30/07/2018 – Argonaut Morning Note

Market Update & Important Indicators:

The S&P 500 fell Friday but managed to post its fourth straight weekly advance, as strong earnings from a number of firms helped offset an end-of-week slide in the technology sector. Investors parsed a mixed batch of data and earnings results over the course of the week that broadly suggested the U.S. economy remains strong, even as certain industries have shown signs of weakening. Data Friday showed the U.S. economy grew 4.1% from April through June-the fastest pace in nearly four years, though lower than the expectation of economists surveyed by The Wall Street Journal. Tech titans like Alphabet and Amazon.com reported earnings that blew past analysts' estimates, sending their shares higher. Yet disappointing earnings from a number of other companies put pressure on the technology sector, sparking wild swings. The Dow industrials fell 76 points, or 0.3%, to 25,451 on Friday. The S&P 500 fell 19 points, or 0.7%, to 2,819 and the Nasdaq Composite lost 115 points, or 1.5%, to 7,737. The US gold price gained 0.1% to record 1223.20 US$/oz.

European stocks finished with their strongest weekly gain in more than four months, with Carrefour's shares surging as the French retailer added to a batch of better-than-expected earnings reports that have helped push regional equities to a six-week high. The Stoxx Europe 600 index closed up 0.4% at 392.08, its highest finish since June 14, FactSet data show. All but the technology sector ended higher, and the telecommunications sector paced advancers.

Japan's Nikkei gained 0.5% despite Nomura plunging almost 6% after it reported disappointing quarterly profits. South Korea's Kospi was up 0.2% even as Samsung Electronics scratched back from early losses to close flat. Stocks in China largely fell, with the Shanghai Composite down 0.3%, while the Shanzhen Composite dropped 0.6%. Hong Kong's Hang Seng Index rose 0.1% even as Tencent and China Construction Bank each slipped and automaker Geely slid over 3%. 

Outperforming throughout today's trading, Australia's stock benchmark topped early July's best in notching another 10 1/2-year closing best. Capped by a nearly six-point gain at settlement, the S&P/ASX 200 rose 0.9% to 6,300 as BHP Billiton rose 2.3% on its $10.8 billion U.S. shale. The major banks also rebounded, helping the index rise 0.2% for the week. But AMP dropped 5.7% to a 15-year low on weak earnings-and-dividend guidance, and Treasury Wine lost 2.5% amid some recent worries about its change in US retailer relationships.

Base metal prices were mainly up Friday on the London Metal Exchange. Aluminium gained 0.3% to 2,055/t, as the 3-month copper contract increased 0.1% to 6,274/t. Zinc was 1.0% higher to record 2,656/t, while nickel appreciated 0.7% to 13,770/t. Lead was 0.8% lower at 2,129/t.

Sandfire Resources (SFR) | June Q Results | HOLD

Market Cap $1,417m | Current Price $8.26 | Target Price $8.85

Sandfire Resources (SFR) reported June Q results with 17.9kt Cu and 9.5koz Au at US$0.80/lb C1 costs beating Argonaut’s forecast of 18.8kt Cu and 9.4koz au at US$1.08/lb. SFR finished FY18 with 64.9kt Cu and 39.3koz Au, within the revised guidance range of 63-66kt Cu and 38-40koz Au. Monty decline development slowed during the Q and has fallen behind schedule as a result of poor ground conditions requiring addition ground support. SFR’s cash balance increased by $55m QoQ to $243m at 30 June. Interestingly, the Company stated that it is considering a rights issue to fund permitting and a BFS on the Black Butte Project in Montana. We expect this raise will be within Sandfire Resources America Inc (formerly Tintina Resources)

Dacian Gold (DCN) | The More you drill the more you find | BUY

Market Cap $610m | Current Price $2.85 | Target Price $3.64

Dacian Gold (DCN) raised $40m through an institutional placement at a price of $2.70ps. DCN aims to raise a further $5m via a Share Purchase Plan which is expected to close at the end of July. Funds raised will provide additional cashflow flexibility for aggressive exploration targeting higher production rates and a longer mine life at Westralia and additional resource growth at Cameron Well (CW) via a ~110km drill program over 18 months. In addition, DCN will also extinguish the uncapped royalty on parts on the Jupiter mine area at a cost of $12m. Argonaut believes this is well-timed and a prudent move aimed at enhancing the project economics via aggressive growth aspirations. DCN trades on undemanding EV/Production metrics of $3,300/oz vs the peer group averaging $6,000/oz. Once operations reach steady state and exploration gets underway, we expect that DCN’s discount to our NAV and its peer group valuation will unwind. BUY, TP $3.64ps

Doray Minerals (DRM) | Debt dwindling & Cash Collecting | BUY

Market Cap $159m | Current Price $0.35 | Target Price $0.48

Doray Minerals (DRM) reported record June Q production at its Deflector Mine with 18.5koz Au and 818t Cu at an AISC of A$1,196/oz (versus 19koz @ A$986/oz in the March Q). Resources grew by 34% after incorporating the new Link and Da Vinci lodes at Deflector, adding ~180koz at around 18g/t Au which are yet to be incorporated into the mine plan or reserves. Cash increased to $30.7m and debt was reduced to $20.5m (from $27.5m in March Q). FY19 guidance was released with 80-85koz Au and 2,250-2750t Cu at an AISC of $1,050-1,150/oz), a 30% increase on FY18 output. Overall, the growth on multiple fronts has re-invigorated DRM’s appeal as a growth story trading on 5x FY19 PE and EV/Production of $1,900/oz. Flexibility in FY19 production, additional exploration success and an aggressive $10m exploration budget will continue to show further upside appeal in the short and medium term. BUY, TP $0.48ps (prior $0.41).