Market Update & Important Indicators
U.S. stocks were mixed, retreating from session highs reached shortly after the Federal Reserve reiterated it would be "patient" in raising interest rates. Stocks got a brief boost from the Fed's statement, but it was short-lived, as few investors had expected officials to signal a coming rate hike. The central bank wasn't expected to make any changes in its latest meeting, which wrapped up Wednesday. Investors have been parsing recent statements from Fed officials for clues about when they could raise interest rates, a move widely expected this year. Technology shares continued to outperform, after a strong earnings report from Apple Inc. Oil tumbled to its lowest level in 6 years, sending energy shares lower on the back of data showing the highest American supplies of the commodity in more than 30 years. The Dow closed down 196 points, or 1.1%, to 17,191 and the S&P 500 lost 27 points, or 1.3%, to 2,002.
European stocks inched up, as a big selloff in Greece weighed down Spanish and Italian markets and left investors cautious ahead of the latest message on the path of monetary policy due from the U.S. Federal Reserve statement later in the day. The Stoxx Europe 600 index closed 0.1% higher having given up most of its early gains. Germany's DAX was 0.8% higher, France's CAC-40 lost 0.3%, while the U.K.'s FTSE 100 rose 0.2%. Spain's IBEX 35 fell 1.3% and Italy's FTSE MIB 0.8%. Greek banks were the heaviest fallers, but the weakness also spread to the wider eurozone banking sector.
Tokyo's stock market edged higher Wednesday, led by strong gains for airline companies benefiting from weak oil prices. The Nikkei Stock Average rose 0.2% to 17795.73, adding to the prior session's 1.7% gain. In mainland China, the Shanghai Composite Index fell 1.4% to 3305.74, as weak oil prices caused declines in large energy companies. PetroChina, the largest constituent in the Shanghai Composite, fell 2.9%. Most also other Asian markets closed higher, as South Korea's Kospi Composite Index tacked on 0.5%, Hong Kong's Hang Seng Index finished up 0.2%, and Australia's S&P/ASX 200 inched 0.1% higher.
Base metals on the LME were mixed, with nickel the best performer, up 1.8%. Gold fell 0.7% to US$1,283.6/oz and WTI crude slid another 3.9% to US$44.45/bbl, its lowest level in 6 years. US data showed oil inventories rose to the highest levels in records going back to 1982, stoking concerns over a supply glut. The AUD is buying US$0.789.
Thought for the Day
Dissecting Caterpillar (NYSE:CAT)
Slowing to a crawl: Caterpillar Inc. (NYSE:CAT) recently reported 4Q14 earnings and downgraded expectations for 2015 earnings. While 2014 revenue and profit were only slightly lower than 2013, CAT’s share price took a hit on deterioration in 4Q14 earnings and 2015 expectations.
CAT 12 month share price performance
Looking forward, the Company has indicated that 2015 revenue is expected to decline to around $50b (2014: $55.2b) and EPS is forecast to be $4.75 excluding restructuring costs (2014: $6.38). Key takeaways from CAT’s outlook commentary:
• No evidence of an upturn in equipment orders for the Resource Industries segment, sales of mining equipment remain depressed and no imminent recovery is anticipated
• Lower oil prices are the largest driver of the declining outlook
• A strengthening US dollar is also expected to negatively impact 2015 sales
• Expectations for the construction industry in China are also lower which will adversely impact equipment sales
• The 2015 EPS guidance of $4.75 was substantially below the analyst consensus forecast of $6.69 per share
How does the lower oil price impact CAT? The Energy and Transportation segment is CAT’s largest revenue generator, accounting for >40% of total revenue in 2014. CAT’s suite of products are used in a variety of different oil and gas applications, including offshore and land drilling, well servicing, oil and gas production and gas compression. The product range includes gas turbines, centrifugal natural gas compressors, reciprocating engines, transmissions and well stimulation pumps. CAT expects that the weaker oil price will impact well servicing and drilling the most.
Aside from the effect on Energy and Transportation segment, CAT also supplies products to the oil and gas sector through construction and mining equipment, such as equipment for drill site preparation, infrastructure and sales of mining equipment to Canadian oil sands. A lower oil price provides significant headwinds for the economies of the oil producing regions of the world which in turn is likely to have negative implications for construction equipment sales.
CAT’s latest release obviously has negative implications for mining service contractors. An already challenging outlook has deteriorated considerably in the last few months as the oil price and commodity prices have tumbled.
BKN bid falls over: Further evidence of the deteriorating landscape comes with the Bradken (BKN) announcement yesterday that discussions with Pacific Equity Partners and Bain Capital (“Consortium”) have ceased and the indicative proposal to acquire 100% of BKN’s shares will not proceed. The announcement stated “the recent volatility in global commodity and financing markets has impacted the Consortium’s ability to obtain financing on terms acceptable to the Consortium”. BKN also noted that no visible signs of a turnaround in the mining cycles have been seen as yet.
In This Issue
OZ Minerals (OZL)
OZ Minerals delivered a strong December Q to round off a recovery year. Production results included 26kt copper and 36koz gold, down 1% and 23% Q-on-Q respectively, maintaining a 100ktpa copper run rate. Under direction of new management, the Company is taking a strategic review of the business. This commenced with the relocation of the corporate office from Melbourne to Adelaide and will incorporate all aspects of the business including a review of the Malu open pit mining schedule and the potential partnering on Carrapateena. The December H marked a return to positive free cash flow with ~$94m generated before a $30m dividend payment. Cash balance increased to unaudited $209m (vs Argonaut forecast of $207m and June 30 $155m).
Sandfire Resources (SFR)
Sandfire Resources (SFR) released December Q results with 15kt copper and 9koz gold in concentrate at a C1 cost of US$/1.18lb (vs Argonaut forecast of 14.0kt copper and 8.0koz gold at US$1.20/lb). Production was down 4.5% Q-on-Q due to water ingress issues in the C4/C5 decline which disrupted mining for four weeks. Despite the issues of the last Q, Production guidance remains on track.
Atrum Coal (ATU)
Atrum Coal (ATU) has stated that the Company is close to securing a partnership Memorandum of Understanding (MOU) on the 3.2Mtpa Groundhog anthracite project (GH) in British Columbia (BC), Canada. GH is the world’s largest undeveloped high grade anthracite project which Argonaut believes has the quality and scale to attract off-take and investment partners. An off-take agreement would substantially de-risk ATU from an equity investment perspective by alleviating market query regarding the saleability of anthracite.
Recent Contacts & Presentations
Northern Star (NST), Doray Minerals (DRM), Troy Resources (TRY), Gold Road Resources (GOR), Saracen Mineral Holdings Limited (SAR), Beadell Resources Limited (BDR), Resolute Mining Limited (RSG), RTG Mining (RTG), Alexium International Group Limited (AJX), Pacific Energy Limited (PEA), Otto Energy Limited (OEL), Peninsula Energy Limited (PEN), Sandfire Resources NL (SFR), Atrum Coal (ATU), Empired (EPD), DTI Group (DTI), Austal (ASB), TFS Corporation (TFC), Pioneer Credit (PNC)