Morning Notes

17/05/2018 - Argonaut Morning Note

Market Update & Important Indicators:

The Dow Jones Industrial Average rose 0.3%. The blue-chip index snapped an eight-session winning streak Tuesday and remains about 7% off its January all-time high. The S&P 500 added 0.4%, and the tech-heavy Nasdaq Composite climbed 0.8%. Macy's shares surged 11% after the department store exceeded same-store sales expectations in the most recent quarter and lifted its targets for the 2018 fiscal year. Other retailers such as Target and L Brands were also among the S&P 500's best performers. Cisco Systems is scheduled to report earnings after the market closes Wednesday, while Walmart and J.C. Penney are on tap for early Thursday. Rosy retail sales data Tuesday have also supported consumer stocks and expectations for robust growth in the U.S., though the figures also reignited worries about higher interest rates. The dollar has also climbed to fresh 2018 highs, stoking fears that it will become more expensive for foreign governments and companies to repay dollar-denominated debt. Still, some investors think markets can withstand higher rates as long as the Fed sticks with its current gradual pace of tightening. 

The Stoxx Europe 600 gained 0.2%, or 0.94 points, to 393.31 even as fears about the plans of Italy's likely coalition government gave cause for concern. The FTSE MIB was the biggest faller of the major European indices, down 2.3%, while the Italian 10-year bond yield rose back above 2% on fears that the coalition will challenge the eurozone's fiscal rules. Saipem was the biggest riser, up 12% after Morgan Stanley said it preferred oil service companies to oil majors, given higher crude prices and market expansion. Elior Group fell 15% after reporting lower margins in its French contract-catering business. France's CAC 40 lifted 0.2% and Germany's DAX was up 0.1%.  

Calm trading in Asia-Pacific markets came after the Dow Jones Industrial Average ended its eight-day streak of gains Tuesday. In Japan, fresh GDP data revealed that the Japanese economy shrank in the first quarter of 2018, snapping its longest run of growth in 28 years. The Japanese Nikkei was last down 0.4%. Elsewhere in Asia, China's Shanghai Composite Index was down 0.7%, while the country's Shenzhen composite index was down 0.4%. Hong Kong's Hang Seng Index was last 0.1% lower on the day.  Chinese tech buyers were also awaiting further developments from negotiations between the U.S. and Chinese governments that may relieve U.S. sanctions on ZTE in exchange for Beijing's removal of tariffs on billions of dollars of U.S. agricultural products.

After solidly outperforming equity markets across the region most of the day on fresh3-year highs for energy stocks, Australia's benchmark pulled back into the close, capped by a 9-poing adjustment lower at the close. The S&P/ASX 200 finished up 0.2% at 6107, recouping a slice of yesterday's retreat. Trading was mixed today, with energy up 1.3%. Mining and bank stocks also helped, and retailer Myer popped 16% on heavy short-covering as F3Q sales weren't quite as bad as feared. But British bank CYBG slid 5% after a disappointing F1H report and Telstra eased a further 0.4%.

The London Metal Exchange’s 3-month copper contract gained 0.4% to 6,795/t. The other base metals were mainly up overnight. Lead prices declined 0.4% to 2,322/t, whilst zinc prices increased 0.6% to 3,065/t. Aluminium finished 0.3% higher at 2,337/t. The Nickle price gained only 0.3% overnight to 14,403/t. Tin Prices fell 0.7% to record 20,800/t.

In this issue:

Swick (SWK) | Price adjustments coming through | BUY                                               

Market Cap $57m | Current Price $0.245 | Valuation $0.37

A key positive takeaway from the 3Q18 update is the continued improvement in drilling margin.  This reflects a strategy to roll over contracts at higher prices and the discipline to walk away from clients unprepared to accept higher rates.  Despite the slight downgrade to FY18 guidance, we maintain a positive view on the trends in the drilling business and the blue-sky upside from Orexplore.  In our view SWK’s EV is supported by its recovering core drilling business alone and we maintain a BUY call on a $0.37 valuation (prior $0.40).

Doray Minerals (DRM) | Deflector turnaround| BUY                                                                 

Market Cap $138m | Current Price $0.31 | Valuation $0.41

Argonaut recently attended a site visit to Doray\'s (DRM) Deflector Mine. We noted a number of recent changes which potentially change project scope going forward. These zones are yet to be incorporated into reserves and the Deflector mine plan, but we see considerable potential for the new mineralisation to add to the mine life and production upside. On our new modelled forecasts DRM trades at an undemanding 4x EV/FCF for FY19, incorporating our forecasts for ~80kozpa Au production and 3.5Kt Cu at AISC of <$1,000oz. Key news flow will include resource upgrades and the potential for increased production via the development of the Link Splay and Da Vinci Lodes by mid-year. BUY (prior HOLD), TP $0.41ps.

Recent Contacts & Presentations

Nzuri Coppoer (NZC) Bowen Coking Coal (BCB), Phosphagenics Limited (POH) Great Boulder Resources (GBR), Orthocell (OCC), Northern Minerals (NTU), ABM Resources Ltd (ABU), Vital Metals Ltd (VML), Todd River Resources Ltd (TRT), Pacific Energy Ltd (PEA), Carnarvon Petroleum Ltd (CVN), Australian Mines Ltd (AUZ), Australian Finance Group (AFG), Paladin Energy Ltd (PDN), Cooper Energy Ltd (COE), Medibio Ltd (MEB), Botanix Pharmaceuticals Ltd (BOT), Salt Lake Potash Ltd (SO4), Golden Mile Resources Ltd (G88), NTM Gold Ltd (NTM), Ausmex Mining Group Ltd (AMG), Matrix C&E Ltd (MCE), Austal Ltd (ASB), Decmil Group Ltd (DCG), Ventnor Resources Ltd, Ausdrill Ltd (ASL), Alice Queen Ltd (AQX), PNX Metals Ltd (PNX), Alliance Resources Ltd (AGS), Myanmar Metals Ltd (MYL), Primary Gold Ltd (PGO), Sino Gas & Energy Holdings Ltd (SEH)

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