Tag Archives: Base Metals and Minerals

article 3 months old

The Overnight Report: Awaiting Jobs

By Greg Peel

The Dow closed down 2 points while the S&P closed flat at 2164 and the Nasdaq rose 0.1%.

Dead Cat

Yesterday saw yet another session on the local market in which the index took off sharply in one direction on the opening rotation, only to reverse steadily throughout the day. Yesterday the ASX200 shot up 44 points from the open before managing a mere 10 point gain by the close.

It seems the computers decided early that all would be forgiven following Wednesday’s steep falls and we’d be back on track towards the highs once more, but investors had other ideas. It is interesting to note, as revealed in yesterday’s Short Report, that the prior rally up to 5600 featured widespread reductions in short positions across the market, suggesting once the nervous shorters were cleaned out, there was no real reason to be there.

Hence we saw the plunge on Wednesday to more realistic valuations and hence yesterday’s attempts at a rapid reversal were thwarted. The futures are stronger again this morning but it would appear, as results season begins to unfold, the market is where it wants to be.

The bulk of the index gain yesterday came down to a 2% jump for energy following oil’s recovery off the US$40/bbl mark. Volatility ensures energy could just as easily be down by as much in coming sessions. Healthcare was the big underperformer yesterday, falling 1.2% as investors took profits on CSL ((CSL)) in particular. Having been slammed these past few sessions, consumer discretionary managed a 0.4% gain.

Which was counter to the data released yesterday. Consumer staples also rose 0.5% despite June retail sales managing only a 0.1% gain to take annual growth down to a tepid 2.8%.

The result provides justification for the RBA’s rate cut decision but there is nevertheless a misleading element to the low number. Low dollar value of sales is a result of two main factors – very low wages growth and discounting. But given low wages growth, consumers are benefitting from discount wars as an offset, particularly in supermarkets.

There was also good news among the data yesterday, with figures showing inbound tourism to Australia is up a significant 12% year to date. The number of Chinese tourists reached an all-time high. Presumably the number of Poms amidst that total will start to decline given the drop in the pound but hey, who are we to complain?

Fight them on the beaches

Markets were set for an expected rate cut from the Bank of England last night but there was still some nervousness that guvna Mark Carney would not act, having declined to do so at the last meeting immediately after the Brexit vote. As it was, the opposite proved true.

Not only did Carney cut the BoE cash rate for the first time in seven years, to 0.25% from 0.50%, representing the lowest level since 1694, he expanded the bank’s government bond purchase program (QE) and introduced corporate bond purchases as well. And he also introduced an exemption for banks on a long criticised reserve requirement that effectively amounts to double-counting of safe assets.

The extent of the package surprised markets. The FTSE jumped 1.6%, the pound fell once more, and the UK ten-year yield fell to an historically low 0.6%. The German equivalent fell further into the negative and the US equivalent fell 4 basis points to 1.50%.

Wall Street rose from the open on the news but quickly fell again, before posting a very typical pre jobs reports, middle of summer session. Ostensibly no one was quite inspired to do anything much.

Commentators agree that if tonight’s jobs number comes in close to expected, around about 160-180,000, not a lot will happen then either. The number will have to be either as shockingly low as the May number or as surprisingly high as the June number to spark a reaction, and even then, another wild number is going to leave Wall Street doubting the veracity of the data.

Commodities

The drop in the pound saw the US dollar index up 0.3% to 95.81 but unfortunately on the cross-rates, the Aussie is up 0.5% at US$0.7627. It’s all very well to cut the cash rate, but the impact is lost if everyone else does too.

Strength in the greenback helped base metal prices lower, with all of aluminium, copper and nickel falling over 1%.

Iron ore fell US$1.80 to US$58.90/t.

West Texas crude ignored the dollar, and rose US66c to US$41.81/bbl.

Given QE in any major economy is supportive of gold, it also ignored the dollar in moving slightly higher to US$1360.40/oz.

Today

The SPI Overnight closed up 17 points or 0.3%.

The RBA will issue a quarterly Statement on Monetary Policy today, ahead of tonight’s US jobs report.

Capilano Honey ((CZZ)) may buzz in with an earnings report today although I have conflicting dates from different brokers.

Rudi will link up with Sky Business at around 11.05am, through Skype, to discuss broker calls.
 

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article 3 months old

Value Over Volume For Rio

Rio Tinto delivered a first half result which was broadly in line, retaining a strict discipline on costs and a value-over-volume strategy.

-Growth emanating from Amrum bauxite, Oyu Tolgoi copper and Silvergrass iron ore
-CEO considers Silvergrass one of the most value accretive projects for Rio Tinto
-Lack of near-term re-rating catalysts but stock well positioned


By Eva Brocklehurst

Rio Tinto ((RIO)) has approved the final phase of the development of Silvergrass iron ore project and delivered a first half result broadly in line with expectations. Net debt ended the half year lower than many brokers expected, largely because of lower-than-forecast capital expenditure. This marks a 12-year low for capex for a half year result but that could change in the second half.

Macquarie does not believe Rio Tinto has the same luxury as Fortescue Metals ((FMG)) in being able to reduce cut-off grades and strip ratios to reduce sustaining capital. While the new iron ore division chief, Chris Salisbury, is expected to do all he can to keep costs down, the broker anticipates low levels can only be maintained in the short term.

Earnings were supported by results in aluminium and energy & minerals offset by a weaker performance in iron ore, copper and diamonds. Iron ore continues to be the main support for the company, generating 64% of underlying earnings. Earnings of US$5.37bn were within reach of most broker estimates. Capex guidance of US$4bn for 2016 and cost reduction guidance of US$2bn over 2016, 2017 are unchanged.

Of interest were comments from the new CEO, Jean-Sebastien Jacques, who reiterated the value-over-volume strategy in iron ore and refrained from providing guidance on the ultimate 360mtpa Pilbara target, instead reiterating a 330-340mtpa 2017 target. Macquarie observes he downplayed the potential for a spin-off of the newly formed energy & minerals division.

