1% and China's Shanghai Composite Index defied the regional decline by ending up 0.4%. In another sign investors are flocking to safety, gold surged to a two-year high in Asia trading, making gold stocks among the region's few winners. China was one of Asia's best performing markets on Wednesday, with the equities market reversing the morning's losses to end higher for the fourth consecutive session, led by gains in stocks of consumer staples.
An ongoing selloff of bank shares and falls in commodity prices weighed on Australia's equities market Wednesday, pulling it lower for a second day running. Financial markets across the region were unsettled by fresh worries about Europe after sterling slumped to a 31-year low overnight. Investors in Australia also face uncertainty and the potential of a hung parliament or a minority government hampered from introducing cohesive economic policy following Saturday's still unresolved federal election. Although off its lows of the day, the S&P/ASX 200 still lost 30.5 points, or 0.6%, to finish at 3197.5, its lowest level in a week. Energy stocks together notched the biggest fall of the day, with the subindex declining 1.8%, while the mining-heavy materials basket sank 1.1%. That came after a steep drop in crude oil on Tuesday, and losses for copper, iron ore and other commodities.
Copper closed lower in London on Wednesday amid growing stocks and indications Chinese demand for the metal is down. The London Metal Exchange's three-month copper contract was down 1.39% at $4,750 a ton at the PM kerb close, the second consecutive day the contract closed lower. Other base metals were mixed. Aluminium closed down 0.2% at $1,641/t, zinc was down 0.2% at $2,100/t, nickel was up 2.9% at $9,939/t, and lead was up 0.4% at $1,828/t
Thought of the Day:
Argonaut Metals & Mining
June Q Preview
Argonaut provides a preview for the June Q 2016. The resources rally following the Chinese New year has continued into the midyear. Gold and gold equities have been the outperformers, with gold hitting A$1,769 at June 30. Iron Ore continues to surprise, maintaining levels above US$50/dmt for the majority of the Q. In the near to medium term, Argonaut prefers zinc amongst the base metals and sees continued strength in AUD domiciled gold.
Copper: Copper ranged between US$2.04/lb to US$2.28/lb through the June Q. Over the period, there were some big physical movements between the SHFE and LME and China exports to May were up 46% to 160kt year-on-year. The copper price is entering FY17 with momentum, up 9% since the start of June. OZ Minerals (OZL) outperformed Sandfire (SFR) for the Q, up 12% versus SFR which declined 10%. OZL was buoyed by a $60m share buy-back and $45mpa of announced cost savings. Finders Resources (FND) commenced production from the 25ktpa Wetar project in Indonesia in June and should hit nameplate in the current Q. SFR and FND are our key picks amongst ASX coppers.
Gold: The vote by the UK to exit the EU along with ongoing geopolitical and currency instability continue to support gold which rose 8% over the Q. Negative bond yields in major economies including Japan, Germany and Switzerland and strong Chinese purchasing (increasing 80% month-on-month to 3.6Moz in May) continue to support the precious metal. During the Q, Saracen (SAR) achieved commercial production at Thunderbox while Troy Resources (TRY) faltered at Karouni, where material handling issues resulted in damage to the mill. The basket of producers will report strong cashflow for the June Q, with free cash flow margins averaging A$400-600/oz.
Iron Ore: Iron ore prices remained strong during the Q, averaging US$55/dmt (62% fines basis). Above US$48/dmt most ASX junior iron ore producers including Atlas Iron (AGO) and Mount Gibson (MGX) are cashflow positive. However, we see prices declining through FY17, driven by reform and consolidation of the Chinese steel industry and continued oversupply from seaborne sources. This included the ramp-up of Vale’s S11D mine (90-100tpa) and Roy Hill (55mtpa).
Nickel: Both LME and SHFE inventories continued to track down during the Q and LME prices repeatedly bounced of lows of ~US$3.80/lb. 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 only ~70-80ktpa, the market will remain above 20 weeks inventory for ~2 years unless there is further supply curtailment. That said, spot prices have jumped 15% since late-June hitting US$4.67/lb on the 5th July. After high cash outflow in the March Q, WSA is expected to be cash flow neutral in the June Q. The Company’s balance sheet is in a strong position following a $70m equity raising. Independence Group’s (IGO) Nova project remains on track for first production in December 2016.
Uranium: Spot prices fell further during the Q, averaging US$27/lb versus US$33/lb in the preceding period. Cameco (TSX:CCO) announced significant supply curtailments in April, planning to remove ~7.0Mlbpa or 4.4% of global supply. However, global supply of U3O8 remains in surplus with considerable global inventories (est. ~200Mlb in China and ~120Mlb in Japan). Paladin Energy (PDN) continued with its strategic initiative to raise cash which will be required to repay the outstanding US$212m convertible bonds, due April 2017. An outcome is anticipated in the current Q.
Zinc: Zinc prices continue to edge higher, averaging US$0.87/lb, up 14% Q-on-Q. Concentrate supply continues to be tight after major mine shuts and production curtailments by major suppliers in 2015/2016, including Glencore and Nyrstar cutting 500ktpa and up to 250ktpa respectively. Unfortunately, mid-cap exposure on the ASX is limited with most pure plays having less than 50ktpa Zn Eq. production and market capitalisations under A$70m. Of the developers, Argonaut prefers Herron Resources (HRR) based on low operating costs, grade and existing infrastructure. Independence Group (IGO) and South 32 (S32) offer limited zinc exposure amongst diversified asset portfolios.
Key Picks Amongst Producing Stocks
• Sandfire Resources (SFR) – BUY, target price $6.05. Exploration recommencing in the broader Doolgunna region offers potential for another DeGrussa/Monty discovery
• MZI Resources (MZI) – BUY, target price $0.68. High payability mineral sands project with high margins in the current low price environment
Table 1. Argonaut’s producing stock recommendations and production forecasts for the June Q
Recent Contacts & Presentations
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), Department 13 (D13), Peak Resources (PEK), Fortescue Metals (FMG), Paradigm Biopharma (PAR)