16/05/2016 Argonaut Morning Note

Market Update & Important Indicators

Prices of U.S. stocks slumped on Friday, as major indexes ended a choppy week lower.   Indexes had wobbled earlier in the session after an upbeat reading on retail sales that contrasted with gloomy earnings reports from department stores earlier this week.    Some investors and traders were concerned about holding stocks heading into the weekend. "Why put yourself into harm's way right now," said Jonathan Corpina, senior managing partner at Meridian Equity Partners. The Dow Jones Industrial Average fell about 185 points, or 1%, to 17535, after falling as many as 208 points earlier in the session. The S&P 500 dropped 0.9% and the Nasdaq Composite slipped by 0.4%. It was the third consecutive week of declines for the Dow industrials and S&P 500, their longest losing streak since the three-week period ended Jan. 15. Friday's declines narrowed the S&P 500's gains so far this year to 0.1%. The Dow is up 0.6% year-to-date.

European stocks finished higher on Friday as a better-than-expected report on U.S. retail sales lifted sentiment, easing fears that the world's largest economy isn't heading for a slowdown. The Stoxx Europe 600 rose 0.5% to close at 334.68, extending its weekly gain to 0.9%.  The weekly advance comes even as investors world-wide this week have been wrestling with a crop of lackluster corporate earnings, including a run of poor results from U.S. retailers. That had triggered fears the closely watched U.S. retail sales data out on Friday would come in weak, supporting the view that the economy was cooling after a sluggish first quarter. However, the data offered a positive surprise as sales leapt 1.3% last month, easily beating analyst expectations.

Mining and materials stocks sent Japan's benchmark index lower on Friday, capping a volatile week for shares across the region. The Nikkei Stock Average gained nearly 2% for the week, one of the better performing Asian stock benchmarks, although still lagging a 6.4% jump in Philippine shares. The Philippine market got a boost from the country's presidential election results.  Bucking those gains, the Shanghai Composite Index and Hang Seng Index slumped 3% and 2.1%, respectively, for the week. Still, it was mostly a day of losses for the region on Friday, on worries about the shaky outlook for commodity prices, and more recently the disappointing updates from the largest U.S. retailers.  "Two or three weeks ago, there was a semi-optimistic wait-and-see mode amongst investors," said Andy Maynard, head of Asian equities at HSBC. Now, "we are seeing outflows."  The Nikkei, initially buoyed by a strengthening dollar against the Japanese yen overnight, closed down 1.4% Friday. Elsewhere in the region, the Hang Seng Index closed down 1% Friday and the Shanghai Composite Index slipped 0.3%.

Australian shares pulled back for a second day Friday from a rally to a near a nine-month high midweek, with mining stocks leading broad losses amid lower commodity prices.   Despite an early push higher, the S&P/ASX 200 lost 30.3 points, or 0.6%, to finish at 5329.0. Still, the index clung to a fifth straight weekly rise with a 0.7% gain of as it distanced itself from February lows. "Valuations in yield stocks, like the major banks, have been pushed significantly higher following last week's rate cut," said Ric Spooner, chief market analyst at CMC Markets in Sydney. "Buyers are now waiting for more visibility on the potential for further rate cuts and the outlook for earnings."

Copper futures closed higher in London, clawing back losses from the previous day. The London Metal Exchange's three-month copper contract was up 0.20% at $4,622 a metric ton at the PM kerb close. On Thursday, the metal closed near a three-month low.  Among the other base metals, aluminum was down 0.61% at $1,535 a ton, nickel was up 0.23% at $8,650 a ton, and lead was down 0.03% at $1,710.50 a ton.

In this Issue

Dakota Minerals | First pass drilling complete – At a Glance
Market Cap $54m | Current Price $0.17 | SPEC BUY
Dakota Minerals (DKO) released the final assays from the first pass drilling program of its 100% owned Lynas Find project in the Pilbara region of Western Australia. While only a modest portion of the prospective spodumene bearing pegmatite area has been tested, drilling has shown thick, shallow mineralisation with average intercept grades of 1.7% Li₂O. This is higher than the average Resource grades in the adjacent project areas of Pilbara Minerals (PLS) and Altura Mining (AJM), at 80Mt @ 1.3% Li₂O and 35Mt @ 1.1% Li₂O respectively. Better intercepts from recent drill results included:

·       20m at 2.61% Li₂O from 5m depth and

·       12m at 1.90% Li₂O from surface

Austal (ASB) | Australian opportunities, but US still key | HOLD
Market Cap $506m | Current Price $1.46 | Valuation $1.70
While the pipeline in Australia has dominated headlines in recent months, U.S. ship build programmes continue to dominate both revenue and the order book.  Recent comment that margins in the Littoral Combat Ship (LCS) programme (which is by far ASB’s most important) are under review therefore gives us pause.  Building in more cautious margin assumptions for U.S. ships see our group EBIT numbers fall 9-10% over the next three years and our blended valuation reduce to $1.70 (prior $1.90).  We have no doubt that LCS margins will improve as the programme matures, but until there is greater clarity we downgrade our recommendation to hold (prior buy).

