Market Update & Important Indicators
U.S. stocks teetered between gains and losses yesterday, as investors pored through the first batch of first-quarter earnings reports. The S&P gained 0.4% to 2,091 and the Dow rose 0.3% to 17,959. European stock markets climbed to a record high Thursday, capping a blistering rally in 2015. The Stoxx Europe 600 index gained 1.1% Thursday to close at 409.15, as investors shrugged off minutes from the U.S. Federal Reserve's latest meeting that showed some officials think an interest-rate increase in June remains a possibility.
Hong Kong's stock market extended gains into a sixth day Thursday, but trading was volatile, as investors rushed to snap up cheap shares of mainland Chinese companies. The Hang Seng Index rose as much as 6.4%, pared gains to 1.8%, and then rebounded as the market paused for lunch, closing the day up 2.7%. In Australia a slump in oil prices and renewed worries about the prospects for iron-ore producers weighed on Australian resources stocks Thursday, pulling the market lower for the first time in a holiday-shortened trading week. The S&P/ASX 200 closed down 0.5% at 5932.2, with most key subindexes in the red.
Metals on the LME were mixed overnight with nickel and copper down 0.2% and 0.3% respectively. Zinc rose 0.9% to close at US$0.98/lb. Gold fell 0.7% to US$1194/oz, while Brent is trading up 1.8% at US$56.57/bbl.
In This Issue
March Q preview
Argonaut provides a preview for the March Q 2015. The Q should see continued strong performance from Australian domiciled gold producers, benefiting from a strong AUD gold price and more competitive costs. However, iron ore, nickel and copper producers incurred both USD and AUD price depreciation. The focus by producers remains strongly upon performance and cost optimisation as opposed to growth, although M&A activities are expected to ramp up in the upcoming Qs. During the Q Argonaut visited Saracen’s (SAR) Carosue Dam, Northern Star’s (NST) Kundana / Kanowna, Doray’s (DRM) Andy Well and Sirius’ (SIR) Nova operations.
Gold: Gold producers are expected to deliver another strong Q. Argonaut’s site visit to NST, SAR and DRM confirmed Australian domiciled producers will benefit from a strong AUD gold price (~A$1,450-A$1,650/oz) and more competitive wage / contract rates. These will translate to improved cash flow. Shorter term, the gold price will remain highly leveraged to policy statements from the Federal Reserve regarding future US interest rate movements. The volatility in USD gold price will be counter-balanced by the AUD/USD FX.
Iron Ore: Rising seaborne supply driven by project expansions from the majors maintained a strong market surplus, resulting in further decline of the iron ore price (14% over the Q to US$64/dmt). Most juniors are hovering around a US$60-65/dmt breakeven price, so cash flows will be neutral to negative Q-on-Q.
Base Metals: Copper and nickel LME inventories rose during the Q putting downward pressure on spot prices. Nickel producers are expected to incur negative quotational price (QP) adjustments following steep price declines late in the Q.
Looking ahead: Argonaut foresees continued strength from the ASX gold sector, enjoying high AUD margins. We are forecasting an incremental recovery in copper prices, buoyed by the prospect of Chinese stimulus and a rebalance following strong selling during the March Q. We continue to see headwinds for the iron ore sector with relentless supply growth from the majors. We also flag potential for a staged recovery in the uranium price driven US utilities re-entering the term market through CY15. M&A activities, particularly in the gold space, are expected to step up with multiple assets owned by major / mid-tier producers understood to be up for sale.
Sandfire Resources (SFR) – Target price $6.10, likely to rebound off a challenging December Q with higher recoveries and production in H2 2015
Sirius Resources Minerals (SIR) – Target price $3.65, strategic high quality off-take and controlling position in the Fraser Range, low exposure to current price volatility
Saracen (SAR) – Target price $0.54, stock offers solid production, FCF, exploration upside (e.g. Karari) and growth
Recent Contacts & Presentations
Saracen (SAR), Beadell (BDR), Fertoz (FTZ), Atrum (ATU), Doray (DRM), Austal (ASB), TFS Corporation (TFC), Buru Energy (BRU), Carnarvon Energy (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), Pura Vida Energy NL (PVD), Migme (MIG), Vmoto (VMT), Pioneer Credit (PNC), Minemakers (MAK)