Morning Notes

10/07/2018 Argonaut Morning Note

Market Update & Important Indicators:

The Dow Jones Industrial Average headed toward its best day in a month as investors focused on a strong jobs report from late last week and the coming earnings season, despite heightened trade tensions. Recent tariffs have kept investors on edge, with the U.S. and China slapping levies on $34 billion of each other's exports on Friday. Some fear the protectionist trade policies will slow corporate activity and crimp global growth, hurting a range of assets from stocks to commodities. Many are looking ahead to second-quarter earnings season, which begins in earnest Friday with results from some of the nation's largest banks, to see how the trade threat is affecting companies. In the last half hour of trading the Dow industrials climbed 1.37%, on track for its largest one-day climb since June 6. The S&P 500 added 0.86%, while the tech-heavy Nasdaq Composite rose 0.81%. All three indexes were on track for a sixth day of gains in the past seven sessions. Trading has been quiet lately, with Friday the lowest-volume day for a full session this year on exchanges owned by the New York Stock Exchange and Nasdaq. In the coming earnings season, analysts will also be looking for signs that corporate profits might be peaking. Earnings at companies in the S&P 500 are expected to increase 20.7% from a year earlier, according to Thomson Reuters I/B/E/S. That would be the second-best quarterly gain in over seven years. The US gold price gained 0.2% to 1257.20 US$/oz.

European shares rose on positive economic news and dovish comments from the European Central Bank. The Stoxx Europe 600 gained 0.6%, or 2.23 points, to 384.59 while the DAX rose 0.4%, as did the CAC 40. CMC Markets noted that ECB President Mario Draghi reiterated that interest rates are likely to remain unchanged for another year or so. Daiwa Capital Markets say German trade data were encouraging, consistent with industrial production figures for May released last week.

In Asian trading, China's Shanghai Composite Index rose 2.5% and Hong Kong's Hang Seng was up 1.3% following a week of declines for both indexes. Shares of Chinese smartphone maker Xiaomi edged lower in its Hong Kong trading debut however, as the broader market rose. Japan's Nikkei rose 1.2% and South Korea's Kospi was up 0.6%.

Australia's two largest miners helped propel the country's stock benchmark to fresh 10 1/2-year highs and a third day of gains as the market underperformed the sharp bounces seen in many other parts of Asia Pacific. The S&P/ASX 200 rose 0.2% to 6286 after briefly cracking 6300 earlier. The materials sector took the lead today, with Rio Tinto gaining 1.4% and BHP Billiton jumping 2.1% following reports that BP was the frontrunner to buy BHP's U.S. shale assets. Meanwhile, the recovery by the major banks also continues to lend support. But, industrials were weighed down by weakness in U.S. peers Friday.

Base metal prices were mostly up on the London Metal Exchange. The 3-month copper contract gained 1.7% to 6,383/t while tin finished 1.4% higher at 19,670/t. The price of aluminium gained 1.7% to 2,146/t and nickel recorded a 1.9% increase to 14,118/t. Zinc lost 1.7%% to record 2,716/t.

In this issue:

June Quarter production and Diggers preview

The ASX Resources indexes have recorded double digit gains in FY18 reflecting positive moves in commodities across the board. Gold stocks continued to perform well with the XGD gold index up 18%. Mid-tier gold miners have run hard and we now see them trading on metrics similar to North American Peers. As such, there is better value in the smaller producers. The real strength however came from sectors exposed to base and battery materials with the S&P 300 Resources Index (XKR) up 34% and the Small Resources Index (XSR) up 45%. In base metals, M&A is intensifying as the number of quality developers dwindles after a series of acquisitions in FY18. We argue that for further inorganic growth, companies must start looking offshore due to the high price and lack of Australian domiciled assets. The Diggers and Dealers (D&D) conference is just around the corner and we highlight our key picks in the sector and identify key themes and expected newsflow.

Otto Energy (OEL) - Initiation of Research - Pumping out the cash in the Gulf of Mexico - BUY - PT $0.10

Otto Energy (OEL) has a producing conventional oil field and two exploration prospects in the Gulf of Mexico as well as an upcoming exploration well one mile from the Armstrong/Repsol discovery on the North Slope in Alaska. We believe OEL is undervalued in that it is trading at circa 3x operating cash flow before any reinvestment into new projects. OEL offers an attractive combination of newly commissioned production and confirmed drill ready exploration prospects. OEL plans to use its forecast substantial free cash flow from operations to invest in new projects to replace produced reserves and potentially materially uplift production and reserves. We initiate coverage on Otto Energy (OEL) with a BUY recommendation and a price target of $0.10.

Recent Contacts & Presentations

Agrimin (AMN), Magnetic Resources (MAU), Core Exploration (CXO), Marindi Metals (MZN), MOD Resources (MOD), Santos (STO), Adriatic Metals (ADT) Bio–Gene Technology (BGT), Walkabout Resources (WKT), Triton Minerals (TON), Calima Energy (CE1), Peel Mining (PEX), Catalyst Metals (CYL), Vault Intelligence (VLT), Doray Minerals (DRM), 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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