Market Update & Important Indicators
Stocks edged higher in afternoon trading, as investors kept an eye on talks between Greece and its creditors. The S&P 500 rose 3 points, or 0.2%, to 2,100, reversing an early loss and putting the benchmark on track for its second straight all-time high. The Dow Jones Industrial Average gained 28 points, or 0.2%, to 18,048.
European equity markets largely shrugged off the collapse of crucial negotiations over a new financing deal for Greece, with the euro chalking up strong gains as investors continue to bet a deal will be reached to secure the country's future inside the eurozone.
The Stoxx Europe 600 briefly dipped in early trade but rebounded to close 0.1% higher, close to the seven-year high hit last week. Greek stocks and bonds lost ground initially but recouped part of their early losses and remained above the weakest levels they have reached in recent weeks. Athens' main stock index closed 2.5% lower. Bond yields climbed, signalling a fall in bond prices. The 10-year yield was around half a percentage point higher at 10.36%. But there was little sign of broader contagion.
Stocks in Australia and Japan fell Tuesday, weighed by the collapse of financing talks between Greece and its European creditors. Elsewhere in Asia, stocks were mixed and the Korean market was flat after its central bank left interest rates unchanged. The Nikkei Stock Average was down 0.1% and Australia S&P/ASX 200 was also down 0.5%. Hong Kong's Hang Seng was up 0.2%, even after Chinese house prices weakened. The NZX-50 closed down 0.1% at 5750.21 led by a 6.1% fall in NZ Oil & Gas (NZO.NZ), which announced last week it was making a takeover bid for Cue Energy Resources.
Base metals on the LME finished in the red. Copper futures closed much lower on the London Metal Exchange on Tuesday, as trading volumes wound down ahead of the start of the Chinese Lunar New Year. The LME's three-month copper contract was down 1.8% at $5,660/ton at the PM kerb close. Nickel closed 2.5% lower at US$14,179/t. Gold slid 1.5% to US$1,209.8/oz and WTI crude gained 1.4% to US$53.53/bbl. The AUD is buying US$0.782.
In This Issue
Sales up profit down: Fortescue Metals (FMG) reported NPAT of US$331m for the December H 2014, down 67% H-on-H, but above Argonauts forecast of US$105m. The biggest impact on earning was at the top line with revenue declining on iron ore prices. Despite a 57% increase in sales on the December H FY14, revenue fell 17% on the back a of 46% lower realised price. Argonaut’s full year NPAT increases to US$850m (previously US$620m) on better than expected first H profits. Net debt at December 31 was US$7.5b.
Dividends down: As expected FMG has reduced dividends to 3c/sh from 10c/sh in the previous interim period. This represents a ~28% payout on NPAT (vs 18% for December 2013). The record date for the fully franked dividend is the 4th March with payment on 7th April. With decreasing margins impacting heavily on free cash flow (down 81% H-on-H), we expect dividends to be a secondary priority to debt repayment, thus staying low while gearing remains high. The Company has stated that it aims to maintain ~US$1.0-1.5b cash on hand (currently US$1.6b), implying that only minor debt reduction in the near term.
Costs winning the chase for now: In the declining iron ore price environment FMG’s cost reductions are winning the chase, decreasing 14% H-on-H. Argonaut’s estimated CFR breakeven price against the 62% fines index is US$57/dmt for H2 FY15, maintaining a ~US$8/dmt margin against today’s price of US$65/dmt. The >3% rise in the iron ore fines overnight is likely the result of last minute restocking ahead of the February 19 Chinese New Year. Argonaut foresees a high probability of prices softening following post-New Year restocking, as a result of relentless expansion from the majors (Vale, RIO and BHP).
ASL expects to impair $170-220m assets (mainly plant & equipment) in the Company’s 1H15 pre-tax results. The likelihood of impairment was first flagged in October 2014. ASL joins a rapidly growing list of companies (such as MAH, NWH, CGH and BKN) that have impaired, or expect to impair, tangible and intangible assets this half.
Recent Contacts & Presentations
Energia Minerals (EMX), OBJ Limited (OBJ), Gage Roads (GRB), Rewardle (RXH), Doray (DRM), Alexium (AJX), Orbital (OEC), IMF Bentham (IMF), Metals X (MLX), Pura Vida (PVD), Image Resources (IMA), Tangiers (TPT), ABM Resources (ABU), Centaurus (CTM), Imdex (IMD)