Aurora Oil & Gas (AUT) is an oil and gas exploration, development and production company operating in North America since early 2005.  With a market capitalization of almost $300 million, it is a small cap hot stock, outside of the ASX 200.

The plan for the development of the company’s oil and gas interests is focused on the US, where large markets and existing infrastructure provides the opportunity for attractive economic returns.

Maiden revenue is expected in the 4Q10. AUT boasts a sound balance sheet with no debt and US$40 million in cash on hand.

The company has the potential to deliver production and profit growth for many years from its existing assets, which are already benefitting from a strengthening commodity market.

2010 is expected to represent a significant year of value creation for AUT from activities that will include drilling, testing, production and land acquisition across the portfolio.

The company is well funded for its existing activities and is well positioned to pursue new oil and gas opportunities.

More about the Business

AUT is focused on onshore US in the south east Texas Eagle Ford shale / Austin Chalk, known as the Sugarkane Gas & Condensate Field.

The company has embraced low-risk development assets, with a drilling inventory in excess of 500 well locations and a very significant production growth profile.

The Sugarkane Field involved an initial acreage acquisition in 2006. Farmin is nearing completion, giving excellent results, with drilling times and costs being reduced dramatically.

Sugarkane consists of a high quality Austin Chalk reservoir, directly overlaying an organic, rich and calcareous regional Eagle Ford shale.

The field has been delineated by more than 25 wells, with consistent reservoir and hydrocarbons from all penetrations.

A Liquids Story

AUT calls itself a “liquids story”, being invested heavily in oil as liquids are more valuable than gas.

AUT is highly leveraged to oil prices. High condensate yields and rich gas significantly increase gross revenue for each mscf produced.

The Eagle Ford is a liquids rich trend. The relative energy differential (BTU) for oil/gas is approximately 6:1. The value ratio of oil/gas has been trending up in recent years.

The Eagle Ford is a premium US shale play, with large US and multinational companies having invested significantly to enter.

These companies include BP, Shell, ConocoPhillips, Exxon/Mobil and Anadarko, amongst others.

An active drilling program is delivering best in trend results. Eagle Ford drilling activity continues to grow rapidly, with some 50 new wells drilled and completed along the trend to the end of 2009, with a dramatic ramp up in 2010.

AUT currently estimates there are 80 rigs operating in the trend.

Eagle Ford drilling has demonstrated improved initial production rates, a decrease in early decline rates and a substantial reduction in costs.

Activity Forecast

AUT’s acreage boasts more than 500 drilling locations. Under current field rules, each gas well holds around 1,320 acres and oil wells of 320 acres.

The group’s drilling plan through 2011 is focused on securing land by production.  Revenues from carry wells are expected in the 4Q10.

AUT’s maiden independent reserves report was released in mid-August. The following reserve allocations were made, with an effective date of 1 July 2010:

1P (Proved) – 1,523,000 bbls, 8.3 Bcf and NPV(10) US$70.2 million;

2P (Proved plus Probable) – 4,317,000 bbls, 24.9 Bcf and NPV(10) US$190.1 million;

3P (Proved plus Probable plus Possible) – 33,207,000 bbls, 138.0 Bcf and NPV(10) US$986.2 million.

Company chairman Jon Stewart noted that the maiden reserve statement provides independent verification of the value proposition for AUT and the rapid de-risking that has resulted from the drilling program to date.

Looking Ahead

AUT have a clear and agreed drilling plan going forward, for which the group is already funded, which will see the majority of the possible reserves moved into the proved and probable categories through the next 12 – 18 months.

Significant increases in production and cash flow to AUT from the development of this world class on-shore asset will continue to grow shareholder value for some time.

Preliminary results indicate robust economics, with Eagle Ford looking to be one of the best shale plays in the US.

AUT’s initial well results are excellent, the group boasts a high liquids ratio, good flow rates and a low reliance on gas prices.

AUT is the largest Sugarkane participator of listed juniors, has no debt and US$40 million in cash.

The company boasts huge growth potential, with project maturity through continuous drilling to deliver production and profit growth for years to come and is one of the stocks to watch.

Australian share price for AUT last closed up 2.3% to 67 cents.

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Australia and New Zealand Banking Group (ANZ) is the nation’s third-largest bank by market capitalisation, and is among the top 50 banks in the world and is one of the shares to buy in a bull market.

ANZ operates retail and business banking in Australia, New Zealand and throughout the South Pacific.

Australia’s banks held up relatively well during the global economic downturn, with provisions for problem loans being the primary issue. However, our major banks believe that provisions have passed their peak and recent results are evidence of this.

ANZ’s 3Q10 results, released today, are a sign of recovery for our major banks. Troublesome bad debt charges decreased whilst underlying profit surged (up 37% for the quarter).