Thought of the Day

Salt Lake Potash (SO4) | Building the Model
Market cap $48m |Current price $0.355 | Unrated

Sulphate of Potash (SOP) is a speciality fertiliser with a market characterised by limited primary supply and significant demand, particularly for its use on high value crops.  In comparison to the much broader Muriate of Potash (MOP, or KCl) market, which currently exhibits overcapacity and declining prices, there has been a major surge in interest in the expansion of primary SOP production to meet latent demand.

Salt Lake Potash (SO4) is one Australian company focused on the potential extraction of SOP from brines as a cheaper alternative to costly secondary production methods.  Following significant expansion of the Mineral Resource Estimate to 80-85Mt SOP in February, and an $8.9m placement concluded in April, the Company has lost no time in deepening its understanding of the resource at its Lake Wells project.

Pump testing

Late last week SO4 announced encouraging results from initial pump testing.  The deep basal sand aquifer was tested from 105-120m and the surface aquifer was tested at two locations to a maximum depth of 24m.  The basal aquifer and one of the surface aquifers were tested at 4 litres/second, which was at the maximum capacity of the pump.

Data modelling showed basal sand permeability of 0.5m/day, although the coarser sands in the lower part of the aquifer (116-120m) indicated much higher permeability of 2-3m/day.  Importantly this hole was located on the flank of the palaeochannel and the channel is much deeper (up to 50m) further south (refer LWTB001 in figure below).

Figure 1: Transect at Lake Wells

Source: SO4

What does this mean?

SO4 estimated transmissivity, which is a measure combining permeability and aquifer thickness, of 8m²/day from the basal sand aquifer.  This number may have improved, potentially significantly, if the pump test had intersected a thicker section of the more permeable, coarser sands.  The relevance of this is that transmissivity, in turn, provides an indication of potential extraction rates from the aquifer.

SO4’s drilling and testing programme will continue in the coming months to build the Company’s understanding of Lake Wells’ hydrogeology.  Ultimately this data will help to firm up potential extraction rates and therefore the number of bores required to underpin desired production.

Linking brine chemistry and extraction rates to a 300ktpa SOP mine

For example, if desired SOP production was 300ktpa, and the K concentration of the brine was 4,000mg/litre, then the project would have to pump just over 1,000 litres of brine every second.

Figure 2: Required brine production for 300ktpa SOP mine

Source: Argonaut calculations

Extraction rates would then provide an indication of the number of bores required and, dependent on the distance between bores, the channel extent needed to support the required SOP production rate.  The table below continues the above example and shows the number of bores and extent of channel required to support a 300ktpa project at different extraction rates.

Figure 3: Bores and channel extent required to support 300ktpa SOP mine

Source: Argonaut calculations

However, while the coarse sands and gravels at the depths of the palaeochannel are likely to be the most productive, there is also considerable potential from the surface aquifer (via bores and trenches) and even from the fractured siltstone.  These zones would potentially supplement production from the basal sands.

Next steps for SO4

In addition to the ongoing drilling and pump testing programme, field evaporation trials are also planned in the near term.  Importantly, after the recent capital raise, SO4 is well funded to continue building its Lake Wells model.  It will provide important data to go into the Scoping Study due for release by the middle of the year.

Important Disclosures

Argonaut acted as the Joint Lead Manager to the Placement to raise $5.0M in March 2016 and received fees commensurate with this service.

Recent Contacts & Presentations

Red 5 (RED), Medusa Mining (MML), Saracen Mineral Holdings (SAR), Paradigm BioPharmaceuticals (PAR), Pilbara Minerals (PLS), Energia Minerals (EMX), Deep Yellow (DYL), Paladin Energy (PDN),), West Africa Resources (WAF), Finders (FND), Credo Resources (CRQ) , Orthocell (OCC), Capricorn Metals (CMM), Gold Road Resources (GOR), Otto Energy (OEL), Dakota Minerals (DKO), Cradle Resources (CXX), Kidman Resources (KDR)

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