Market Update & Important Indicators:
The Dow Jones Industrial Average rose Friday to finish a second consecutive week higher, as fears of contagion from Turkey's currency crisis continued to ebb. The index of the 30 U.S. stock-market stalwarts added to its massive gains from Thursday, when the Dow logged its biggest point move in four months, easing investor concerns that the U.S. market was on the cusp of a more significant pullback. An additional week of solid corporate profit reports from companies like Walmart helped. The Dow industrials climbed 0.4%, while the S&P 500 added 0.3% and the Nasdaq Composite rose 0.1%. The additional gains helped the Dow and S&P 500 notch a second consecutive week of gains, of 1.4% and 0.6%, respectively. The Nasdaq, however, is down 0.3% over the past five trading days, as tech stocks came under pressure earlier in the week. While all 11 major S&P 500 sectors rose Friday, consumer-staples stocks were among the best performers. Up 3.2% this week, the sector of food makers and household-product manufacturers has been enjoying a renaissance lately, as investors have sought their relative safety to hedge against market volatility. Consumer staples tend to pay generous dividends and fare better during periods of economic duress since consumers tend to always need those goods and products. The US gold price gained 0.9 to record 1,184.60 US$/oz.
European shares closed lower as worries about the Turkish lira continued to weigh on sentiment. The Stoxx Europe 600 slipped 0.1% as the embattled currency fell more than 4% against the dollar. Germany's DAX shed 0.2% and France's CAC-40 edged down 0.1%.
Many Asia Pacific stock markets ended a tough week with generally modest gains, as Turkey's travails colored activity in most locations. Japan's Nikkei added 0.4%, led by precision instruments, metals and shipping. Medical-device maker Terumo gained 3%, as did Sumitomo Metal Mining and major shipper Mitsui O.S.K. Hong Kong's Hang Seng edged up 0.4%, snapping a five-day losing streak as index heavyweight Tencent Holdings rebounded from a large setback that followed downbeat earnings results. Korea's Kospi rose 0.3% as Samsung and HK Hynix pared the previous day's losses. The one market that fell was China, which has been one of the world's biggest decliners this year. Indexes fell more than 1% to fresh multiyear lows, capping roughly 5% declines for the week.
Australia's stock benchmark, the S&P/ASX 200, lagged bigger gains seen in much of Asia
Pacific Friday, but the increase was still enough for it to notch another 10 1/2-year closing high. The index rose 0.2% putting the week's gain at 1%. Consumer discretionary names advanced 0.4%, hitting fresh 10-year highs, and the heavily weighted financials climbed 0.3%. But health care pulled back 0.5% after hitting another record high earlier.
Base metal prices were mixed on the London Metal Exchange. Lead fell 2.6% to 1,963/t, Zinc gained 0.3% to 2,391/t. Nickel gained 1.2% to 13,390/t as the 3-month copper contract lost 0.2% to 5,890/t. Aluminium lost 0.9% to 2,004/t.
In this issue:
Bauxite/Alumina/Aluminium: Tight Bauxite Supply to Support Alumina Prices
China based Chalco’s (HK:2600, SELL) alumina business segment accounted for almost 100% of the company’s total profit before tax in 1H18, while aluminium was negligible. The outperformance of alumina to aluminium highlighted a structural shift in market fundamentals of alumina.
China’s alumina supply deficits widened to 0.22mt in June from 0.09mt in May, driven by sluggish production, a decrease in imports and strong demand. The accumulated YTD deficit was 0.65mt, compared to a surplus of 0.42mt in 2017. Key points to note include:
1. China’s alumina production in June decreased 2% MoM to 5.89mt. Cumulative production increased only 1% YoY to 33mt, compared to an 8% increase in 2017. In July, China’s total operational refining capacity decreased 4% MoM and 2% YoY to 70.8mt. Daily production in July, according to market commentator SMM, decreased 4% mom.
2. The decline in operational capacity was mainly due to bauxite supply tightness in China, especially in Henan and Shandong provinces. Many alumina producers therefore had to cut back their production and placed operations on care and maintenance. This situation is expected to continue through August with only slight improvement. As of 16 August, China’s alumina prices have increased 24% YoY and 6% year to date, while aluminium prices decreased 9% YoY and 2% year to date.