Also in the news is ANZ’s latest foray into Asia. ANZ is eyeing off a 57.27% stake in Korea Exchange Bank, worth $3.8 billion and giving ANZ the opportunity for a solid platform in South Korea.

Tentative Recovery Mode

Like all of our banks, financial institutions, and companies in general, ANZ was hit hard by the global credit crunch, with most of our banks reporting large writedowns and bad debts.

ANZ addressed the global economic downturn in its 1H10 results release, noting that the scale and depth of the crisis in the US and Europe meant that recovery will not happen smoothly.

The US economy is starting to show signs of a sustainable recovery, whilst Europe is still suffering at the hands of the Greek debt crisis, which will impact on credit spreads globally.

Still, ANZ believes the problems in Greece are unlikely to affect underlying economic growth globally and are not going to be very significant for Australia.

The bank has forecast the Australian economy will grow by 3% in 2010, with Asia, excluding Japan, forecast to grow by 8%.

Fitch Recognises Asian Strength

Earlier this week, market chat surrounding ANZ focused on the group’s proposed majority stake ownership in Korea Exchange Bank.

ANZ is participating in a due diligence process for a 57.27% stake in the South Korean bank, worth $3.8 billion on current market values.

Allegedly, private equity fund MBK Partners is still trying to put together a bid for the 51% stake in KEB that Lone Star Funds is trying to offload. MBK is also apparently in discussions with other investors to form a consortium.

A majority stake in KEB would give ANZ a solid platform in South Korea, Asia’s fourth-largest economy and an increasingly important trade partner for Australia.

ANZ will only go ahead with a deal if it satisfies its strict criteria, including that the deal is accretive to shareholder value within the short to medium term.

The latest deal is part of ANZ’s strategy of becoming a super regional lender.

Fitch Ratings agency has recently revised up ANZ’s long-term Issuer Default Rating (IDR) to AA- Outlook Positive from AA- Outlook Stable,  noting ANZ’s Asian expansion strategy and generally improved financial profile.

Fitch said the change takes into account ANZ’s improved earnings diversity following the full acquisition of its wealth management operations.

Quarterly Analysis

ANZ today confirmed that its 3Q10 underlying profit surged 37% to $1.3 billion on year, taking underlying profit for the nine months to 30 June to $3.6 billion, up 26% on year.

Impressively, bad debt charges for the period were at $1.44 billion, a 34% decrease.

The quarterly figures impressed the market today, even offsetting somewhat gloomy outlook guidance.

ANZ said that a global economic recovery was in swing, with the improving economic cycle continuing to see ANZ’s provisions trend lower.

However ANZ cautioned that the global outlook is unusually uncertain on a combination of consumer, business and public sector de-leveraging, domestic and international reregulation, and the implications of high unemployment and other protracted structural challenges in the US and in Europe.

ANZ warned that banks around the world are facing permanently higher costs, with continuing pressures on wholesale funding and deposit rates.

The bank hasn’t yet determined its 2011 funding task but this is expected to come in at around $20-$25 billion.

At the end of June, ANZ had a Tier 1 capital ratio of 10.3%.

Outlook

Australia’s banks held up relatively well during the global economic downturn, with provisions for problem loans being the primary issue. However, our major banks believe that provisions have passed their peak and we agree.

ANZ’s 3Q10 results, released today, are a sign of recovery for our major banks. Troublesome bad debt charges decreased whilst underlying profit surged (up 37% for the quarter).

Also of interest is ANZ’s latest foray into Asia. ANZ is eyeing off a 57.27% stake in Korea Exchange Bank, worth $3.8 billion and giving ANZ the opportunity for a solid platform in South Korea.

Though the market was initially concerned about ANZ’s aggressive Asian growth strategy, ANZ is continuing to benefit from strong growth in Asia as the bank battles softened domestic credit growth.

And while global market volatility continues to mar the future, the improving economic cycle is helping ANZ’s provisions trend lower.

ANZ closed up 1.3% to $22.47 yesterday.

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Aussie Stocks – AMP Limited  (AMP)

AMP Limited (AMP) is a leading wealth management company with more than 3.4 million customers across Australia and New Zealand. Aussie stock AMP is a popular blue chip stock and is one of the major movers on the ASX.

It is Australia’s largest retail and corporate superannuation provider, and one of the region’s most significant investment managers.

AMP offers a wide range of financial products and services, including: retirement savings and income; investments; superannuation; financial planning; insurance; and banking.

After bouncing back in 2009 after a disastrous 2008, AMP has encountered further challenges in 2010 on fears of a global economic slowdown.

The group released its 2009 results earlier this year, which failed to move market sentiment.

