Morning Notes

31/08/2017 Argonaut Morning Note

Market Update & Important Indicators:

The Nasdaq Composite headed toward its third straight day of gains Wednesday, boosted by shares of chip makers. The tech-heavy index rose 1.1%, while gains in semiconductor stocks helped the S&P 500 edge up 0.5%. The Dow Jones Industrial Average turned positive finishing up 0.1% at 21,892. Some investors and analysts have said the economic and earnings backdrop for stocks remains favourable, keeping the market within striking distance of record highs even amid geopolitical tensions. North Korea's missile launch over Japan weighed on U.S. stocks early Tuesday before shares recovered, the latest example of this year's short-lived pullbacks. The U.S. gold price was slightly lower overnight, shedding less than 0.1% at 1,308.10 US$/oz.

European stocks rebounded from a six-month low on Wednesday, as tensions after North Korea's latest missile launch eased for now and spurred investors to take on more risk. The Stoxx Europe 600 index rose 0.7% to close at 371.01, after sliding 1% to settle at its lowest level since Feb. 10 on Tuesday. That drop came after North Korea launched a ballistic missile over Japan, in a move seen as another direct provocation from Pyongyang meant to destabilize the Asian region. Stocks, however, managed to shake off the concerns on Wednesday, with Asian markets scoring firm gains, U.S. stocks trading higher and European stocks closing higher across the board.

Asian stocks continued to recover Wednesday while market havens lost ground as investors brushed aside the worries that followed a missile launch by North Korea. Tuesday's missile was the first Pyongyang has fired over Japan's main islands since 2009, and the latest in a string of direct provocations that have briefly weighed on financial markets in recent weeks. Still, many investors said the economic and earnings backdrop of the stock market remained favourable, offsetting geopolitical jitters. Japan's Nikkei Stock Average rose 0.7%, helped by a nearly 1% gain in the dollar against the yen from the end of Tuesday's trading, which supported shares of exporters. Hong Kong's Hang Seng Index rose 1.2% while South Korea's Kospi index nudged up 0.3%. The broader Asian stock-market rebound was also helped by U.S. economic data showing that growth remains steady and consumer sentiment is upbeat, said Masashi Murata, currency strategist at Brown Brothers Harriman.

Australian shares wrap up a choppy session nearly unchanged, as big banks and Telstra held the market back from tracking gains across the region. The S&P/ASX 200 rose less than one point to end at 5669.7, though still the first rise in 4 sessions as the index stuck within a range held for months. Telstra was down sharply as it traded ex-dividend and after plans to monetize future earnings from the country's national broadband network were nixed, while several heavily-weighted banks built on what has been a weak month. Still, energy, mining, utilities and industrial sectors were all in positive territory.

The London Metal Exchange’s 3-month copper contract traded lower overnight, shedding 0.33% to finish at $6,769/t. The other base metals finished mainly lower. Nickel prices shed 1.1% to 11,520/t, whilst aluminium prices lost 0.8% at 2,069/t. Lead prices also finished lower, dropping 0.4% to 2,344/t. Zinc prices fell 0.5% to 3,087/t. Tin prices bucked the trend, rising 1.4% to finish at 20,800/t.

In this Issue:

CTI Logistics (CLX) | WA barometer | BUY
Market Cap $67m | Current Price $0.90 | Valuation $1.50

CLX’s FY17 results came in largely in line with our expectations, reflecting the weakness in WA over the last year. However, some recent positive economic signs and more upbeat commentary from a number of Perth-based businesses are worthy of notice. We anticipate a medium-term recovery in CLX’s earnings in the west to add to a stable performance from GMK on the east coast, and believe that FY17 will prove to be the trough year in this cycle. It is appropriate looking beyond the near term, in which case we believe CLX offers compelling value. Buy maintained on a $1.50 valuation.

Independence Group (IGO) | FY17 Full Year Results | HOLD
Market Cap $2,007m | Current Price $3.42 | Target Price $3.30

Independence Group (IGO) released FY17 financial results with revenue of $422m, underlying EBITDA of $151m and NPAT of $17m (vs $417m, $138m and -$59m respectively in FY16). The improved result was primarily driven by higher realised metal prices with zinc, copper, nickel and gold rising 69%, 15%, 11% and 4% YoY respectively. FY16 was also impacted by $65m acquisition costs relating to the purchase of Sirius Resources. The Company maintains a sturdy balance sheet with $36m cash, $200m drawn debt and $200m undrawn debt. We see a high likelihood that IGO will draw down further debt in the September Q to maintain working capital as Nova Ni/Cu ramps up to nameplate. FY17 was an investment year for the Company with ~$235m capital items, including $166m at Nova. FY18 should see a return to strong cashflow with the first full year of production at Nova and increasing production at Tropicana Gold (increasing from 431koz in FY17 to 440-490koz in FY18).

Sandfire Resources (SFR) FY17 full year results | BUY
Market Cap $912m | Current Price $5.78 | Target Price $6.05

Sandfire Resources (SFR) released FY17 full year results with revenue of $533m, EBIT of $114.2m and NPAT of $77.5m (up 10%, 52% and 62% YoY respectively). The profit increase was driven by lower operating costs and higher revenue. Quotational price adjustments, related to rising copper prices, accounted for a ~$19m increase in revenue. Earnings per share increased 61% from 30.5¢/sh to 46.2¢/sh. SFR exited FY17 with a strong balance sheet with $127m cash and negligible debt.

Tox Free Solutions (TOX) | Working off a lower base | HOLD
Market Cap $441m | Current Price $2.27 | Valuation $2.15

While FY17 EBITDA of $82.8m was in line, the guidance for FY18 was well below our prior expectations. As a result, although we believe TOX has a solid, diversified base off which to grow, this base is lower than we had previously thought. Our FY18 and FY19 EBITDA forecasts are 7% and 12% lower than prior, and this has impacted our valuation and recommendation. We downgrade to hold (prior buy) on an amended valuation of $2.15 (prior $2.50).

Recent Contacts & Presentations:

Indoor Skydive Australia (IDZ), OZ Minerals Ltd (OZL), NorWest Energy Ltd (NEW), Berkut Minerals Ltd (BMT), Draig Resources Ltd (DRG), Minotaur Exploration Ltd (MEP), Ausdrill Ltd (ASL), Neometals Ltd (NMT), PNX Metals Ltd (PNX), Northern Minerals Ltd (NTU), New Century Zinc Ltd (NCZ), Metal Bank Ltd (MBK), Rift Valley Resources Ltd (RVY), Panoramic Resources Ltd (PAN), Doray Minerals Ltd (DRM), Wellard Limited (WLD), Bryah Resources Ltd (BYH), Auris Minerals Ltd (AUR), Gage Roads Brewing Co Ltd (GRB), Stavely Minerals Ltd (SVY), Orbital Corporation Ltd (OEC), 4DS Memory Ltd (4DS), Kin Mining NL (KIN), Pharmaust Limited (PAA), Botanix Pharmaceuticals Ltd (BOT)

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