Jacques indicated growth will emanate from Amrum bauxite, Oyu Tolgoi copper and Silvergrass iron ore, which should underpin production into the next decade. This implies there will be no further project approvals in the near term.

The expansion of Silvergrass will cost US$338m and increase mine capacity by 10mt, with low phosphorous Marra Mamba ore lowering unit costs. Most of the capital will be spent in 2017, with first production expected in the fourth quarter of that year. The company assumes the return to be well in excess of 100%, with pay-back in less than three years at consensus prices of US$50/t or less. The new CEO has reassured brokers that he remains committed to disciplined capital allocation and considers Silvergrass one of the most value accretive projects.

Portfolio simplification is expected to continue and the company indicates it remains open to divesting non-core assets. UBS believes Rio Tinto can deliver over US$4bn from divestments over the next three years. The CEO, as a former head of copper & coal, has delivered around 70% of the divestments since 2013 and UBS expects him to reinvigorate the portfolio and to shy away from acquisitions.

The broker believes the company can sustain Pilbara earnings margins at US$20/t in the medium term and expects iron ore price to become less cyclical, with the upside capped by oversupply and the downside limited by the cost curve. UBS believes the company is well positioned in the current challenging commodity environment with long life, low-cost and well invested assets. Hence, a Buy rating is maintained. On the other hand, Ord Minnett prefers a Hold rating, given a lack of near-term re-rating catalysts.

Macquarie believes the stock is well positioned relative to BHP Billiton ((BHP)) in the race on lowering costs, and retains a preference for Rio Tinto. Deutsche Bank also believes Rio Tinto has the best balance sheet, production growth and cost reduction plans of the major diversified miners. The broker was particularly impressed with the cost performance in coal, alumina, aluminium, bauxite and minerals. The company has downgraded mined copper guidance slightly, to 545-595,000 tonnes.

Deutsche Bank reduces 2016 earnings estimates by a modest 1% after reducing aluminium metal premiums, bauxite price assumptions, and lowering group copper production in line with revised guidance. These charges are partly offset by lower depreciation across most divisions and lower alumina, coal and mineral costs. The latter three cost estimates lift the broker’s 2017 and 2018 forecasts.

The result was weaker than Citi anticipated although the US45c interim dividend was higher than expected. The company is maintaining a US$1.10/share 2016 minimum dividend. The main miss for both Citi and Credit Suisse was on copper, with the latter noting Kennecott reported a US$208m loss. Citi expects iron ore prices to fall to US$42/t in 2017 as supply increases and Chinese steel demand weakens but acknowledges, if current spot prices prevail, upside risk exists.

FNArena’s database contains four Buy ratings and four Hold. The consensus target is $53.30, suggesting 5.7% upside to the last share price. Targets range from $48 (Citi) to $57 (Macquarie, UBS).
 

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article 3 months old

The Overnight Report: Fightback

By Greg Peel

The Dow closed up 41 points or 0.2% while the S&P gained 0.3% to 2163 and the Nasdaq added 0.4%.

Bashed

Well the pitchforks are certainly raised and blood is being spat. It was heartening to see respected CLSA bank analyst Brian Johnson on the ABC news last night pointing out that what may be lost on the mortgage swings of less-than-the-RBA rate cuts has been gained on the retiree roundabout of increased term deposit rates. But who’s going to listen?

Retiree enclaves don’t win elections, mortgage belts do. So we’ll overlook the retirees and just go for the politically popular with the great unwashed. Bash, bash, bash. If capitalism isn’t working, perhaps the government could re-nationalise CBA. And on the former RBA governor’s not unreasonable call to investigate bank funds management divisions, he may be proved redundant. Analysts suspect the banks will be looking to offload these divisions in their desperate attempts to meet stricter capital requirements in the low growth environment.

The 2% fall in the financials sector yesterday provided the bulk of the index plunge. We can cite several reasons for bank selling – they were bought up ahead of the rate cut, their mortgage “repricing” measures are insufficient to overcome margin pressure, European banks posted some woeful results the night before, and the pitchforks are out.

Thereafter, the biggest falls were posted by the other sectors that were heavily bought ahead of the rate cut – consumer discretionary and utilities. Lesser falls were posted elsewhere and the resource sectors proved largely resilient.

It was somewhat of a capitulation trade, and as I suggested yesterday, it’s not unhealthy ahead of reporting season proper to rebase below inflated levels that might otherwise have led to small “misses” on earnings leading to panic stock-dumping. The trend, according to the chartists, remains bullish. There may also have been some fear yesterday that Wall Street’s apparent breakdown the night before might be the start of something bigger. Last night’s trade suggests otherwise, and the local futures are looking positive this morning.

Just a Blip

On Tuesday night the S&P broke down from its lengthy 2165-75 trading range which technically seemed onerous but in summer-thin, lackadaisical Wall Street trade in which central banks provide the safety net, not fundamentally significant. Suffice to say, the S&P is back at 2163 this morning and the Dow has reversed a seven-day losing streak.

Oil had a lot to do with it, or more specifically, gasoline. The weekly US inventory numbers came out last night and showed less of a build in gasoline stocks than was feared, hence WTI crude rebounded 3.6% with a bit of help, one assumes, from short-covering.

There was also mildly positive news on the data front, with ADP’s private sector jobs report showing a better than forecast 179,000 additions. Wall Street is pencilling in 185,000 for Friday night’s non-farm payrolls. We do need to bear in mind, however, that (a) the ADP report has a poor correlation record and (b) economists have been way off the mark with their forecasts these past couple of months.

A result of 185,000 would be fair to muddling – enough to restore some hope in the US economy following the weak GDP report but not enough to reignite Fed rate hike fears. On that subject, two Fedheads last night individually suggested at least one rate hike is still possible for 2016, although one is hard pressed to find anyone on Wall Street agreeing.

