Market Update & Important Indicators
U.S. stocks rose Thursday, though pulled back from their earlier highs, on the heels of gains in Chinese and European shares, with the Dow industrials rebounding from a five-month low. Both the Dow Jones and the S&P gained rose 0.2% to 17,549 and 2,051 respectively.
Prices of European stocks surged on Thursday, as investors sensed a glimmer of hope that Greece could strike a last-ditch deal with creditors to keep it in the eurozone. Confidence was further bolstered by a rally in Chinese markets after several days of heavy falls, which boosted mining stocks in Europe. Markets in Europe steadied after recent declines, as Greece requested a new three-year bailout on Wednesday and pledged to start implementing some overhauls, adding to investor hopes that a deal can be reached at Sunday's crisis summit. Still, an agreement depends on Prime Minister Alexis Tsipras making a drastic turnaround on pension cuts, tax increases and other austerity measures after five months of often acrimonious negotiations. The Stoxx 50 gained 2.6% and the German DAX lifted 2.3%.
Chinese shares made their biggest daily gain in six years Thursday, restoring confidence in Beijing's suite of attempts to rescue its struggling stock market. Some companies that had halted trading of their shares lifted suspensions, and their stock prices immediately rose by the maximum 10%. The gains follow a report by state-run Xinhua News Agency that Chinese police had visited the China Securities Regulatory Commission to investigate "malicious short selling," a move widely interpreted as another stab at arresting the selloff. Regulators have increased scrutiny of short selling in the wake of China's recent stock decline, which wiped out roughly $4 trillion in value from Chinese equities.
Metals on the LME all rose with copper rising 1.9% to US$5.55/lb and nickel gaining 5.0% to 5.20/lb. Gold was up 0.1% to US$1159/oz and Brent increased 2.7% to US$58.61/bbl. The AUD/USD is trading at 0.747.
In This Issue
AWE Limited (AWE) | BUY
AWE has reported a significant 84% Reserve upgrade for the Sugarloaf Area of Mutual Interest (AMI), located in the Eagle Ford Shale and Austin Chalk unconventional plays in Texas. Net AWE Reserve increases were significant with 1P increasing to 19.4 mmboe (from 13.1), 2P increasing to 42.4 mmboe (from 23.1). Subsequently, 2C Resource estimates decreased to 22.5 mmboe from 30.1 mmboe as Resources were re-classified into Reserves. As highlighted in our initiation “Perth Basin, the Unexpected Jewel in the Crown”, we believed the most significant increase in Reserves would come from the Waistia discovery and Sugarloaf AMI. Importantly, this Reserve estimate increases AWE’s total 2P Reserves by 24% to over 100 mmboe (Argonaut estimate 105), a “critical mass” metric often used by large oil and gas companies when assessing potential takeover targets.
On the back of the upgrade we have revised our AWE’s share of Sugarloaf production estimates up to 5,000 boe/d (previously ~3,000 boe/d) and have extended production to 2032. This increases our Sugarloaf NPV to A$0.80ps from A$0.49/ps. We have also revised our Austin Chalk recoverable estimates to 22.5mmboe (from 30.1 mmboe) decreasing our NAV of the Chalk upside to A$0.03/ps from A$0.04/ps.
Northern Star (NST) | HOLD
Northern Star (NST) reported record June Q production (152koz sold), significantly exceeding Argonaut forecast of 140koz (produced). Cash, bullion and investments were A$178m at 30th June, v A$112m at 31st March, after A$20m debt repayment in April. This strong performance implies a FCF margin of ~A$550/oz sold, assuming no significant working capital adjustments. The Company’s A$50m drilling campaign and conducive geology will ensure continued delivery of positive results in the coming months. With the Tanami JV Agreement scheduled to be completed by mid-September, Argonaut anticipates additional guidance on the project in the near term. The strong balance sheet will enable the Company to examine growth options through further M&A. However, potential acquisitions are likely value accretive given the Company’s demonstrated track record on this front. Argonaut increases its valuation to A$2.00 (was A$1.85), factoring in strong FCF and a nominal A$50m for the Central Tanami Project. HOLD maintained.
Resolute (RSG) | HOLD
Resolute Mining (RSG) delivered a strong June Q, producing 99koz (v Argonaut forecast 91koz). Cash generation of ~A$29m was strong as anticipated with the cessation of open pit waste stripping. FY15 total production was 328koz, above the 315koz guidance. The Company’s FY16 guidance is set at 315koz @ AISC A$1,280/oz (v Argonaut estimate 300koz @ A$1,199/oz). Whilst the Company’s cash flow will remain robust, particularly during H1 FY16, RSG will likely require additional funding strategies to service its debt repayment requirements and to cover the Syama underground start-up capex. HOLD and A$0.40 valuation maintained.
Recent Contacts & Presentations
Tox Free Solutions (TOX), GR Engineering (GNG), Austal (ASB), Northern Star (NST), Sandfire (SFR), Regis (RRL), Kingsrose (KRM), Medusa (MML), Orbital (OEC), Alexium (AJX), Rewardle (RXH), Saracen (SAR), Sino Gas & Energy (SEH), Dacian (DCN), Buru Energy (BRU), Carnarvon Energy (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), Pura Vida Energy NL (PVD), High Peak Royalties (HPR), Carnarvon Petroleum (CVR)