Market Update & Important Indicators
A sharp slump in Chinese markets piled further pressure on stocks Monday, after patchy economic data and corporate earnings spurred declines last week. China stocks suffered their sharpest drop in eight years amid concerns the government is pulling back on measures to prop up to the market. Markets slipped in the U.S. The Dow Jones Industrial Average fell 128 points, or 0.7%, to 17,441 in afternoon trading while the S&P 500 index shed 0.6% after Friday's 1.1% fall. On Monday morning, investors received readings on U.S. durable goods orders in June, which rose 3.4%, compared with analysts' estimates of a 2.7% rise. The Dallas Fed said its reading on manufacturing activity stood at -4.6 in July, denoting contracting activity.
A sharp rally two weeks ago after Greece reached a new bailout deal with its creditors has foundered amid lackluster earnings in Europe and the U.S. and compounded by events in China. European stockmarkest were sharply weaker overnight, with the FTSE, DAX and CAC declining 1.1%, 2.6% and 2.6% respectively.
China stocks suffered their sharpest daily percentage decline since 2007. The Shanghai Composite Index ended down 8.5% at 3,726, its second-straight day of losses and the worst daily percentage fall since February 27, 2007. China's main index is up 6% from its recent low on July 8, but still off 28% from its high in June. The smaller Shenzhen Composite fell 7.0% and the small-cap ChiNext Closed 7.4% lower. Other Asian markets declined more modestly, pressured by disappointing earnings results overseas. Hong Kong's Hang Seng Index fell 3.1%, Japan's Nikkei Stock Average fell 0.9% and South Korea's Kospi was off 0.4%.
Base metals were also dragged lower overnight, with LME copper, nickel and zinc declining 1.4%, 2.4% and 1.0% respectively. Crude oil was also lower, with Brent down 2.1% to $53.47/bbl and WTI off 1.3% at $47.39/bbl. Gold inched lower to $1,095/oz, however iron ore was one of the few brighter spots, climbing 1.8% to $52.35/t.
In This Issue
Carnarvon Petroleum (CVN) | BUY
Carnarvon Petroleum Limited (CVN) released its Q4 FY15 results capping off a significant year for the Company. Through the year CVN successfully farmed down its Thai asset for A$55m retaining a US$32m royalty payment, drilled the successful Phoenix South-1 well with an estimated 19 mmbbl of recoverable oil and commenced a significant 3D seismic program covering the entire Phoenix acreage. The latter remains on schedule for completion in the Q3 CY15. In addition, the Company appointed Peter Moore (former Vice President of Exploration for Woodside Petroleum) as non-executive Director.
CVN begins the FY16 with further exploration upside in addition to the two oil prospects found in the 100% owned Cerberus blocks. Gross US$70m carry on the upcoming Roc-1 well (spud date Q4 CY15, Quadrant Energy and JX Nippon) which will test the structure up dip from the Phoenix South-1 oil discovery, a strong cash position of A$97.3m and Nil Debt. In addition, the extensive acreage position in the Phoenix area has numerous follow up prospects with further lead generation expected from the recently acquired seismic data. We believe the stock will rerate as the Roc-1 Spud date draws closer and with the identification of further prospect targets.
Austin Engineering (ANG) | BUY
A $31.6m equity raise via a 5 for 6 entitlement issue and a $20m subordinated loan have had a marked positive impact on ANG’s balance sheet, reducing gearing to ~28% and leverage to ~3.1x. With comfort around the balance sheet, we can start to focus on the business’s operational leverage. Although an earnings recovery is proving a long, hard road, we believe ANG to be undervalued on a longer term view. With balance sheet risk reduced we upgrade to buy (prior hold) on a $0.70 valuation (prior $1.15).
Northern Star (NST) | HOLD
Northern Star (NST) delivered a record June Q (previously announced), producing 153koz @ AISC A$983/oz (per ounce sold). Normalised FCF was ~A$53m, implying a FCF margin of A$350/oz produced. The stock offers protection against the volatile USD gold price environment with its Australian domiciled high grade operations, high margins and a solid balance sheet (A$178m cash, bullion and investments, no debt). Operational performance improved in the June Q with higher output and lower AISC delivered across all sites. The strong balance sheet will enable the Company to examine growth options through further M&A. Potential acquisitions are likely to be value accretive given the Company’s demonstrated track record on this front. HOLD and A$2.00 valuation maintained.
Recent Contacts & Presentations
Resolute (RSG), Rift Valley (RVY), Pacifico (PMY), Kingsgate (KCN), Troy (TRY), Northern Star (NST), Sandfire (SFR), Regis (RRL), Saracen (SAR), Sino Gas & Energy (SEH), Dacian (DCN), Buru Energy (BRU), Carnarvon Petroleum (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), Pura Vida Energy NL (PVD), High Peak Royalties (HPR), Karoon Gas (KAR), Austex Oil (AOK), UIL Energy (UIL), Tlou Energy (TOU), FAR Limited (FAR), Cooper Energy (COE), Central Petroleum (CTP), Senex Energy (SXY)