But if it is another number closer to 300k than 200k, as it was in June, there could be some mild panic. The ADP number was nevertheless enough to send the US dollar index up 0.5% overnight and force some consolidation in gold, which is down five bucks.

Aside from Friday night’s US jobs report, markets are looking to tonight’s Bank of England meeting. Immediately after the surprise Brexit vote result the BoE assured a rate cut would follow if necessary, but at the subsequent scheduled meeting the BoE did nothing. The post-Brexit bounce allowed more time to assess the issue.

The governor did, nonetheless, hint a rate cut was probably still likely, and that’s what the market has priced in for tonight. Volatility may transpire if one is not forthcoming.

Commodities

West Texas crude is up US$1.43 at US$41.15/bbl.

Base metals continue to move back and forth but aren’t making any headway. Only lead posted a move in excess of 1% last night, to the downside, while the others posted gains.

Iron ore is unchanged at US$60.70/t.

Gold is down US$5.10 at US$1357.70/oz, with the US dollar index up 0.5% at 95.53.

The Aussie is down 0.2% at US$0.7588.

Today

The SPI Overnight closed up 27 points or 0.5%.

Rio Tinto ((RIO)) reported after the bell last night and while in the interim the media has made much of the 50% profit decline, the result met expectations.

Earnings reports are due today from Downer EDI ((DOW)), Suncorp ((SUN)) and Tabcorp ((TAH)), among others.

June retail sales numbers are out locally today and tonight the focus will be on the BoE.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

REPEAT: Alkane Resources Poised For Upside In Rare Earths

Post the publication of the story below, FNArena has been notified by the company 2012's ShinEtsu deal is now out of date and it has been replaced by an agreement with Vietnam Rare Earth to process Alkane's concentrated product into rare earth products. More information about this deal can be found in the company's statement made to the ASX on 7th April 2016. This story has been re-published to include this update.

Hallgarten & Co considers Alkane Resources a survivor of the specialty metals race, with its Tomingley gold mine providing the means to remain in contention.

-Large in-ground resource at Dubbo
-China unlikely to keep defensive pricing
-Two cash options for Tomingley
 

By Eva Brocklehurst

Hallgarten & Co considers Alkane Resources ((ALK)) to be a great survivor of the specialty metals race. Specialty metals and rare earths have registered strong demand and surges in pricing at various times over the last decade and the analysts believe rare earths are likely to move higher in the near future.

The company's cash position at the end of June was $29.8m, which in the analysts' view, makes it one of the most cashed up players in rare earths. The location of the company's Dubbo zirconia project in central NSW involves rare earths, zirconium, niobium and hafnium.

This means the project has potential in high value applications in new and evolving technologies. It is also helpful, the analysts contend, that this is one of the world's largest in-ground resources of rare metals and rare earths.

The mine is expected to process 1m tonnes of ore per year over 70 years or more. Alkane first identified the potential of the Dubbo project in 1999 and remains the only player still in prospect from a group of companies that were advancing rare earths at that stage.

Why? The analysts point to a gold project, Tomingley, in the near vicinity, which was brought into production in 2014 to provide an insurance policy against the notoriously fickle rare earths industry. This has provided cash flow and producer status as well, enabling Alkane Resources to self fund its development in a tough market.

Over-production of rare earths is blamed for the fall in prices from 2011 to the present day, yet there has been little reduction in consumption, Hallgarten observes. China remains the dominant player by a large margin and little new production has been added, which in itself may not even replace those mines China has closed for environmental reasons.

The analysts also discount as myth the story that western demand pushed the prices of the rare earths suite higher in the first place. China's efforts to suppress prices to clear potential competitors out of the segment has largely been successful, they observe, and the number of junior challengers are now few.

The broker initiates coverage on Alkane Resources with a Long strategy and 85c target and a thesis is that China's loss-leading is nearing an end as it cannot afford to undercut pricing any longer. Hence, prices could start moving higher for all rare earth metals, except lanthanum and cerium which remain well supplied.

The question for Hallgarten is whether the threat of several players in the market waiting to flick the “on” switch is great enough to maintain China's defensive pricing. On its calculations the answer is no. Either way, the Chinese will probably raise prices gradually as a means to keep control.

Based on both Hallgarten's and Alkane's 2020 estimates, forecast price uplifts are not ambitious and all prices remain at discounts to the peak years of the rare earths phenomenon.

So, where is the Dubbo project at this stage? A demonstration pilot plant at ANSTO, the research complex on the outskirts of Sydney, has been running since 2008. Alkane published its front end engineering design (FEED) in 2015, which the analysts note contained much of the information normally used in feasibility and scoping studies.

This confirmed the economics of the project, with anticipated product revenue of around US$17/kg and costs of US$8/kg. Where ANSTO has been quite helpful, the analysts maintain, is in improvements and optimisation of the flow sheet, which has delivered a significant reduction in annual water consumption and reduced the site footprint by 50%.

Japan's Shin-Etsu has become a strategic partner in the development of the project with a non-binding memorandum of understanding signed in 2012. Shin-Etsu operates Japan's only large scale separation and refining plant for rare earths. Shin-Etsu would have priority to purchase at commercial prices a quantify of the rare earths that it would process. Obtaining further offtake agreements will be the key, in Hallgarten's view, to moving the financing of the project ahead.

Meanwhile, back at Tomingley, from Alkane pouring its first gold bar in 2014 it is now planning to head underground to access a number of known reserves, the main one being at the Wyoming One pit. Hallgarten notes, originally, many investors thought this operation would fade away as the Dubbo zirconia project ramped up. Now, the analysts suspect that there could be two outcomes, neither of which extinguishes the gold project.

