Materials Stocks Tips and News on the ASX.
Share to buy – Whitehaven Coal (WHC)
Until recently, we've viewed a lack of market confidence as mis-pricing WHC.
Over the journey, the company has maintained an earnings margin average of $13/t but it appears the market has been factoring in the future coal price and giving management little benefit for being able to sustain its margins, despite its track record.
The risk lies with the thermal coal price outlook and whether China continues to retreat from the trade.
Today the company announced record high ROM coal production of 5.7Mt for the March quarter, up 21% compared with the previous corresponding period and 44% YTD.
The company also recorded its highest quarterly saleable coal production of 5.3 Mt for March, up 28% compared to a year earlier, and 48% YTD.
Whitehaven Coal says that it is on track to meet FY2016 guidance for saleable coal to be in the range of 19.5 Mt to 20.1 Mt.
The miner says that costs guidance for the full year FY2016 is now expected to be $57/t.
We think momentum can now build in the stock and are prepared to be buyers..
Share to buy – Rio Tinto (RIO)
Since bottoming out near $38 in December, iron ore has rallied to presently be trading above $48.
- Overnight, the bulk commodity jumped 3%.
- The bounce in iron ore, unsurprisingly, has coincided with a bounce in Rio Tinto which has completed a basing pattern and now appears poised to push higher.
- We are looking for a short-term rally in Rio and active traders can consider being buyers.
Share to sell: GWA Group (GWA)
GWA's result in February missed consensus estimates and guidance was lowered. Cost increases, the A$ and price declines all offset attempted cost savings, so GWA needs to work harder. Bathrooms & Kitchens saw margin expansion but with 70% of products imported and GWA's 32% premium pricing to peer product ranges, there are concerns over the company's structural issues. Those concerns are reflected in the company’s share price, which has fallen from a high around $3.25 in October, to presently be trading around $2.60. We have a solid bearish structure in place, with the shorter-term EMAs crossed lower and the price action below the longer-term EMA filter, which remains negative. More recently, the price action has been back to retest and confirm as resistance the $2.70-75 region, an area which previously acted as support on multiple occasions.
Newcrest Mining Limited – Sell Stock
Newcrest Mining (NCM) is an Australian gold producer, with operations in Australia, Indonesia, Papua New Guinea, Fiji and West Africa. The group’s flagship mine is PNG-based, Lihir, with the other offshore operations being Gosowong in Indonesia, Hidden Valley (50%-owned) in PNG and Bonriko in Ivory Coast. NSW-based Cadia Valley and WA-based Telfer make up the company’s domestic operations. Gold weakness Although gold prices have stabilised in recent months, gold exchange traded funds (ETFs) have continued to shed their bullion holdings, highlighting weak investment demand for the yellow metal. Last Friday night’s better-than-expected US jobs report has increased the likelihood of the US Federal Reserve bringing the forward the date it begins tapering stimulus to December. The market response will likely be a rise in US bond yields and the US dollar, both of which are negative for gold. This reduces the incentive for ETFs to hold bullion and if they continue to sell their holdings – which we expect they will - gold prices are likely to head south. Outlook NCM’s cash costs for the September quarter were $1093 an ounce (oz), whilst the average realised gold price was $1442/oz. With gold prices recently trading around $1285/oz that implies NCM’s cash margin has shrunk by approximately 44% since the end of the quarter, to $192. It also means that Lihir, with a cash cost of $1152/oz, Telfer, with a cash cost of $1296/oz and Bonriko, with a cash cost of $1889/oz, have either become uneconomical or are very close to it. The balance sheet worsened considerably in FY13, with the net debt to equity ratio soaring from 14% to 41%. High costs and falling gold prices are hammering the group’s cash flows, limiting its options to arrest the balance sheet deterioration. This increases the odds of a capital raising. NCM stuck to its FY14 production guidance of 2.0 – 2.3 million ounces. Unfortunately, it is mining lower grade ore from its gold mines, as evidenced by the September quarter production report. A repeat performance in subsequent quarters increases the risk of missing production guidance. Amidst all these concerns, we think there is enough bad news to send NCM shares even lower from current levels. For all of our latest australian sell shares and trading ideas sign up for FREE 7 Day Trial and gain full access our research files.
