Market Update & Important Indicators
Falling bond yields dragged financial shares lower Tuesday, putting U.S. stocks on course for their fourth consecutive session of losses. Recent declines have dragged the S&P 500 back from near-record levels as investors consider upcoming central-bank decisions, the state of the global economy and next week's U.K. vote on European Union membership. The S&P 500 posted its largest three-day decline since February in the period ended Monday. Major indexes bounced around Tuesday, but remained lower for much of the session. Financial stocks helped lead the S&P 500 lower, with the group falling 1.4%. The financial sector has dropped 4.6% so far in June, sharply outpacing declines in other sectors. The moves have come as bond yields have dropped around the world, with the 10-year U.S. Treasury yield falling near a record low Tuesday, and as investors' expectations for an interest-rate rise in the next few months have diminished.
European stocks booked a fifth consecutive decline on Tuesday as heightened "Brexit" worries unsettled equity investors. Haven-seeking investors continued to scoop up government bonds, which helped to nudge Germany's benchmark bond yield into negative territory for the first time. The Stoxx Europe 600 fell 1.9% to 320.53-the pan European benchmark's fifth losing session in a row. European stocks hit intraday lows Tuesday afternoon and losses sharpened into the close of trading as Reuters reported that the European Central Bank is preparing to publicly say it will support the financial markets, along with the Bank of England, if the U.K. votes in favour of leaving the EU.
Japanese stocks fell Tuesday, dragged down by banks and health-care stocks, as concerns persisted about the U.K.'s possible exit from the European Union. The Nikkei Stock Average fell 160.18 points, or 1.0%, to 15859.00, adding to a 3.5% drop on Monday. Japanese stocks opened lower and moved briefly into positive territory before slipping again. While Monday's selloffs centered on companies exposed to European economies, global market routs started engulfing even this year's outperformers such as health care. Stocks in Shanghai were little changed ahead of a decision by index provider Morgan Stanley Capital International later Tuesday on whether to include them in international investors' portfolios.
Concerns about the possible fallout from the U.K.'s looming vote on whether to leave the European Union sparked the sharpest one-day selloff in Australian shares in more than three months. The local market was playing catchup with falls in global markets after a public holiday Monday and as investors focused on renewed concerns about global economic growth and the June 23 referendum in the U.K. Broad losses across sectors pulled the S&P/ASX 200 down 109.3 points, or 2.1%, to finish at 5203.3–the lowest level since April 27.
Copper futures closed lower in London on Tuesday due to a stronger dollar. The London Metal Exchange's three-month copper contract was down 0.80% at $4,520.50 a ton at the PM kerb close. Among other base metals, aluminium closed up 0.1% at $1,605 a ton; zinc was down 2.9% at $2,007 a ton; nickel was unchanged at $8,837 a ton; and lead was down 1.6% at $1,676 a ton.
Thought of the Day:
Argonaut Exploration Dashboard – Gold in WA the main game
ABS data to March 2016 suggests that minerals exploration metres drilled has bottomed out at levels last seen more than a decade ago, although the downward trend in minerals exploration expenditure shows drillers’ margins are still under pressure. Gold in WA is the main game and service companies exposed to this sector are likely to be better placed as recent capital raised gets deployed.
Low as it goes:
Commenting in a note last year (Wallets growing cobwebs, 10/09/15), we felt quarterly exploration metres drilled was unlikely to fall further. The last three quarters’ evidence bears this out, with metres drilled bottoming out at levels as low as at any time over the last three decades.
Drillers’ margins tighter:
However, while metres drilled may be bottoming, expenditure on exploration continues to fall, reflecting miners’ bargaining power in an environment of surplus drilling capacity and intense competition. Drillers’ margins continue to be pressured.
Moving through the cycle:
The current trough in exploration drilling kicked in mid-2013. Looking at cycles over the last three decades troughs roughly last 3-5 years suggesting we are now more than half way through the current trough. Deployment of recent junior capital raised may be positive for the June and September quarters.
WA dominates:
In the most recent quarter (March 2016), just under two thirds of all exploration expenditure took place in WA. Queensland came a distant second with 13% of all exploration expenditure.
Gold glitters:
Within WA, almost half of all drilling expenditure was gold related. Iron ore exploration expenditure was 30% of total, but spend on other commodities was relatively small. History demonstrates far more stability in gold exploration than for other commodities.
Implications:
We largely reiterate our previous views:
• We have past the bottom (of quarterly metres drilled) for this cycle
• A rebound will be slow, led by gold and brownfield drilling to replenish reserves
• Service businesses exposed to gold are better placed but margins remain pressured
Exposure to exploration drilling:
Beaten down drilling companies will start to attract interest as the cycle slowly turns. Companies exposed to this sector include ALS (ALQ), Ausdrill (ASL), Boart Longyear (BLY), Imdex (IMD), and Swick (SWK).
Recent Contacts & Presentations
Navitas (NVT), Gage Roads (GRB), Bionomics (BNO), Invigor Group (IVO), Marindi (MZN), Cardinal Resources (CDV), Galaxy Resources (GXY), Cooper Energy Limited (COE), Evolution Mining (EVN), LWP Technologies (LWP), Walkabout Resources (WKT), Minotaur Exploration (MEP)
Please read Argonaut's Important Disclaimers & disclosures