Looking at the company's market cap they suggest there is no credit being given for Tomingley and wonder whether it could be spun out advantageously. It could provide a cash windfall at current gold prices and the low Australian dollar that far exceeds its current cash flow. The second option is that the gold division remains within Alkane and is retained as an internal funding source for building the Dubbo project.

Hallgarten assumes gold production will be around 70,000 ozs in the current financial year. The company also has a history in other gold projects, having discovered the McPhilamys gold project, which was ultimately sold to Regis Resources ((RRL)). There are prospects in the company's armoury in gold and base metals ground in central NSW.
 

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article 3 months old

The Overnight Report: Break Down

By Greg Peel

The Dow closed down 90 points or 0.5% while the S&P lost 0.6% to 2157 and the Nasdaq fell 0.9%.

Sell the Fact

There may be some confusion as to why an interest rate cut from the RBA would cause the first sell-off in some time on the ASX when one would assume the opposite. The explanation is merely that the market so aggressively priced in an expected cut over the past few sessions there was really nowhere else to go, as profits were locked in.

An August rate cut was being tipped by economists as far back as May, although there was a little wavering from the market in between. Though not referred to directly in the governor’s statement yesterday, the cruncher was likely the US GDP result. On justifying its decision, the board cited moderate local economic growth, low inflation, and that persistent “complication” of the strong currency.

The weak US GDP result largely killed off any expectations of a September rate hike from the Fed, or even this year. Hence the US dollar has been falling ever since, forcing the Aussie higher. Unfortunately for the RBA, it appears the rate cut will only serve to drag on the Aussie, not send it falling. Last night the US dollar index fell another 0.8% and the Aussie is back to where it was pre-cut this morning at US$0.7604.

With regard individual sectors, in yesterday’s report I observed “a weaker US dollar is supportive of commodity prices. As to whether such support was worth a 2.7% jump in the energy sector yesterday on only a slight tick up in the oil price is a different matter”. And yesterday energy fell 3.2%. This contributed significantly to the overall 0.8% index drop but if we average out the two sessions, energy has only fallen in line with other sectors.

Outside of oil, the big loser yesterday was again consumer discretionary, down 1.4%. This sector should be a beneficiary of lower rates, but it had also been heavily bought in the lead-up to the RBA’s decision. The banks should also benefit, and they fell 0.7%.

On that note we saw the banks move swiftly yesterday to hand over only around half of the RBA cut in variable rates. The peasants are already at the gates wielding pitchforks. The trade-off was an increase in deposit rates, which will be some comfort to those living off investments, but no doubt will be overlooked by blood-spitting politicians.

The ASX200 was very much due a correction from the post-Brexit run-up, which received extra fuel from RBA speculation. A re-basing ahead of earnings season proper is not such a bad thing, and to that end the futures are suggesting another decent drop today.

Fiscal Helicopter

The RBA’s problem with the Aussie is nothing compared to the Bank of Japan’s problem with the yen. Not only has the yen refused to fall despite everything the BoJ and Abe government have thrown at it, now hopes have faded once more of the Fed coming to the rescue and pushing up the greenback.

It has been expected for a month that the BoJ and Japanese government would unleash a combined monetary and fiscal shock & awe package as a last ditch effort, but on Friday the BoJ disappointed. So it was over to Abe, who yesterday announced a new fiscal stimulus package worth US$73bn over several years.

The package will cover everything from infrastructure, such as port upgrades, to child care and maternity leave. And 22 million low-income Japanese will all receive a direct “Pennies from Shinzo” hand-out of US$147. They can each now buy a beer in Tokyo.

Alas, the yen is another 1% higher against the greenback this morning, having jumped substantially following Friday’ BoJ disappointment. There may be some disappointment in the fiscal package as well, but it’s more a case of a weaker dollar.

Deflated

The US dollar was weaker again last night because the Fed’s preferred gauge of inflation, the core personal consumption & expenditure (PCE) measure, rose a mere 0.1% in June. An annual rate of 0.9% is well below the Fed’s 2% target.

It’s not that US consumers aren’t spending. Indeed, personal consumption rose 0.4% in June, and the increase in June quarter spending is the biggest since the GFC. But incomes rose only 0.2%, meaning the trend is consumers dipping into their savings continues. This does not bode well. The Fed would like to see rising consumption, but supported by rising wages.

And to add to concerns, last night’s US auto sales numbers for July were disappointing. For month after month recently, auto sales have surprised to the upside, sparking fear of a “subprime” bubble building in car loans given the near-zero interest rate environment. The “miss” was not substantial, but following on from a surprisingly weak earnings result from Ford last week, it appears the positive economic contribution of auto sales is finally fading.

This news weighed on Wall Street last night. The other issue was the oil price.

WTI is only down US36c this morning but the point is that at US$39.72/bbl, the 40 support level has been broken. With supply returning after outages everywhere from Nigeria to Libya and Canada, supply-side fears have returned. Wall Street has paid a lot of attention to an oil price which for some time had been fluctuating within a comfortable range, but a break-down is a different matter.

Wall Street has subsequently broken out of its own tight trading range as well. Although last night marked the seventh straight down-day for the Dow, it was the first substantial fall since the Brexit rebound began. The S&P500 has dropped out of its two-week 2165-75 range, and the Nasdaq turned south for the first time in six sessions.

Commodities

As noted, West Texas crude is down US36c at US$39.72/bbl.

Base metals were mixed yet again, with no metal moving more than 1%.

Iron ore rose US20c to US$60.70/t.

The US dollar index is down 0.8% at 95.07, thus gold is up US$10.40 at US$1362.10/oz.

Today

The SPI Overnight closed down 35 point or 0.6%.

It’s service sector PMI day across the globe today, including Caixin’s take on China’s number.

The US will see the private sector jobs report for July tonight.

On the local stock front, we’ll see earnings results from Rio Tinto ((RIO)) and Genworth Mortgage Insurance ((GMA)) and in the wake of yesterday’s shocker from Seven West Media ((SWM)), Seven Group Holdings ((SVW)) will also report.
 