WPL Woodside Petroleum – Share Tip
Woodside Petroleum (WPL) is Australia’s largest oil and gas explorer and producer. WPL operates the $27 billion North West Shelf (NWS) Venture in offshore WA, which produces around 40% of Australia’s oil and gas. The company also has several key LNG projects, which include, Pluto (WA), Browse (WA) and Sunrise (East Timor). The Pluto project is up and running, but the Browse basis LNG project has been delayed for a period of the two years. Key Points Quarterly Report: WPL reported strong production of 21.9 mmboe for the 3Q13, which was up 9.5% quarter on quarter, the result was mainly due to increased production from the North West Shelf following planned maintenance shutdowns in 2Q13 Sales volumes of 20.9 mmboe up 33.5% on 2Q13 Revenue came in flat at US$1.34 billion, with the higher sales offset by slightly lower realised average prices Leviathan and Browse
>> The groups growth profile has been questioned over the past few years, with issues and delays over two potential projects, Browse LNG project in WA and the Leviathan fields located offshore Israel. However a number of key issues in these projects have been alleviated of late. >> The Browse project which was shelved early in the year looks to be back on the table. WPL and its Joint Venture partners have decided to take USE floating LNG technically to commercialise the Browse gas fields. >> While no costing has been done for the new concept, we would expect it to be less capital intensive than its previous options. >> The Leviathan gas fields is one of the world’s largest off shore gas finds of the past decade. >> WPL successfully bid for a 30% stake in project almost 12 months ago, but the deal is yet to be finalised, with the Israeli government trying to set gas reservation on the field. >> The Israel Supreme Court has recently dismissed the right to do this which paves the way for WPL to proceed with its offer.
Atlas Iron (AGO) Buy Share
Atlas Iron (AGO) is an iron ore producer and explorer located in Western Australia. The company has a growing number of high quality iron ore projects and one of the largest landholdings in the lucrative Pilbara region. AGO is now one of the area’s largest iron ore producers. The company has a significant number of direct shipping ore (DSO) projects in WA. DSO projects are those that are in close proximity to ports, which helps to significantly lower capital costs. AGO has several projects in varying stage of development, with its Abydos mines in production and its Mt Webber mine due to e commissioned in December. Key Points: Quarterly Production:
>> A record 2.4 million tonnes of iron ore shipped in third quarter, up from $2.2 Million tonnes in the previous quarter >> Production rate of 10 million tonnes achieved in the quarter >> Operating costs for the quarter were within the $49-$53 region >> Average sale price increased 9% from the previous quarter to USD 117 a tonne, which on an Aussie dollar basis would have been much higher
Western Areas NL – Sell Stock
Western Areas NL (WSA) is an Australian-based nickel sulphide producer which owns the Forrestania Nickel Project, along with development projects in Canada and Finland. It was listed as a share to sell in our traders report on September 30th 2013. The company has two producing nickel mines, Flying Fox and Spotted Quoll. The primary discovery at Flying Fox, is one of the highest grade nickel deposits in the world. Along with Spotted Quoll, these operations are some of the lowest cost nickel mines in the world. Key Points:
>> Revenue of $306 million, down 7% from FY12, hurt by a fall in nickel prices >> Underlying profit of $6 million, an 87% decline on the prior year >> On a reportable basis, the group lost of $94 million on the back of a $99.7 million impairment relating to exploration write-offs >> Cash flow from operations did decrease 27% over the year, whilst cash on hand halved to $80.7 million. Despite the fall the group did repay $105 million of convertible bonds and a $45 million corporate loan facility during the year >> This recent fall coincides with data out of China, which showed copper imports (a widely accepted barometer of economic activity) declined 20% over the month of August >> This data coupled with today’s lower-than-expected final read from the HSBC manufacturing index (actual 50.2 versus forecast 51.2) paints a bleak picture immediate picture for Chinese demand
Boart Longyear (BYL) Share To Sell
Boart Longyear (BLY) provides contract drilling services to the mining, environmental, infrastructure, and energy industries. The Drilling Services business provides drilling services to the mineral exploration, development and production, environmental, infrastructure and energy markets. The Drilling Products business designs, manufactures and sells drilling equipment such as drills and support systems, as well as bits, rods and all requisite tooling. China continues to slow Yesterday, the HSBC Final Manufacturing PMI confirmed China’s manufacturing sector contracted sharply in June. The PMI reading of 48.2 was the weakest since September 2012. Deteriorating business conditions, including falling customer orders and rising inventories, were blamed for the poor manufacturing result. Another worrying trend that has emerged in recent weeks has been a tightening in Chinse credit markets. Since mid-May, Chinese banks and financial institutions have been wary of lending to each other, leading to sharp rises in inter-bank borrowing rates. Weaker credit, combined with Beijing’s reluctance to stimulate the economy, is likely to keep manufacturing in the doldrums for a little while longer. Poor operational update BLY warned yesterday that it indeed was facing worsening trading conditions, particularly relating to its Drilling Services business, which is suffering from weak rig utilisation rates and customers delaying their drilling programs. The group said FY13 revenue and EBITDA were likely to miss consensus estimates of a US$1.355 - US$1.556 billion range for revenue and a US$176 – US$211 million range for EBITDA. In FY12, BLY reported revenue of US$2.01 billion and EBITDA of US$254 million. Not only is the group on track for a massive year-on-year drop in revenue and operating earnings, but it was forced to seek assistance from lenders regarding its bank debt facility. BLY was allowed to reduce its leverage ratio (gross debt / EBITDA) requirement from 4.75x in FY13 to 3.50x by FY16. In return the company must give up security over a greater range of assets, has to pay a higher rate of interest and increase the pace of principal repayments. Outlook China’s manufacturing sector has entered contraction territory and its export sector is buckling under the weight of tepid global economic growth. As a result, miners are likely to curtail their capital expenditure in response to weaker demand. BLY is therefore unlikely to see a pickup in demand for its drilling products, whilst drill rig utilisation rates are likely to continue heading lower. At the end of FY10 rig utilisation rates were 75%, but are heading towards 50% at the end of FY13, according to BLY. Although BLY’s revised covenants allow it space to breathe if EBTIDA stays low in coming years, the fact it must pay higher interest is worrisome in a period where lending rates are expected to rise. BLY must convince the market that it has measures in place to slash costs and/or that revenue is likely to rebound. We don’t think the latter is likely to occur any time soon. Net profit margin has shrunk from 7.9% in FY11 to just 3.4% in FY12. Higher interest expense without an offsetting reduction in operational expenses is likely to heap further on the group’s margins. Boart Longyear was listed as a sell share for our members on June 2nd. For all of our latest share tips and trading ideas sign up for FREE 7 Day Trial and gain full access our research files.
