Market Update & Important Indicators
Stocks struggled for direction in light trading, bouncing in and out of positive territory. The lack of enthusiasm for stocks has plagued the market in recent weeks. After a sharp drop and bounceback in the first three months of the year, stocks have plodded along with little fanfare. In about the first six weeks of the year, the S&P 500 dropped 11%, and regained those losses by March 18, covering a span of 221 points. The S&P 500 is roughly flat between March 18 and Friday's close, trading within a 66-point range. Monday was typical of this flat-trading pattern. Traders said few shares were changing hands because of the upcoming holiday weekend and a busy investor conference schedule. The DUG Permian Basin conference kicked off in Texas, drawing many oil and gas investors, while the SunTrust Robinson Humphrey Annual Financial Services Conference began in New York. J.P. Morgan's Global Technology, Media and Telecom Conference is in Boston this week. Investors also continued to seek clarity on the course of U.S. interest rates. Federal Reserve Bank of St. Louis President James Bullard on Monday suggested there were more factors in favor of gradually raising U.S. interest rates than there were for holding steady. Even as the Fed indicated it may raise rates in the coming months, investors remain cautious about the health of the U.S. economy. Corporate earnings for the first three months of the year declined, marking the fourth consecutive quarter of contracting earnings, according to FactSet. Economic growth remains meager, with inflation broadly appearing soft. Elsewhere, the Stoxx Europe 600 fell 0.4%. Greece's Athex Composite gained 1.5% after the country's parliament approved tax and austerity measures needed to secure further loans.
Declining commodity prices weighed on Asia's resource stocks Monday, while the Japanese share market slipped amid a lack of major consensus from the Group of Seven meetings between finance ministers and central bankers. Energy stocks led losses in much of the region, after crude oil prices fell Friday in the U.S. and continued to slip during Asian trading hours Monday. Tokyo-listed Inpex Corp. finished down 2.2%, More broadly in the region, the Nikkei Stock Average was down 0.5% and the Hang Seng Index slipped 0.2%. The market was reacting to G-7 meetings taking place in Japan over the weekend and this week. Officials there have yet to come to an agreement on how to address slack in the global economy, for example, through coordinated fiscal and monetary policies. But the prospect of higher U.S. interest rates remains at the top of investors' list of concerns. Expectations that the Federal Reserve could tighten as early as June ticked up last week. Shares in Japan were especially hurt after data in the morning showed Japanese exports declined 10% in April, accelerating from a 6.8% drop the previous month. It was the seventh-straight month of declines, reflecting the impact of moderating global growth and a stronger yen. Economists surveyed by The Wall Street Journal had expected a 9.1% decrease. Meanwhile, Chinese stocks bucked losses in the region, although trading there has been sideways for weeks. The Shanghai Composite Index finished up 0.6%, as investors monitored regulators' latest stance on the market. China's stock regulator rejected two small firms applying for initial public offerings last Friday, suggesting the authorities want to limit the supply of new shares that could pressure the market.
Australian shares fell, with mining companies losing ground on the biggest single-day drop in China's iron-ore futures in two weeks and travel agency Flight Centre Travel Group slumping after warning on profits. The S&P/ASX 200 Index closed 0.6% lower, or 32.4 points, at 5318.9 with investors also concerned about the prospect of higher U.S. interest rates. The index had broken briefly below the 5300 threshold, before recovering some ground. BHP Billiton Ltd. and Rio Tinto PLC fell 2.6% and 2.3% to A$18.37 and A$44.00, respectively, after iron-ore futures on the Dalian Commodity Exchange fell 5.4% to 352.5 yuan (US$53.90) a metric ton on Monday. China buys more than two-thirds of all physical iron ore traded globally, so the signals it sends about demand are closely watched. Energy companies were also on the back foot after crude-oil prices slipped in Asian trade Monday, reflecting fears that the global supply of oil will continue to outpace demand after some of the recent supply disruptions were halted. July Brent crude on London's ICE Futures exchange–the global benchmark–fell US$0.14 to US$48.58 a barrel. Woodside Petroleum Ltd. dropped 1.1% to A$26.79 after analysts gave a mixed response to the company's investor day held at the end of last week. Morgan Stanley, which has an equal-weight call on Woodside and A$24.94/share price target, isn't convinced that the right balance had been reached between its exploration activity and M&A aspirations that are limited to deals under US$1 billion.