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(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

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article 3 months old

Material Matters: Steel, Iron Ore, Copper And Mineral Sands

-Emerging upside risk to Chinese steel production
-China's steel exports still rising despite trade litigation
-Steel demand remains robust in China
-Grid, property copper demand losing momentum in China
-Higher pigment prices to support mineral sands upside
 

By Eva Brocklehurst

Steel

China continues to expand its steel exports, crowding out other sources worldwide, Morgan Stanley observes. The winners in this game will be those delivering the raw materials to China’s steel trade, the broker adds.

China’s steel exports expanded by 9% in the first half, appearing little affected by a rise in trade litigation. While China’s steel exports to Europe and the Americas has fallen in 2016 – where most of the trade litigation is sourced – this is being made up for by alternative markets in Asia. China has lifted exports to Asia by 20% in the first half, the broker notes.

The emerging upside risk to Chinese steel production rates in 2016 potentially alters the broker’s seaborne iron ore and metallurgical coal forecasts. China’s first half crude steel output, annualised at 802mt, requires 45-48mt more imported ore to be considered, while metallurgical coal imports are annualising at 35% above Morgan Stanley’s March 2016 outlook.

Iron Ore

Ord Minnett observes Chinese steel production is continuing at high rates while iron ore shipments for the major producers were slightly below expectations in the June quarter. Iron ore prices remain above forecasts with spot prices above US$55/t since the beginning of July.

Steel demand data remains supportive with property prices improving, building starts rising and infrastructure spending still strong.

Looking ahead, Chinese steel production is expected to fall slightly towards year end and this could mean iron ore prices soften from current levels. Ord Minnett expects iron ore prices to be US$53/t in the second half of 2016 and US$48/t in 2017.

Copper

A number of disruptions at several large copper mines suggest production misses to Macquarie, largely from lower grades and technical difficulties but also snow at Los Bronces and a mill failure at Grasberg. Grasberg is projecting a move to higher grade ore and a big uptick in production in the second half.

Despite the shift upwards in disruptions, Macquarie is still expecting a year where disruptions are relatively low.

Not all mines performed badly in the June quarter. The broker notes MMG’s new greenfield mine at Las Bambas outperformed and achieved commercial production on July 1. Peru, where Las Bambas is situated, has almost doubled copper output in less than two years and become the number 2 copper producer after Chile.

UBS has reviewed the downstream demand for copper amid concerns strong credit in the first half has led to a lift in the copper finance trade. Apparent consumption in China is up 11% in the year to date. Grid spending remains robust but power station investment and most physical indicators are actually negative, the broker observes. Vehicle sales and rail spending are positive but provide a less important component to copper demand.

Based on the data, UBS suggests real copper demand growth is around 5-10%. The two heaviest components of copper demand, the grid and property sectors, appear to be losing momentum while appliances are improving and may benefit from fit-out demand as a result of the strong property sales in the first half.

UBS forecasts 4.3% growth in China’s copper demand in 2016. Copper demand is typically weighted to the second half so momentum going forward will be the key. UBS forecasts a copper price of US$2.00/lb at the end of 2016, 10% lower than spot.

Mineral Sands

Titanium dioxide pigment prices are rising. Credit Suisse is unsure why but notes it is variably attributed to heavy de-stocking by pigment producers, capacity reductions and a lot of painting being done. While these factors may be significant, the broker also suggests cost-push on rising ilmenite prices is another driver in China, where there have been eight successive price rises through July.

Higher pigment prices should translate to some upside for mineral sands feedstock pricing, albeit with a delay as demand volumes are likely to rise first given the latent capacity in feedstock. Credit Suisse forecasts high grade feedstock prices to rise 13-16% in 2017.

The broker downgrades rutile prices by 1% for 2016 and upgrades by 3% for 2017, expecting ilmenite has the strongest growth outlook because of the prior closures of mines in China, where ilmenite is a by-product of iron ore. Channel checks suggest 500,000t of ilmenite supply was lost from Sichuan in 2015, tightening the Chinese market.
 

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article 3 months old

The Overnight Report: Oil Wakes The Bear

By Greg Peel

The Dow closed down 27 points or 0.2% while the S&P fell 0.1% to 2170 as the Nasdaq rose 0.4%.

Pressure on Glenn

The NSW bank holiday yesterday led to light volume and exacerbated volatility as the local market surged through the morning session like a creature possessed. A near 50 point rally to lunchtime took the ASX200 well past the 5600 mark before gravity finally kicked in later in the day.

The sudden burst of enthusiasm was, supposedly, all about heightened expectations for an RBA rate cut today. Having been a 50/50 bet on Friday, yesterday saw the chances of a cut priced in closer to 65%. It was all to do with that weak US GDP result.

US GDP numbers are prone to being revised, often substantially, in subsequent months. But there is no doubting the 1.2% growth result on first estimate for June shocked a market looking for 2.6%. The US dollar plunged by 1.2% on the news, albeit helped by a stronger yen following the BoJ’s lack of action. And as a result, the Aussie shot back up to US76c.

That’s too high for the RBA, the local market decided. If the US economy is indeed weaker than hoped then the chances of a Fed rate hike in 2016 now seem more remote, therefore the US dollar will not rise but possibly weaken further, meaning the Aussie, through no fault of its own, will remain elevated. This provides the RBA with an ongoing “complication”.

On the other hand, a weaker US dollar is supportive of commodity prices. As to whether such support was worth a 2.7% jump in the energy sector yesterday on only a slight tick up in the oil price is a different matter. Materials managed only 0.9%, which seems more considered. The tune may be different today for the energy stocks after WTI traded under 40 last night.