Today, AMP released its 1H10 results. The group’s closely-watched underlying earnings result was below market expectations, being impacted by higher insurance claims and a decline in profit from AMP’s mature business.

All of AMP’s divisions showed weakness in 1H10, except for its New Zealand division, and the group is forecasting continued investment market difficulty in 2H10.

Credit Crunch Cloud

Towards the end of 2007, AMP encountered problems, care of the high volatility flooding the Australian equity market.

AMP went into damage control in late 2007 and 2008 as its stock slumped, taking careful steps to maintain its “A”-range credit rating.

The company soldiered through the credit crunch by bypassing acquisitions in order to reduce debt and pay out capital returns to shareholders.

AMP looked ready to turn it all around last year, in line with the growth displayed by most companies (including finance companies) on hopes of a global economic rebound.

Renewed Investment Jitters

Coming into 2010, AMP’s stock became sluggish on renewed fears of a global economic downturn.

In February, AMP released its results for 2009, failing to move market sentiment much either way.

Net profit rose to $739 million from $580 million in the prior year, whilst underlying profit was down 5% at $772 million.

Revenue from ordinary activities came in at $10.92 billion, swinging from a loss of $10.97 billion the prior year on the back of net investment losses.

AMP kept its dividend steady at 16 cents per share, contributing to a result that both AMP and a major broker noted was roughly in-line with forecasts.

AXA Deal Dragging

Market focus on AMP has for a long time revolved around its bid for AXA Asia Pacific Holdings, which has also been a takeover target for other suitors.

In May, AMP said there is a long way to go in its proposed purchase of AXA. The company admitted to still needing final approval from Treasurer Wayne Swan, though the ACCC has not blocked AMP’s bid.

AMP is looking to AXA APH’s independent directors and minority shareholders for proposal support after the ACCC blocked National Australia Bank’s (NAB) counter-bid for AXA.

With today’s 1H10 results release, AMP failed to release any encouraging news on the proposed takeover.

The group noted that AXA still remains strategically attractive, though the market is of the opinion that NAB will eventually win AXA.

Underlying Earnings Aches

AMP today disappointed the market by reporting 1H10 results which fell short of expectations.

Net profit for the half rose 17.4% to $425 million on growth initiatives, and ahead of analysts’ forecasts for around $383.4 million.

Of more concern was AMP’s underlying profit result of $383 million. Though this was up from $367 million in the same half a year ago, it was below market expectations for around $420 million.

AMP declared a half dividend of 15 cents per share, compared to a dividend of 14 cents a year ago.

A deeper look into AMP’s results highlighted several challenges. All of AMP’s divisions showed weakness for 1H10, except for its New Zealand business.

Also evident was the impact of a government crackdown on fees in the domestic pension fund industry. As one of Australia’s largest pension fund managers, AMP has had to respond to the crackdown by rolling out new products.

However, the potential benefits of these new products will not likely be seen in the near-term.

AMP said that investment markets are likely to remain challenging in 2H10 and added it was too soon to give guidance for the full year.

The one upside was cost guidance. AMP expects costs in the Australian Financial Services division to rise just 3% in 2010, down from a prior forecast for 4%-5% higher costs.

Outlook

Like many global equities – and not just those pertaining to the finance sector – AMP has seen its fair share of trials coming into 2010.

Renewed fears of a global economic slowdown has dragged on AMP, which is also battling a government crackdown on fees in the domestic pension fund industry.

AMP’s 1H10 results failed to impress investors today. The underlying earnings result was below analysts’ expectations. It is evident that AMP has suffered a difficult half on higher insurance claims and a decline in profit from its mature business.

All of AMP’s divisions showed weakness in 1H10, except for its New Zealand division.

Unfortunately, going ahead AMP expects to see further challenges. The company anticipates investment markets to remain troubling in 2H10, and for this reason AMP has declined to give specific full year outlook guidance.

AMP share price has suffered over the course of one year falling from as high as $6.97 to as low as $5.09 in yesterday’s session. However, if a break through below $5.00 key support is confirmed then further weakness may result.

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Transfield Services (TSE) delivers essential services to key industries in the resources and industrial, infrastructure services and property and facilities management sectors. As one of the stock trading recommendations, we believe it is one of the shares to sell.

A leading global provider of operations, maintenance, and asset and project management services, TSE’s operations span Australia, New Zealand, the United States, the United Arab Emirates, Qatar, New Caledonia, South East Asia, India, Chile and Canada.

Like most global equities, TSE’s stock slumped heavily over the course of the global economic downturn. However, unlike many of its peers, TSE has failed to achieve a meaningful stock turnaround in 2009-10.

Though the company continues to win projects, TSE is feeling margin pressure as major Australian companies cut back on nonessential spending and as US markets face volatility.

Whilst TSE recently released impressive 1H10 results, the group’s guidance was less heartening.