OZ Minerals Limited (OZL) – Share To Sell
OZ Minerals (OZL) is an Australian based mining company with a focus on copper and gold. The company owns and operates the Prominent Hill copper-gold mine and the Carrapateena copper-gold project located in South Australia and has a number of equity interests in listed resource companies. Copper crunched China’s slowing economy has darkened the outlook for miners such as OZ Minerals. The country’s manufacturing sector contracted sharply in June, and its credit markets have tightened in response to its weakening economy. Below we highlight the deterioration in the price copper since the beginning of the year. There has been divergence in London Metals Exchange copper inventories (white line) and the price of New York Sep-2013 copper futures (green line):
Newcrest Mining Limited Nosedives (NCM)
Newcrest Mining (NCM) is Australia's largest gold producer and one of the world's top five gold mining companies by production, reserves, and market cap. NCM’s main operations are in Australia, Indonesia, Papua New Guinea, Fiji and West Africa. The group’s flagship mine is PNG-based, Lihir, with the other offshore operations being Gosowong in Indonesia, Hidden Valley (50%-owned) in PNG and Bonriko in Ivory Coast. NSW-based Cadia Valley and WA-based Telfer make up the company’s domestic operations. Gold price plunge Gold holdings at exchange traded funds (ETFs) have fallen significantly in 2013, with the drop in bullion holdings reflecting a dramatic fall in investment demand. The plunge in gold prices has encouraged China and India, as well as the US and Perth Mints, to ramp up their physical purchases of bullion. However we believe the surge in ETF-related supply is overwhelming any physical demand for the precious metal. The spot gold price has plunged 16% in the year to date amid a sharp deterioration in sentiment towards the precious metal. Global inflation remains low whilst the US central bank has flagged an end to its monetary stimulus measures sometime this year in response to a strengthening US economy. We expect these headwinds to persist for a while yet, resulting in an environment where any short-term gain in gold prices is met by even stronger selling. Higher cost mines threatened by gold NCM is one of the higher cost gold producers in Australia. Cash costs were $1086 an ounce (oz) for the March 2013 quarter, with a number of its mines plagued by operational issues. Telfer, which accounts for a quarter of overall production, had cash costs of $1162 an ounce. This was 27% higher than the previous quarter due to weaker copper output, planned mill shutdowns and the sourcing of ore from higher cost open pit sources. The group’s offshore mines, Gosowong, Hidden Valley and Bonriko, contribute around 20% of overall production. Cash costs at these mines were $806/oz, $1790/oz and $930, respectively. With gold prices currently trading around $1400/oz, Hidden Valley has become uneconomical and Telfer’s cash margins are very tight, magnifying the threat of impairment charges at these mines. Outlook A major problem for NCM and other higher cost gold producers is the impact plunging gold prices are having on mine profitability. Mine shutdowns and weaker output contributed to a big rise in quarterly cash costs at Telfer, whilst Hidden Valley has become uneconomical given how much cash costs exceed current gold prices. We believe there is more weakness in store for gold prices, raising the threat of write-downs at NCM’s high-cost mines. Newcrest was listed as a sell share for our members on June 5th. For all of our latest share tips and trading ideas sign up for FREE 7 Day Trial and gain full access our research files.
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Nov 2014 - Nov 2016
Our short-term focused Trading Report returned 30.03%, outperforming the ASX/200 Accumulation Index by 6.45%*
DISCLAIMER: *Performance is derived from recommendations provided by Australian Stock Report’s Trading Report, opened on or after date of acquisition in Nov 2014 *Return figures are gross returns and do not take into account fees or brokerage costs. *Returns are calculated based on a $50,000 hypothetical portfolio, risking 2% of the overall portfolio balance ($1,000) as a starting point for each trade. *Due to slippage and gapping, losses can sometimes exceed $1,000 on an individual trade. *Opening and closing prices for trades (and therefore the prices used for determining aggregate profit/loss) will be those published on the Australian Stock Report website and will be determined by the price at which they could realistically be executed in the market at the time the recommendation is published. *ASX 200 Accumulation Index Return is calculated based upon the price of the index at the start of the session on the day the first ASX 200 trade was placed, i.e. 24.11.2015
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