Take out the resource sectors, and the only other sector screaming “rate cut” was the banks, with a 0.5% gain. Utilities were up, but only by 0.4%, while telcos were the worst performer with a 0.7% fall. Consumer discretionary should be the beneficiary of a rate cut, but it fell 0.1%, likely because it had been on a bit of a tear last week.

Whether or not traders decided over lunch yesterday that 50 points was a bit steep, or whether the Chinese PMI numbers were the cause of the afternoon pullback, is unclear. The Chinese numbers were mixed.

Beijing’s official manufacturing PMI for July fell to 49.9 from 50.0 in June, suggesting the impact of stimulus measures has worn off and the sector is back in contraction. However Caixin’s independent measure, more weighted to smaller businesses, saw a jump to 50.6 from 48.8, suggesting the first sign of expansion since February 2015. Beijing’s official service sector PMI rose to 53.9 from 53.7. Caixin will publish its equivalent tomorrow.

Not a lot of clarity in those numbers, nor any confirmation Beijing will be forced into more frantic stimulus. Most likely traders simply decided yesterday that once the index surpassed 5600, it was a good enough level to take profits. Earnings season awaits, and begins to ramp up by week’s end.

The RBA’s statement will be published at 2.30pm. Data yesterday suggested the Australian housing market is indeed cooling slightly, as prices and sales growth eased. This supposedly provides the RBA with more scope to cut if needs be.

Look out if they don’t.

Atlas Shrugged

If you’re into meaningless labelling, oil is now officially in a bear market. Having traded below US$40/bbl last night, WTI has fallen 20% from its prior peak. Yet for Wall Street, it’s no longer a big deal.

The US manufacturing PMI for July showed a fall to 52.6 from 53.2, and construction spending was down 0.6% in June. In the wake of the GDP report, there’s not a lot to be cheery about with regard the US economy. It was a choppy session on Wall Street, featuring a bit of a midday plunge, but when the dust settled it still appears Wall Street has no impetus to meaningfully correct and the S&P500 remains firmly entrenched in a 2165-75 range.

We’re getting towards the end of US earnings season and to date, 71% of S&P500 companies having reported have beaten on earnings and 51% on revenue. The net earnings decline has been in the order of 3.5% when 6.5% had been forecast. But realistically, US earnings seasons have become like those popular US sitcoms of bygone days that endlessly rotate on cable television.

Every quarter for however many now has seen earnings expectations marked down hard before “surprising” to the upside. Beats on earnings in the order of 60-70% are the norm. The fact remains, US earnings are in recession and revenues have failed to show any sign of actual recovery pretty much since the GFC, on a net S&P500 basis. Yet Wall Street keeps posting fresh all-time highs.

As to why, we only need appreciate that in some cases, US companies are offering a higher yield on their dividends than they are on their bonds. We are in a parallel universe that is unrecognisable. And central banks across the globe have no intention of changing that.

Commodities

Oil had a bit of a blip on Friday night when the US dollar plunged 1.2%, but it was back to business as usual last night as the dollar crept back up 0.3% and the realities of building inventories, and in particular building gasoline inventories at the height of US driving season, re-established. As to just how low oil can go, well that’s a matter of debate. Having suffered the shock of early 2016 and recovered to find a threshold of rig restarts at US$50/bbl, one presumes the downside is relatively limited as those rigs can just as swiftly shut down once more.

And at some point, what everyone has been expecting for nigh on two years now, the global economy must see some benefit from lower energy costs.

West Texas crude is this morning at US$40.08/bbl, down US$1.32 or 3%.

Base metals were again mixed last night, with aluminium falling 0.5% and copper 1%, while nickel and zinc each rose 1%.

But look out, iron ore has jumped US$1.70 to US$60.50/t.

Gold is relatively steady at US$1352.40/oz.

The Aussie’s been on a rollercoaster since Friday night, shooting up to 76 on the greenback plunge but falling back 0.8% in the meantime to US$0.7533 as RBA expectations intensify.

Today

The SPI Overnight closed down 21 points or 0.4%. NSW is back.

Locally we’ll see building approvals and trade numbers today ahead of the RBA’s decision.

The US will see the Fed’s preferred measure of inflation tonight as the PCE is released along with income and spending data.

Earnings reports are due today from a handful of companies locally, including Navitas ((NVT)) and Seven West Media ((SWM)).

Rudi will Skype-link with Sky Business today to discuss broker calls at around 11.15am.
 

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(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

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article 3 months old

More Favourable Outlook For Mineral Deposits

Confidence is growing in Mineral Deposits as the production improvements at the company's two main operations ramp up

-Mineral Deposits cash flow increasing amid supportive market conditions
-Deep discount of MDL stock appears excessive to Ord Minnett
-Company's focus on costs, margins and consistent production


By Eva Brocklehurst

Brokers are gaining confidence in minerals sands producer Mineral Deposits ((MDL)) as its key joint ventures have kicked off significant production improvements in the June quarter.

Ord Minnett raises its recommendation to Speculative Buy from Hold and its target to 70c from 29c, based on the observation consistency is improving at the company's operations and cash flow is increasing. Moreover, supportive market conditions and joint venture agreements are reducing the funding risk.

The broker expects investor confidence to improve if the company can deliver two consecutive quarters of better performing operations. The financial risks are high but the deep discount reflected in the stock price relative to valuation appears excessive, in Ord Minnett's view, given momentum is shifting in a positive way in terms of both pricing and performance.

The company's contributions to TiZir (50% owned) interest payments are underwritten by joint venture partner, Eramet, and the broker believes the company can manage to balance the funding risk associated with the high debt load.

TiZir has achieved its first half of positive earnings since completion of construction at Grande Cote, Senegal, (90% owned by TiZir). Major maintenance was undertaken in February and production is now expected to recover to levels of a year ago.

Ord Minnett expects Mineral Deposits' earnings to rise to $22m in the second half from $1.8m in the first half, on the back of higher prices and as Grande Cote and the Tyssedal (Norway) upgrading facility ramp up.

