Morning Notes

11/01/2018 Argonaut Morning Note

Market Update & Important Indicators
Declines in shares of real-estate and utility companies pushed the S&P 500 lower Wednesday as Treasury yields continued to rise. Real-estate and utilities stocks are considered by many investors to be bond-like because their regular dividend payouts make them attractive as income-bearing substitutes for bonds. Wednesday's drop extended recent losses for the sectors as the yield on the benchmark 10-year U.S. Treasury note moves closer to their dividend yields. The S&P 500 declined 0.2% following its longest winning streak to start a year since 1964. The Dow Jones Industrial Average was recently down 0.2% after shedding as many as 129 points earlier in the session. The tech-heavy Nasdaq Composite was down 0.3%. Some analysts attributed Wednesday's pause to investors taking profits after a strong start to the year, while others pointed to nervousness that higher inflation could be around the corner, which could force central banks to be more aggressive with interest-rate increases. Corporate news drove swings in individual stocks. Berkshire Hathaway shares moved between small gains and losses and were recently up 1.1% after Chairman Warren Buffett elevated Gregory Abel and Ajit Jain, two longtime lieutenants, to vice chairman roles at the company, all but confirming years of speculation that one of them is in line to replace him. The U.S. gold price traded higher overnight, adding 0.3% to close at 1,316.30 US$/oz.

European stocks fell Wednesday, following a five-day rally that pushed the market to its highest level in more than two years. Bucking the trend, shares of banks tracked a rise in U.S. bond yields. The Stoxx Europe 600 index ended down 0.4% at 398.60, pulling back from a 2½-year high hit on Tuesday. Germany's DAX 30 index fell 0.8% to close at 13,281.34, after dropping as much as 1% during the session. France's CAC 40 lost 0.4% to 5,504.68 after closing on Tuesday at a 10-year high. The U.K.'s FTSE 100 index rose 0.2% to 7,748.51, nudging an all-time closing high as banks rallied.

Bearish trading gripped most stock markets in the Asia-Pacific region. Japan's Nikkei closed 0.3% lower as the yen strengthened against the dollar, South Korea's Kospi fell 0.4% on a drop for index heavyweight Samsung Electronics and the Taiwanese Taiex dropped 0.8%. Hong Kong's Hang Seng bucked the trend, rising 0.2% to set a record 12th-straight daily increase. In China, the Shanghai Composite rose 0.2%, while the Shenzhen Composite fell 0.3%.

Australian shares snap a 5-session winning streak, amid broad-based falls in the materials and real-estate sectors. The S&P/ASX 200 index notched a new 10-year intraday high at the open, but quickly lost hold of those gains to close 0.6% lower at 6096.7. BHP Billiton fell 0.3% despite its ADRs showing strongly on Wall Street overnight, while Santos advanced 0.2% on oil futures reaching a 3-year high. Funds manager Platinum Asset Management gained 4.6% to close at its highest level since early 2015 after inflows positively surprised in December and Morgan Stanley dropped its bearish call on the stock.

The London Metal Exchange’s 3-month copper contract traded higher overnight, gaining 0.7% to finish at $7,153/t. The other base metals also finished higher. Aluminium prices rose 1.5% to close at 2,167/t, whilst Lead prices jumped 0.2% to close at 2,561/t. Zinc prices added 0.2% to close at 3,358/t, whilst Tin prices closed 0.6% higher at 20,092/t. Nickel prices posted a 1.9% gain, closing at 12,884/t.

In this issue
Austin Engineering | Interims preview | HOLD
Market Cap $162m | Current Price $0.28 | Valuation $0.265

The significant improvement in market conditions in 2H17 continued into the last half, providing the visibility to largely underpin 1H18 EBITDA guidance for $10-12m. We expect the positive recovery trend to continue in future periods. We are further attracted to a well-articulated strategy that leverages ANG’s strengths and opportunities across all business units. Reflecting strong sector interest and a belief in ANG’s recovery potential the share price is up 24% since results. At $0.28 it is >15x our FY19 EPS forecast and ahead of our $0.265 valuation (prior $0.26). Following this share price move we believe a Hold call (prior Buy) is appropriate pending operational and financial updates next month.

Metals and Mining – Commodity Price Revision
Argonaut has revised its commodity prices with changes to base metals, uranium, gold and iron ore (tabled on Page 7 in the link below). We have also revised our AUD/USD and USD/CNY FX forecasts and the discount rates applied to Australian domiciled gold and base metal stocks. We see unified global economic growth as a key driver for resources in 2018 favouring industrial metals such as copper and zinc. We take a view that the proliferation of electric vehicles will continue to drive battery mineral demand deep into the next decade. Other macro factors which are expected to positively impact commodity prices include improving economic sentiment in the US, China’s “One Belt, One Road” initiative, Chinese economy stabilising measures and Chinese industrial/environmental reform of metal mining and processing. Downside risk to commodity prices include an appreciation of the US dollar, cooling of the Chinese housing sector and global geopolitical tensions. Gold as a defensive investment remains a key theme with ongoing geopolitical tensions in the middle east and between the US and North Korea. Argonaut’s preferred commodities are industrial metals tied to unified global growth, namely zinc, copper, zircon, pigment feedstocks (TiO2 products). We also favour bauxite and Australian domiciled gold. Our key pick stocks are listed from Page 4 in the attached link.

Recent Contacts & Presentations
Greenland Minerals & Energy Ltd (GGG), Walkabout Resources Ltd (WKT), Marindi Metals Ltd (MZN), Volt Power Group Ltd (VPR), PharmAust Ltd (PAA), Alice Queen Ltd (AQX), Jervois Mining Ltd (JRV), St George Mining Ltd (SGQ), Overland Resources Ltd (OVR), Metro Mining Ltd (MMI), Botanix Pharmaceuticals Ltd (BOT), Xanadu Mines Ltd (XAM), Orthocell Ltd (OCC), Whitebark Energy Ltd (WBE), Atrum Coal Ltd (ATU), Minotaur Exploration Ltd (MEP), Panoramic Resources Ltd (PAN), Sino Gas & Energy Holdings Ltd (SEH), Great Boulder Resources Ltd (GBR), Metallum Ltd (MNE), Gold Road Resources Ltd (GOR), Apollo Consolidated Ltd (AOP), De Grey Mining Ltd (DEG), Triton Minerals Ltd (TON), Evolution Mining Ltd (EVN)

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Argonaut Morning Note