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15/05/2015 Argonaut Morning Note

    Home Stockbroking & Research Morning Notes 15/05/2015 Argonaut Morning Note
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    15/05/2015 Argonaut Morning Note

    By admin | Morning Notes | 0 comment | 14 May, 2015 | 0

    Market Update & Important Indicators

    The S&P 500 closed at an all-time high, halting a three-session slide. The index climbed 23 points, or 1.1%, to 2,121. The Dow also posted more than a 1% gain, closing 192 points higher at 18,252. A number of factors helped equities. Wholesale prices in the U.S. unexpectedly declined and retail sales are lacklustre (which may give the Federal Reserve pause in raising rates), bond markets have stabilised, and the weaker U.S. dollar will help U.S. based multinationals with foreign earnings.

    European stocks finished solidly higher Thursday, with German stocks surging at the close as the head of the European Central Bank reiterated commitment to the bank's massive stimulus program for the eurozone. The Stoxx Europe 600 rose 0.6% to 397.99, with all sectors finishing higher. Germany's DAX 30 shot up as much as 2% before closing 1.8% higher, at 11,560. The index tracking stocks in Europe's largest and export-oriented economy had earlier in the day fallen by as much as 1.2%, in part as the euro rose above $1.14 for the first time since late February. In Paris, the CAC 40 rose 1.4% and in London, the FTSE 100 rose 0.3%.

    Stocks in Tokyo fell on concerns about a slower U.S. recovery, while shares in China remained resilient despite a batch of weaker-than-expected economic data. The Nikkei Stock Average was down 1.0%, to 19,570, after a four-day winning streak, as weaker-than-expected U.S. retail sales data fanned concerns about a slower U.S. recovery, pushing down the dollar against other currencies, including the yen. The Shanghai Composite Index finished 0.1% higher at 4,378, easing off concerns about a major correction. The benchmark is up more than 4% this week after China cut interest rates on Sunday, despite disappointing economic data Wednesday. The Hang Seng Index was up 0.1% at 27,287.

    Base metals finished mostly lower on the LME overnight, with copper declining 0.1% and nickel down 2.0%. Iron ore 62% Fines dropped 0.4% to $62.30/t and Brent crude dipped 0.8% to $66.70/bbl. Gold however, reflecting a weakening U.S. currency, added a further 0.5% overnight to $1,221/oz.

    Thought for the day

    WA changing gears – fewer beneficiaries in the production boom
    A telling point: Perth Airport, which for years has been bursting at the seams with fluoro-clad passengers, recently registered its first fall in quarterly passenger numbers in 12 years. Other data on net migration, unemployment and housing also shows the tailwind from the resource construction boom is fluttering out. As WA transitions to a production boom, we find far fewer companies directly stand to benefit.

    Major themes playing out at present:
    • Massive investment has led to supply outstripping demand (specifically in iron ore)
    • Environment encourages a move toward owner-operator for longer-life mines
    • Inputs getting cheaper due to a significant oversupply of equipment and people
    • Miners squeezing suppliers and contractors hard, forcing some out of business
    • Progression to development of fewer, but better quality, mining projects

    At the time a broad shortage of inputs meant nearly all mining services businesses were beneficiaries of the construction boom. However far fewer are benefitting from the production boom, with bargaining power now firmly in the hands of the miners. We highlight below our views on winners and losers in a production-focussed environment.

    Description Why? Co. examples
    Winners:
    Mobile equipment support.  Production requires mobile equipment. It needs repair, replacement and maintenance. Deferral can only be short term. ANG, BKN
    Ops & maintenance, facilities management.   Specialist roles that are unlikely to be taken in-house. Any brownfield capex doesn’t come close to replacing prior greenfield capex.  PEA, PRG, TOX, TSE
    EPC contractors.  Far fewer new projects. However, those engineering firms that take on construction risk provide comfort to miners and bankers. GNG
    Losers:
    Contract miners, equipment providers.  Likely owner-operator trend. Equipment oversupply means cheap 2nd hand or dry-hire gear. Fewer tenders are hotly contested. ASL, EHL, MAH, MLD
    EPCM contractors.  Miners do not need to take on construction risk for smaller projects. Recently less demand for EPCM model (in Australia). AAX, LYL
    Exploration Weaker commodity prices discourages search for new deposits. Brownfield exploration less impacted. BLY
    Plant construction.  Mega projects off the table for now. New projects now much smaller, and outside iron ore / LNG. Contractors diversifying. CGH, CIM, DCG, MIN, MND, NWH, RCR, SXE
    Source: Argonaut

    In This Issue

    Independence Group (IGO) | SELL
    Gold Road in the crosshairs: Gold Road Resources (GOR) has confirmed recent buying in the stock has been from Independence Group (IGO). Whilst the size of IGO’s stake is yet to be disclosed and likely to be under 5%, it is highly probably that GOR is in the Company’s acquisition cross hairs. IGO has stated that it is perusing exploration, development and producing assets for acquisition.

    Kingsrose Mining (KRM) | SPEC BUY
    Argonaut’s field visit to high grade Indonesian gold miner, Kingsrose’s (KRM) Talang Santo and Way Linggo sites confirmed lean, compact operations and “hands-on” management. ‘Teething’ issues, experienced in the last few Qs are expected to subside as the mine ramps up. With the mine transitioning into better ground condition areas, Argonaut sees stronger CF and more focused exploration, which should translate to share price appreciation. Whilst the mine is of modest scale at present (~35-40koz pa when ramped up), given spare front-end mill capacity, successful exploration will translate to boosted production and lower opex with minimal capex. Argonaut is particularly impressed with the management team and KRM’s exploration pipeline, which will see numerous targets tested in the coming months.

    Saracen (SAR) | BUY
    Saracen (SAR) delivered a 25% Resource upgrade at Thunderbox (TB), expanding the deposit to 2.0Moz @ 1.7g/t (was 1.6Moz @ 1.7g/t). Overall Resource at the TB Project has increased to 3.2Moz. While the Company’s recently released Feasibility Study (FS) on Stage I confirmed a robust 4.5-year open pit, the upgraded Resource reinforces the potential for an underground operation (FS expected end of CY15). There is significant upside to Argonaut’s modest valuation of A$10m on Thunderbox underground and satellite pits upon positive study results. SAR’s A$20m, 7-rig exploration program remains a key differentiator to peer producers and will likely deliver further organic growth across its assets. BUY maintained with a $0.58 ($0.57) valuation.

    Recent Contacts & Presentations

    Saracen (SAR), Kibaran (KNL), Sino Gas & Energy (SEH), Rewardle (RXH), Alexium (AJX), Ausdrill (ASL), Tox Free (TOX), OBJ Limited (OBJ), Cash Converters (CCV), Decmil (DCG), TFS Corporation (TFC), Mobile Embrace (MBE), Dacian (DCN), Saracen (SAR), Fertoz (FTZ), Atrum (ATU), Doray (DRM), Buru Energy (BRU), Carnarvon Energy (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), Pura Vida Energy NL (PVD), MZI Resources (MZI), High Peak Royalties (HPR), Spookfish (SFI)
     

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