Copper futures closed lower in London, on a bearish cocktail of poor trade data from top consumer China, weaker oil prices and a stronger dollar. The London Metal Exchange's three-month copper contract was down 0.4% at $4,562 a metric ton at the end of open-outcry trading, having hit a two-day low earlier in the session at $4,545 a ton. Trade data out of top consumer China over the weekend put pressure on metal prices, with the Asian powerhouse importing 341,677 tons of copper in April, down from 570,000 tons in March. Oil prices fell for a fourth-straight session on renewed concerns about a global glut in crude supply. U.S. crude for June delivery settled down 33 cents, or 0.7%, at $48.08 a barrel on the New York Mercantile Exchange. U.S. oil has fallen 0.5% during the losing streak, its longest in a month. Brent, the global benchmark, fell 37 cents, or 0.8%, to $48.35 a barrel on ICE Futures Europe.
Thought of the Day
Paringa Resources (PNL)|Sales contract reaffirms high margins| SPEC BUY
Market cap $29.4m | Current Price $0.19 | unrated
Paringa Resources (PNL) announced that it had successfully transferred its cornerstone coal sales agreement with major energy suppliers Louisville Gas and Electric Company and Kentucky Utilities Company (LG&E and KU) to the Company’s proposed Buck Creek No. 2 Mine in Kentucky, US. This sales agreement represents sales of US$205m over the first five years of the mine’s life and accounts for 60% of annual production, slated at 1.8m tons per annum. The transfer results from a strategic decision by PNL to develop the shallow, lower capex No. 2 Mine ahead of the larger scale No. 1 Mine (producing 3.8m tons per annum).
High margin coal even at the bottom of the market
The sales contract is priced at US$40.50/t in 2018 escalating to US$45.75/t in 2022 (FOB prices). Prices were marginally reduced during renegotiation from an initial total value of US$220m, however they still provide strong margins against the estimated all-in FOB production cost of US$32.94/t. The corresponding cost from No. 1 Mine, which is expected to commence production ~18 months later, is US$29.34/t. Buck Creek has potential to generate 30% EBITDA margins at the bottom of the coal market. Capex for No. 2 Mine is low, estimated at US$33m (vs US$88m for No. 1 Mine).
Figure 1: Buck Creek project map showing LG&E and KU’s three power plants located in PNL’s target Ohio River Market (Trimble County, Ghent and Mill Creek power stations)
Argonaut expects updated capex and opex figures for the No 2. Mine is coming weeks, leading into an updated BFS for the complete Buck Creek project in Q3 CY16. Project permitting is underway and expected to be completed by June 2017. Development should commence shortly thereafter, with first production slated for Q2 CY18. We believe Buck Creek will attract several financing options given the high proportion of contracted production and low development capex.
Coals aint coals – Captive market the differentiator
Buck Creek is located in the Illinois Basin and strategically positioned on the banks of the Green River which gives access to the vast Ohio and Mississippi river energy market. This market consists of over 17 power plants operated by 10 different utilities, likely to accept Buck Creek’s coal specifications. The greater market includes >40 coal-fired power stations (with product suitability untested). The thematic for demand growth in the Illinois Basin is strong with the US Environmental Protection Authority (EPA) estimating Illinois Basin coal production for the electrical power sector to increase by 76Mt (68%) from 2013 to 2025. In contrast, the two other major US coal regions (Central Appellation Region and Powder River Basin) are forecast to decline by 80Mt & 191Mt respectively. Natural gas powered generation when factoring in transmission costs, transport costs and storage costs is less competitive in the interior regions of the US. Proximity to high calorific coal, low mining costs and cheap transport via rail and river barging gives Illinois Basin coal a clear cost advantage over natural gas.
Figure 2: Comparative cost of natural gas and Buck Creek coal to target markets (year-to-date average mmbtu)
Argonaut maintains a SPEC Buy recommendation with a $0.98 target price. At the current price of $0.19, the stock offers deep value to our valuation.
Recent Contacts & Presentations
Paladin Energy (PDN), Credo Resources (CRQ) , Orthocell (OCC), Paragon Care (PGC), Orthocell (OCC), Salt Lake Potash (SO4), Dakota Minerals (DKO), Cradle Resources (CXX), Saracen (SAR), Gold Road Resources(GOR), Regis Resources (RRL), Gascoyne Resources (GCY), Botanix (BNE), Sino Gas & Energy (SEH), Altura Mining (AJM), Navitas (NVT), Gage Roads (GRB)