Tyssedal Titanium And Iron, in which Mineral Deposits has a 50% holding, produced its first chloride-route titanium slag and high-purity iron ore in January after a four-month shutdown. Production in the June quarter of titanium slag was close to previous levels.

Morgans also expects a lift to nameplate output at Grande Cote over 2016, generating positive earnings in the December half, and in the full year. Heavy media concentrate (HMC) was at 75% of previous levels for the half and the broker models have increased efficiencies in the December half.

The company's focus is, appropriately in the broker's view, on costs and margins, which includes maintaining throughput and plant availability for consistent production. Morgans, too, notes funding from Eramet to contribute to TiZir obligations substantially reduces the risks during a weak commodity market and as as plant optimisation continues.

The broker anticipates increased production in the December half and stronger cash flow. Pigment prices have firmed and supply constraints are expected to lead to better ilmenite and rutile prices. Morgans retains an Add rating and 96c target.
 

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article 3 months old

The Monday Report

By Greg Peel

BoJ Disappoints

Well I hate to say I told you so, but I told you so. Whenever the world expects the Bank of Japan is about to unleash monetary shock & awe, it always disappoints. Then when no one’s paying much attention, it surprises with an extensive package.

The world was sure the BoJ would deliver something substantial on Friday – increased QE and/or a cash rate further into the negative, and the central bank itself had previously dropped a few hints. But Friday’s meeting brought no change to QE or rates, but rather the BoJ will increase its annual purchase of Japanese stock ETFs (exchange traded funds) by almost double, to around US$58bn.

The news lifted the Nikkei a little but sent the yen soaring, given the world was set for something more aggressive. It’s now over to the freshly mandated Japanese government to come up with something more substantial on the fiscal front.

The Australian stock market was bumbling along looking very “Friday” during the morning ahead of the BoJ announcement, which was worth a drop of 20 points. The index recovered late in the session, probably reflecting the fact it was the last day of the trading month and fund managers would have been keen for the index to close on a 2016 high.

With China such a focus, it’s easy to forget the importance of Japan as a trading partner, and specifically a buyer of iron ore, coal and LNG. The oil price had been down on Thursday which might otherwise explain a 1.3% drop for the energy sector on Friday, but iron ore was up strongly, base metal prices were up and the materials sector finished down 1.2%.

Elsewhere, a 1.3% gain for consumer discretionary is a “risk on” trade, probably backed by hopes of an RBA rate cut tomorrow, but this was countered by the biggest mover of the day – utilities, up 1.5%. Ditto on the RBA, so as usual, the markets are simply playing the central banks. And why wouldn’t you?

Could be some disappointment tomorrow if the RBA doesn’t oblige.

No Fed Rate Hike?

So we’ve covered the BoJ and RBA, so now we must move on to the Fed.

Economists had forecast a 2.6% growth rate for the US June quarter GDP. On first estimate, it came out at 1.2%. The March quarter GDP was also revised down to 0.8% from 1.1%. The culprit within the June numbers was a 3.2% decline in business investment – the largest since the GFC.

The US dollar index had fallen a full 1.2% on Saturday morning to 95.52 on a combination of the weak GDP result and the surging yen.

Yet the US stock market remained as it has been of late, as idle as a painted ship upon a painted ocean. The Dow fell 24 points or 0.1% while the S&P rose 0.1% to 2173 and the Nasdaq rose 0.1%. Over the last eleven trading sessions the S&P500 has moved in a range of 0.9%. The last time that happened was in 1970.

Fundamentally, one would suggest therefore that the US market is looking a bit toppy after its sharp rebound post-Brexit. Technically however, this stall in the rally without a pullback is deemed a bullish sign.

The biggest drag on the Dow on Friday night was ExxonMobil, which posted its worst quarter in some time after more than halving earnings compared to the same quarter 2015. The result was a miss. Fellow Dow component and oil producer Chevron also posted a miss but managed to avoid share price punishment.

The major take-out from Friday night was nevertheless another diminishing of Fed rate hike expectations. September now appears unlikely, unless there are some astounding data between now and then (US jobs this week).

Commodities

The big drop in the dollar and reduced rate hike expectations predictably had gold rising US$15.80 to US$1350.40/oz.

The story was more mixed in base metal markets, where metal-specific stories are more dominant at present. Aluminium jumped 2% and zinc 1.5%, but copper and lead only managed 0.5% and nickel fell 1%.

Iron ore fell US40c to US$58.80/t.

After having a good look at its 200-day moving average on the downside, West Texas crude rose US30c to US$41.40/bbl.

On greenback strength the Aussie was up 1.3% at US$0.7598 on Saturday morning.

The SPI Overnight closed up 17 points or 0.3%.

Not Stressed

Not long after Wall Street, and thus the world, closed for the weekend, the results of the latest UK/EU bank stress tests were released. There was a lot of eye-rolling when the bulk of 51 banks assessed were given a thumbs-up.

The tests are supposed to determine whether a bank has enough capital to survive another GFC-style shock. However, unlike the Fed’s equivalent tests on US banks, the European tests have no quantitative hurdles built in. The assessment is qualitative. The sceptics would say this allows the results to be prima facie positive in order to avoid a compounding panic on the day.

It was also noted the results provided no “test” to incorporate Brexit or negative interest rates. Nor were the results for Greek and Portuguese banks published – those banks are informed privately. In the end, the only banks deemed to be in trouble were the ones the world knew were in trouble anyway – mostly Italian.

The Week Ahead

On the subject of Fed focus, the US non-farm payrolls report for July is out on Friday night, preceded by the private sector report on Wednesday night.

Other US data releases this week include the manufacturing PMI and construction spending tonight, personal income & spending and vehicle sales tomorrow, the services PMI on Wednesday, factory orders and chain store sales on Thursday and the trade balance on Friday.

