Latest Research

Fortescue Metals Group (FMG) - Bumper FY17, But Winter Is Coming

Fortescue Metals Group LogoFortescue Metals (FMG) reported a strong set of FY17 results with underlying EBITDA of US$4.7bn (vs Argonaut $4.8bn) and NPAT of US$2.1bn (vs Argonaut US$1.8bn, +15%). Full year FY17 production came in at 170.4Mt (vs 165-170Mt guidance) at a C1 cost of US$12.82/wmt (-17% yoy). A final dividend of 25cps was announced increasing total FY17 dividends to 45cps, representing a 52% payout ratio. Looking forward to FY18, FMG sees production of 170Mtpa at a C1 cost of US$11-12/wmt and an increase in the dividend payout ratio to 50-80% of net profits. We continue to believe prices will moderate in FY18 as Chinese de-capacity programs and high stockpile levels cap the upside. We also expect FMG’s capacity to maintain high level dividends will be short lived as the proposed US$1.5bn capex for the Firetail replacement options come into play in FY19. HOLD.

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Xanadu Mines (XAM) - The Next Mongolian Empire - Site Visit

Xanadu Mines LogoArgonaut recently visited Xanadu Mines (XAM) advanced stage copper/gold exploration assets in Mongolia. The Company has two core projects, Kharmagtai and Red Mountain, and both contain several clusters of porphyry intrusions with a range mineralisation styles. An intercept of 646m @ 0.51% Cu & 0.87g/t Au at the Stockwork Hill deposit earlier this year confirmed the potential for the Kharmagtai Project to develop into a globally significant porphyry district. Kharmagtai has three defined discrete porphyry deposits, and a fourth would likely provide the critical mass to promote development. We believe the Golden Eagle prospect at Khamagtai could be the next discovery with a gold rich cap identified in shallow RC drilling supported by coincident geophysical and geochemical anomalism. The pipeline Red Mountain Project is well advanced with defined porphyry mineralisation at the Dolerite Hill prospect (184m @ 1.06% Cu Eq) and a massive sulphide intercept at Target 10 (6.2m @ 5.5% Cu Eq). SPEC BUY recommendation.

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Paringa Resources (PNL) - Construction Underway

Paringa Resources LogoParinga Resources (PNL) has commenced construction at Poplar Grove, the first mine to be developed at the Buck Creek Thermal Coal Complex. Excavation of the boxcut is underway in preparation of the slope (decline) construction to access the WK No. 9 coal seam. First washed coal production is expected Q3 CY18. All major contracts have been signed on a fixed price basis which should mitigate price and timing overruns. The Company has achieved ~US$1.2m cost saving on the development capex to date. Argonaut maintains a BUY recommendation with a $1.66 target price.

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Micro Caps - Results Preview

Argonaut Limited LogoOne thing common to our microcap universe is that investors need to look beyond near term financial performance to appreciate the potential. However we expect investors to selectively do so, particularly given the capital flowing into the microcap space. Our picks in our universe are currently CLX and GRB. For logistics business CLX, we believe FY17 will prove to be the trough year and that mid-cycle earnings support a higher share price. And brewer GRB is successfully executing to date its strategy to sell more proprietary product. We are upbeat on the potential for OEC’s drone business, but worry about timing and the drag from REMSAFE in the near term. TPS and VLT are still in the process of proving their business models. The former turned the corner in the latest quarter, but both are still close enough to our valuations to warrant hold calls.
Note: we exclude from this preview earlier stage companies under coverage for which we do not have financial forecasts (AMN, BOT, HZR, OBJ, OCC and SO4).

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Small Caps - Results Preview

Argonaut Limited logoSmall caps (ex-mining services) under coverage offer exposure to attractive sectors. GCS and SXE have significantly increased their presence on the construction-rich east coast. PGC sells products and services into the acute and aged healthcare space. PPC has a large, low-cost, country-wide property development portfolio focused on growth corridors. ASB should benefit from increasing naval spend, and TOX has exposure to the defensive waste management sector. We think there is more value apparent in GCS, PGC and PPC, while ASB, SXE and TOX are closer to our valuations.

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