Market Update & Important Indicators
U.S. stocks wobbled between gains and losses as beaten-down health shares rebounded. The Dow finished up 0.3% to 16,049, while S&P500 advanced 0.1% to 1,884. Global stock markets have been sliding in recent sessions because of renewed worries over slowing growth and questions over the Federal Reserve's plan for raising interest rates. In Europe, troubles at Glencore as well as an emissions scandal at Volkswagen AG have added to investor unease.
Investors dumped European stocks for a second straight day, as fears about a slowing global economy continued to drag on sentiment. The pan-European Stoxx Europe 600 index fell 0.7% to 339.23, closing at its lowest level since early January. European data on Tuesday underscored a separate worry facing the European Central Bank. Spanish inflation slumped to negative 1.2% in September, missing forecasts of a negative 0.5% reading. In Germany, inflation also missed forecasts. Consumer prices there fell 0.2% in September, the steepest decline since January and reviving concerns the Eurozone is slipping into deflation.
Markets across Asia plummeted, with commodities and related sectors bearing the brunt of worries that China's slowdown is spilling into global markets. Japan's Nikkei Stock Average closed down 4.1% at 16930.84, giving up gains for the year and hitting an eight-month low. Tumbling resources stocks dragged Australia's S&P ASX 200 to a two-year low. The benchmark fell 3.8%, its biggest one-day move in a little over a month. The Shanghai Composite Index fell 2%.
Metals finished mixed overnight. Brent and WTI crude advanced 1.9% and 1.8% to $48.23/bbl and $45.23/bbl respectively and gold lost 0.4% to $1,127.9/oz.
Thought for the Day
Medusa Mining (MML)
The recent share price depreciation of Medusa Mining (MML) is presenting an attractive risk / reward proposition. The recent rebalance of the GDXJ index led to Van Eck exiting its position in the sock (~13m shares) on 18th September.
Operationally, MML’s Co-O mine has delivered continued grade improvement over the past six Qs, following the implementation of a number of initiatives. Margins are likely to expand with ongoing grade improvement, increased mine throughput and reducing sustaining capex. The stock trades at ~2.5x steady state FCF (at ~150koz @ AISC US$900/oz) and compares favourably with peers on EV / production, offering unhedged production with an unencumbered balance sheet (US$8m net cash at 30th June).
Operational performance: MML has implemented a number of operational initiatives, most notably stoping protocols and payment systems based on ore tonnes blasted rather than tonnes trammed. Following these initiatives, stope dilution has improved and reduced overdrawing of stopes is improving the safety records. The head grade has improved over the past six Qs. With 66% of the stopes converted to the new designs prior to the current Q, the head grade is expected to move towards ~7.0g/t in H2 CY15.
Capex to reduce in near to medium term: The Company is completing a number of capex projects, including:
• Ventilation upgrade (expected December Q completion)
• Service shaft upgrade (A$10m, expected completion June CY16)
• Tailings dam (expected September Q completion, will hold ~4 years of tailings)
Completion of these projects will see capex reduction in the near to medium term. The installation of the service shaft will convert the current Saga shaft to a dedicated ore shaft, improving efficiencies and increasing the mine’s hoisting capacity.
Cost profile: Improving grades, expanding throughput and reducing capex will see AISC reduce in the near to medium term. The Company’s FY16 guidance is 120-130koz @ AISC US$960-1060/oz (including US$80/oz for the service shaft). FY17 production is expected to be 135-145koz, and an AISC of ~US$900/oz is tangible.
Exploration upside: The Company will be testing the extensions of the mineralisation at depth (L12-16) through underground drilling from a number of dedicated underground platforms (see Figure 2 below). Given historical hits and the extent of mineralisation, this program is likely to demonstrate upside to the existing 427koz @ 7.3g/t Reserve.
Peer comparison: Assuming a steady state production of ~150koz @ AISC ~US$900/oz, the stock is trading at ~2.5x steady state FCF. The stock already trades on a competitive level v peers, achieving these targets will see enhanced relative valuation.
Recent Contacts & Presentations
Intueri Education (IQE), OBJ Limited (OBJ), TFS Corporation (TFC), HRL Holdings (HRL), Tox Free Solutions (TOX), Sino Gas & Energy (SEH), Dacian (DCN), Carnarvon Petroleum (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), FAR Limited (FAR), Central Petroleum (CTP)
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