Morning Notes

01/09/2017 Argonaut Morning Note

Market Update & Important Indicators
Shares of energy companies climbed with crude prices intraday, contributing to a broad rally in U.S. stocks. Energy shares had been under pressure for much of the month, extending losses for the year after Hurricane Harvey sent crude prices lower. But energy stocks in the S&P 500 rose 0.6%, lifting broader indexes. Commodity prices rebounded, too, with U.S. crude jumping 2.8% to $47.22 a barrel. The Dow Jones Industrial Average rose 0.1%, or 31 points, to 21923 in afternoon trading. The S&P 500 gained 0.5%, while the Nasdaq Composite added 0.8%. Even after the day's gains, energy shares in the S&P 500 continue to head toward their biggest monthly loss since December 2015. Fresh data suggesting the U.S. and global economy has continued to grow at a steady, albeit slow, pace also helped buoy major indexes, even as geopolitical tensions continue to overshadow markets. Americans' personal spending rose in July at the fastest pace since April, while personal incomes posted their biggest one-month jump since February. The U.S. gold price was stronger overnight, adding 1.0% to close at 1,320.80 US$/oz.

European stocks moved higher, as basic resources shares rose following better-than-expected manufacturing data from China, but retail shares struggled after a warning from French supermarket chain Carrefour. The Stoxx Europe 600 index picked up 0.8% to close at 373.88, adding to a 0.7% gain from Wednesday, when fears of a military conflict between the U.S. and North Korea eased and enlivened buying appetite. Wednesday's and today's rallies, however, weren't enough to pull the pan-European benchmark into positive for the month. The Stoxx 600 ended with a 1.1% decline for August, marking its third straight monthly decline. Stocks have been hurt in part by strength in the euro, which recently hit a more than two year high at around $1.20 against the U.S. dollar and a roughly eight-year high against the pound. Germany's DAX 30 index rose 0.4% to end at 12,055.84, and France's CAC 40 index added 0.6% to reach 5,085.59. In London, the FTSE 100 tacked on 0.9% to 7,430.62.

In Asia, the Nikkei Stock Average closed up 0.7%, after weakening in 14 of the past 19 trading sessions, leaving the index down for the month of August. But many other markets in the region are poised to emerge from the summer volatility largely unscathed, with double-digit gains for the year. Chinese stocks end largely flat, leaving gains for the month on the Shanghai index at close to 3%, while small caps on Shenzhen's ChiNext board rally 6% in August. Hang Seng was down 0.6%. The Shanghai Composite Index closed down 0.1% at 3360.81, adding 2.7% for the month.

Too little, too late for Australian stocks as its benchmark index posted a fourth-straight monthly decline. Though the S&P/ASX 200 rose 0.8% on the day to 5714.5, it fell 6 points for the month and a third-consecutive drop of no more than 0.1% as the index remains stuck in the 5600-6000 range seen all year. The day's gains were led by the Big 4 banks, capping a weak month despite fairly solid earnings reports. Miners also did well, with BHP Billiton ahead by 1.6% as it wrapped a second-straight strong month in style.

The London Metal Exchange’s 3-month copper contract traded higher overnight, gaining 0.3% to finish at $6,788/t. Other base metals finished higher. Nickel prices added 1.9% to 11,740/t, whilst aluminium prices gained by 1.4% at 2,099/t. Lead prices rose 1.0% to 2,368/t, with Zinc prices jumping 1.8% to 3,142/t. Tin prices also lifted by 0.4% to finish at 20,873/t.

In this issue
Berkeley Energia (BKY) | Retortillo fully funded | BUY
Market Cap $196m | Current Price $0.84 | Target price $1.70

Berkeley Energia (BKY) has secured funding for the second stage of development for the Retortillo uranium mine and processing centre, part of the greater Salamanca Project in Spain. The Company has entered into an agreement with the sovereign wealth fund of the Sultanate of Oman (State General Reserve Fund ([SGRF]), who will issue BKY an unsecured interest free loan to the value of US$65m which can be converted into ordinary shares at £0.50 (A$0.82), an 11% premium to the 10-day VWAP. In addition, SGRF will be issued 50.4m unlisted options with a weight average exercise price of £0.85 (A$1.39) over three tranches. The loan will fund final development of the Retortillo uranium mine and processing centre and the options will largely fund the second mine, Zona 7, located ~10 km from the Retortillo plant. Argonaut maintains a BUY recommendation with a $1.70 target price. BKY is the only listed uranium developer globally with near term, large scale production capability. We regard this funding agreement as a creative, low dilution (relative to current pricing) and unencumbering financing solution.

Doray Minerals (DRM) | Treading water | HOLD
Market Cap $76m | Current Price $0.22 | Target price $0.23

Doray Minerals (DRM) reported its FY17 result with operating cashflow of $59.1m (vs Argonaut $62.8m, -6%) on production of 102koz and 4.6kt Cu in FY17. The Company recorded a net loss of $71.7m after non-cash impairments of $69.5m. DRM had previously flagged ~$46.9m impairments in the 1H result in February 2017, with a further $22.6m of impairments incurred in the 2H as a result of mine plan revisions at both Andy Well and Deflector. Overall, the top line result was broadly in-line, but was muddied by the non-cash impairments following the notice of closure of Andy Well. We revise our forecasts to include the updated Deflector mine life and the closure of Andy Well. As a result, we move to a HOLD recommendation and revise our target price down to $0.23ps (prior $0.43ps).

Southern Cross (SXE) | Turning on the lights | BUY
Market Cap $103m | Current Price $0.645 | Valuation $0.85

FY17 represented a transformational year for SCEE, broadening both its sector and geographic presence through the acquisitions of Datatel and Heyday5. The Company ends the year with a record order book of $480m (FY16 order book was $55m), and a potential pipeline of another $1.3bn work. Significant restructuring has also reduced SCEE’s fixed cost base, providing expanded EBITDA margins for FY18 and beyond. SCEE’s successful diversification, higher than expected order book, and reduced fixed cost base has caused us to increase our valuation to $0.85 (previously $0.60). BUY call maintained.

Recent Contacts & Presentations
Calima Energy Ltd (CE1), Austal Ltd (ASB), 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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