Today is manufacturing sector PMI day across the globe, with Beijing also throwing in China’s service sector PMI. Wednesday sees everyone else’s services PMI.

The Bank of England will meet on Thursday night but having done nothing at the last meeting not long after the Brexit vote, it’s unlikely to move at this meeting.

Aside from PMIs, Australia will see house prices and new home sales today, building approvals and the trade balance tomorrow, and retail sales on Thursday.

The RBA will meet tomorrow and publish a quarterly Statement on Monetary Policy on Friday. The chance of rate cut tomorrow is currently deemed to be 50/50.

Welcome to August, and that means welcome to result season proper. Things start slowly this week before snowballing through the month. Report highlights this week include those of Rio Tinto ((RIO)) on Wednesday, Suncorp ((SUN)) and Tabcorp ((TAH)) on Thursday and Virgin Australia ((VAH)) on Friday.

It’s a long weekend in NSW thanks to Banking Holiday today. The ASX remains open but things might be a little slow.

Rudi will appear on Sky Business on Tuesday via Skype-link to discuss broker calls at around 11.15am. He'll re-appear in the studio on Thursday, 12.30-2.30pm and does the Skype-link again on Friday, 11.05am.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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article 3 months old

The Overnight Report: Going Nowhere

By Greg Peel

The Dow closed down 15 points or 0.1% while the S&P gained 0.2% and the Nasdaq rose 0.3%.

Risk On?

The ASX200 is not exactly shooting the lights out at the moment but the bias clearly remains to the upside. The index has spent the week grafting its way to 5550 from 5500 with the technicals still suggesting higher levels to come.

The Brexit blip notwithstanding, the longer run rally from below 5000 to yesterday had initially been led by defensive stocks, with the big cap banks and miners dipping and recovering at different times. I have made mention often enough of how the utilities sector just kept rising and rising.

Analysts were already struggling with valuations among the defensives, while at the same time conceding the fact global interest rates continue to fall, the Fed continues to stall, and the RBA may yet act again. So throw out your historical PE comparisons – what’s the point when the German government is issuing zero coupon ten-year bonds? We have never been here before.

But on Wednesday we finally saw some selling in the local utilities sector and yesterday that continued. The banks have quietened down now with Commonwealth Bank’s ((CBA)) result, due in a couple of weeks, set to be the next catalyst other than a rate cut next week.  Yesterday’s big movers were materials, up 1.5% consumer discretionary, up 0.8%, and energy, down 1.0%. Everything else was pretty quiet.

Energy fell on the oil price and that currently is looking a bit vulnerable but solid iron ore prices, resilient gold prices and some strength in base metals have seen materials now taking the lead. This is cyclical, not defensive, as is consumer discretionary, which of course would benefit from another rate cut.

Central banks are driving global markets. They are the “free put”. If the defensive yield plays have now stretched about as far as they can, even under the new world order, will it be cyclicals that take us back to 6000? That, supposedly, will depend on result season.

Stalled

And on the subject of earnings, Ford (Dow) shocked all and sundry last night by posting a weak result and disappointing guidance. Its shares fell 8%, and ensured the Dow was down over hundred points early in the session in a dour mood.

The result was a shock because US car sales have been posting record after record every month and providing some hope for the US economy. But on the one hand there are concerns about the growing number “subprime” car loans being issued, and on the other, it turns out Ford has been forced to offer huge money-back incentives in order to post those record sales numbers. Globally, Ford cited the China slowdown as also being a drag.

However, General Motors reported earlier in the season and beat on expectations. So maybe Henry just needs to have a good look at himself. Whatever the case, and as so often has played out these past couple of weeks, Wall Street grafted its way back through the session to a relatively flat close.

The past ten sessions of almost no close-to-close movement is the tightest in a couple of decades.

US earnings season is at the halfway mark, with just over 50% of S&P500 companies having reported. So far, everybody’s pleased. The quarterly decline in earnings to date is closer to 3% than the 6% forecast pre-season.

Just don’t tell anyone the same has been happening every quarter for some time now. Forecasts are marked down and down and down until most companies can’t help but beat.

Wall Street may be pleased, but it’s still not going anywhere.

This mornings after-the-bell results have included a beat from Amazon which has its shares up 2%, and a strong beat from Google parent Alphabet, which has its shares up 4%.

One obvious drag on Wall Street at the moment is oil. Following another 2% fall last night, WTI is close to its 200-day moving average. If that breaks, commentators assume the oil-stocks correlation of early 2016 will reassert itself.

Commodities

West Texas crude is down US81c at US$41.10/bbl.

The US dollar index is only down 0.1% at 96.68 but base metals had a strong session last night following a couple of weaker ones. There is likely positioning going on ahead of today’s BoJ meeting for which great expectations are held, and in between there’s the Filipino nickel industry story.

Nickel rose 3% in London last night, zinc 1.5%, aluminium 1% and copper 0.5%.

Iron ore rose another US$1.20 to US$59.20/t.

After jumping sharply post-Fed on Wednesday night, despite the Fed remaining as inconclusive as ever, gold is back down US$5.10 at US$1334.60/oz this morning.

The Aussie is 0.2% higher at US$0.7504.

Today

The SPI Overnight closed up 8 points.

As I have noted before, whenever the world is expecting shock & awe from the BoJ the central bank usually does nothing, but often catches everyone out another time when expectations are negligible. Expectations are very high that today the BoJ will do something significant on the monetary front, to be followed up next week by something significant from the government on the fiscal front.

Stay tuned.

Locally we’ll follow up Wednesday’s June quarter CPI result with the PPI today, along with month of June private sector credit.  Japan will dump a lot of monthly data and the BoJ meets, and tonight sees first estimates for June quarter GDP in both the eurozone and US.

Origin Energy ((ORG)) is among those posting the last of the production reports today.

Rudi will Skype-link with Sky Business around 11.05am today to discuss broker calls.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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