3. On the demand side, China’s aluminium production has been in recovery, up 12% YoY in July and flat from June. Year to date production increased 3% YoY. The rebound in aluminium exports (up 2% MoM and 18% YoY to 519kt in July and up 14% YoY in the first 7 months also stimulated aluminium production.
In addition to Alumina deficits, Alumina prices were also driven by rising bauxite prices (up 70% YoY and 26% year to date to Rmb535/t), which was caused by supply tightness in China. Looking ahead, stronger bauxite prices and refining reductions should continue to support alumina prices.
While, rising bauxite prices and China’s increasing appetite for imports will benefit bauxite miners, the ramification for refiners and smelters is not good as their margins are being squeezed. We believe some smelters will struggle to breakeven.
Stocks in Focus:
Chalco: (HK:2600) – SELL, HK$3.90 TP (under review): Although Chalco is vertically integrated with its self-owned bauxite mines, only half comes from own supply and China domestic sources are declining (both quality and quantity). In view of the poor performance of Chalco’s aluminium business segment, we expect continued downward pressure on earnings.
Metro Mining (ASX:MMI) – BUY, A$0.40 TP: Metro Mining is ramping up its Bauxite Hills operation in Northern Australia. We see MMI as a key beneficiary to declining China domestic bauxite reserves and the growing seaborne trade. Argonaut visited MMI’s operations this week and was impressed at the rapid rate at which ramp-up is progressing
Alumina Resources (ASX:AWC) – Not Under Argonaut Coverage: AWC should be a beneficiary of tight Chinese Alumina supply with its investment in bauxite mines and alumina refineries through its 40% investment in Alcoa World Alumina and Chemicals
South 32 (ASX:S32) – Not Under Argonaut Coverage: S32 should be a beneficiary of tight Chinese Alumina supply through its Worsley Alumina operations in Western Australia
Myanmar Metals (MYL) | Great expectations from exploration | SPEC BUY
Market Cap $86m | Current Price $0.07 | Target price $0.22
Myanmar Metals (MYL) released an accelerated mine development plan for its Bawdwin Project in Myanmar (51% MYL, 49% local owners) outlining a 15,000m drill program and setting a timeline to complete feasibility studies, offtake and financing and requisite permitting. Drilling will focus on the Shan and Meingtha lodes to upgrade resources from Inferred to Indicated status. The Company also plans to test extensions to the known Bawdwin lodes, starting with electrical geophysics (IP and EM), magnetics and soil sampling. Argonaut believes this initial work will generate multiple highly prospective targets given the lack of modern exploration in the region. We highlight that historic workings and exposed metalliferous gossans span over an 8km strike (versus the current resource strike of 1.2km).
Recent Contacts & Presentations:
Melbana Energy (MAY), Botanix Pharmaceuticals Ltd (BOT), Novo Litio (NLI), Classic Minerals (CLZ), OZ Minerals (OZL), Saturn Metals (STN), Antipa Minerals (AZY), SRG Ltd (SRG) Bowen Coking Coal (BCB), Birimian (BGS), Breaker Resources (BRB), Galena Mining (G1A), Valmec (VMX),Bryah Resources (BYH), Calima Energy (CE1) Genesis Minerals (GMD), Agrimin (AMN), Magnetic Resources (MAU), Core Exploration (CXO), Marindi Metals (MZN), MOD Resources (MOD), Santos (STO), Adriatic Metals (ADT) Bio–Gene Technology (BGT), Walkabout Resources (WKT), Triton Minerals (TON), Calima Energy (CE1), Peel Mining (PEX), Catalyst Metals (CYL), Vault Intelligence (VLT), Doray Minerals (DRM), Nzuri Coppoer (NZC), Bowen Coking Coal (BCB), Phosphagenics Limited (POH) Great Boulder Resources (GBR), Orthocell (OCC), Northern Minerals (NTU), ABM Resources Ltd (ABU), Vital Metals Ltd (VML), Todd River Resources Ltd (TRT), Pacific Energy Ltd (PEA), Carnarvon Petroleum Ltd (CVN), Australian Mines Ltd (AUZ), Australian Finance Group (AFG), Paladin Energy Ltd (PDN), Cooper Energy Ltd (COE), Medibio Ltd (MEB), Salt Lake Potash Ltd (SO4).