Market Update & Important Indicators
U.S. stocks slipped in choppy trading Thursday, as a pair of disappointing bank earnings reports weighed down financial shares. The Dow Jones fell 106 points, or 0.6%, to 17,321 and the S&P 500 lost eight points, or 0.9%, to 1993.The Stoxx Europe 600 index was 1% higher in early trading, bouncing back from Wednesday's sharp fall which came after a World Bank cut in global growth forecasts and an intensifying commodity slump ignited fears of a weakening global economy. Germany's DAX, France's CAC 40, and the U.K.'s FTSE 100 were all 1% higher. In a surprise move, Switzerland's central bank on Thursday scrapped its policy of capping the Swiss franc at 1.20 to the euro, ahead of more monetary easing that is expected from the European Central Bank next week.
Stocks in Shanghai jumped Thursday as financials rallied, while other markets in Asia posted robust gains on a rebound in oil prices. The Shanghai Composite ended the day 3.5% higher at 3336.46, the market's second-best gain so far in 2015. Japan's Nikkei Stock Average posted its best gain in three weeks.
Metals on the LME all rose overnight with the exception of tin which remained flat. Copper regained some of the week’s losses, adding 1% to US$2.58/lb. Gold rose strongly, up 2.8% to US$1263/oz, while WTI crude fell again, closing at US$46.25/bbl.
Thought for the day -A week to forget for base metals
Copper and Nickel
It has been a week to forget for copper and nickel with steep declines in the 3 month rolling forward contract prices. The two metals have fallen 8% and 7% respectively since last Friday. This has corresponded into sharp declines in base metal equities which, despite recent disproportionate declines to the metal prices in AUD terms (see our note Base metal sell off), lost further ground this week.
Trading at spot prices
Argonaut has noted a trend in the past four months whereby base metal equities are trading near the implied value of flat spot pricing with little attribution for pipeline projects or exploration upside. To clarify, if we run flat spot priced and current FX in our models we derive a valuation near to the stock price on the day. There have been a few exceptions to this rule including Western Areas (WSA) and Independence Group (IGO) which have probably been regarded as safe havens in a volatile market. In view of the sharp commodity price declines this week we have put spot prices into our base metal models (detailed in tables 1 and 2 below).
If we plot the current trading price to the modelled valuation at spot commodity prices and FX, Sirius Resources (SIR) and Sandfire Resources (SFR) standout as two stocks which appear oversold (i.e. they are trading below a valuation at spot prices). OZ Minerals (OZL) and WSA may have further to fall before they rebalance again spot valuations.
Long term outlook
Argonaut does not consider the current nickel and copper prices sustainable in the medium to long term. The rough thematic for most “Copper Bears” is that oil and iron ore prices have recently fallen >50% and copper, like these commodities, is a proxy for global GDP growth and therefore must suffer a similar fate. The well held US$3.00/lb copper floor was breached late last year and most recently copper futures appeared to be in free fall. However, unlike iron ore and oil, we do not see the same oversupply pressure in copper. Global inventories are running relatively low, at one week’s global consumption. Whilst the market is forecast to be in surplus by 0.5-1.5Mt in 2015/2016, we consider this amount to be the required working inventory to service a ~22Mt global market.
While nickel inventories are currently running at high levels (~12 weeks global consumption), the long term supply is less secure with few tier one nickel sulphide discoveries in recent years and aging mines globally.
Our key picks in the current environment include:
Sandfire Resources (SFR) – Although production in the forthcoming December results with be negatively impacted by operational disruptions caused by a water ingress issue, the company is set to rebound in H2 FY15 with higher grades and subsequent higher H-on-H production. Following a meeting with management we believe water issues in the C4/C5 decline have been resolved and pose little risk going forward. We regard SFR to be the most oversold in the current volatile price environment.
Sirius Resources (SFR) – Following a successful equity raising (at $3.82 in July 2014) and completion of debt financing, SIR is fully funded to commence construction on the Nova nickel project. With first production scheduled for late 2016, the company is less exposed to near term price volatility. SIR is strategically positioned to control future discoveries within the Albany-Fraser Mobile Belt with a central mill and most advanced understanding of local mineralisation controls. We regard SIR to be a takeover target at current levels with a highly sought after concentrate and the likelihood of being the lowest cost nickel producer in Australia.
In This Issue
Doray Minerals (DRM) announced that the bid for Mutiny Gold (MYG) is unconditional. The successful bid will see DRM’s production profile double, increasing the stock’s investment appeal and addressing queries over Reserve / mine life. MYG owns the high grade, undeveloped Deflector gold / copper project in WA, which shares numerous similarities with Andy Well (grade, scale, production profile, see page 6). The potential acquisition is accretive on several fronts and improves on DRM’s liquidity. Operationally, DRM is expected to deliver several strong Qs, driven by improving mine performance, better grades and the Stage II open pit (16g/t). This should reaffirm the stock’s status as a high margin gold producer. DRM has announced December Q production of 21koz @ 9.0g/t (v September Q 18koz @ A$1,384/oz).
Troy Resources (TRY)
As anticipated, Troy Resources (TRY) recently obtained credit approval for the final tranche (A$30m) of the Investec facility and an Environmental Permit, paving way for first gold in Q2 CY15. This addressed the key market query, i.e. project funding. The Company’s funding position looks comfortable with available cash Eq of US$77m v remaining capex of US$42m at 30th September (see page 3). With improving grade and production from Casposo and the coming online of Karouni (~US$602/oz), the stock is one of the very few in the ASX gold space with decreasing costs and expanding margins. Post FY15, capex is anticipated to rapidly diminish (to ~A$30m in FY16 and ~A$20m in FY17), and a return to dividend could be as early as FY16. Argonaut is anticipating TRY to deliver 35koz Au Eq @ AISC US$1,026/oz for the December Q.
Recent Contacts & Presentations
Northern Star (NST), Doray Minerals (DRM), Troy Resources (TRY), Gold Road Resources (GOR), Saracen Mineral Holdings Limited (SAR), Beadell Resources Limited (BDR), Resolute Mining Limited (RSG) , RTG Mining (RTG), MACA Limited (MLD), Alexium International Group Limited (AJX), Decmil Group Limited (ACG), Pacific Energy Limited (PEA), Otto Energy Limited (OEL), Peninsula Energy Limited (PEN), Sandfire Resources NL (SFR), Atrum Coal (ATU)