TSE has forecast flat FY10 earnings growth on FY09. Considering the fact that most companies are upgrading guidance forecasts on improved global economic conditions, this sluggish forecast indicates TSE sees no major operational improvement on the horizon.

Local Difficulty

In terms of revenue by industry group, 39% of TSE’s revenue is derived from revenue and industrial, 31% from property & facilities maintenance and 30% from infrastructure services.

Transfield Services has worked towards integrating its Australian and New Zealand businesses into one, targeting organic growth through upped service offerings and cross-selling opportunities.

However, whilst Australia and New Zealand contribute the highest global proportion of TSE’s revenues (around 65%), the company is struggling to maintain margins.

This is in spite of signs of an economic recovery in Australia, which unfortunately has not extended to all of TSE’s main operational sectors (resources and industrial, infrastructure services and property and facilities management).

Though TSE notes it is seeing continued growth momentum in the infrastructure sector, the group is facing mixed market conditions across the resources and industrial sectors. This is coming primarily via the constraint of customer spending commitments.

In other words, resource and industrial companies are cutting back on non-essential services, including TSE’s project management services.

TSE is looking to leverage off relationships from government stimulus to secure organic growth. Unfortunately the government is no longer throwing out stimulus packages like confetti, as was the case during the worst of the downturn, and TSE will instead have to rely on self-sufficiency measures.

Difficulty Abroad

Whilst TSE is juggling volatile conditions locally, the group’s exposure to the Americas is also doing it little favours.

TSE acquired TIMEC, a provider of asset management services to the resource and food industries, in early 2007, before the onset of the global financial crisis.

TIMEC is now facing refinery overcapacity, negatively impacting work volumes.

TSE’s other primary US business, US Maintenance, is a provider of outsourced contract management services. TSE admits the division has been hit by a mixed retail sector in the US.

TSE is now looking to the Middle East and Asia as to a stronger growth region to invest in.

Good Results, Poor Outlook

In late February, TSE announced its 1H10 results.

The company revealed earnings rose 33% to $40.1 million, on revenue of $2 billion.

TSE generated record cash flow from operations, and declared a dividend of five cents per share.

The results were evidence of a large range of new projects TSE picked up over the year from abroad and locally.

This includes being selected to construct Australia’s lucrative National Broadband Network project.

Whilst the half results were good, TSE’s outlook guidance is less than heartening.

TSE announced during the results release that FY10 earnings growth will be flat to modest, a forecast that was recently reiterated.

Outlook

Whilst TSE recently released impressive 1H10 results, the group’s guidance was less heartening.

TSE has forecast flat FY10 earnings growth on FY09. Considering the fact that most companies are upgrading guidance forecasts on improved global economic conditions, this sluggish forecast indicates TSE sees no major operational improvement on the horizon.

Though the company has declined to elaborate on these challenges, a deeper look into TSE’s operations and sectoral issues paint a clearer picture.

The group is facing margin pressure as its Australian and New Zealand exposure is being hurt by resource and industrial companies cutting back on non-essential services, including TSE’s project management services.

TSE is hoping to leverage off relationships from government stimulus to secure organic growth, though owing to signs of economic growth it seems unlikely the Australian government will throw TSE a stimulus lifeline in the foreseeable future.

TSE is also facing challenges in its Americas exposure, particularly via a struggling retail sector. Such challenges are evident in recent US data, which has confirmed a slowdown in US consumer spending and potentially rising unemployment.

The share price for TSE has shown weakness, declining 30% since October last year. However, there remains continued selling pressure on TSE with the share price last settling at $3.30.

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Shares of the Week – QBE Insurance Group (QBE)

QBE Insurance Group (QBE) is a blue chip stock a leading provider of general insurance and reinsurance services in Australia, the Pacific, Asia, the Americas and Europe.

The company is Australia’s largest insurer, and one of the top 25 insurers worldwide.

It has offices in 45 countries, and offers a range of retail and wholesale insurance products, across a gamut of insurance lines.

Though QBE faced financial sector pressure over the global economic downturn, the company was able to regroup somewhat in 2009 on overall global economic bullishness.

However, QBE’s stock has fallen in 2010 on a tough time for global insurers. The company recently reported below-expectations FY09 results, with profit up only 6% to $1.97 billion.

On Monday, QBE issued a profit warning, stating it now expects 1H10 net profit to fall by about 40% on-year, primarily due to lower investment income.

Peer Insurance Australia Group (IAG) has also issued a dire profit downgrade, indicating a tough time awaits our insurers.

Riding out volatility…

Financial stocks came under severe pressure over the course of the global economic downturn, especially evident in QBE’s volatile stock ride over 2008.

Though market conditions were tough for QBE over 2008, the stock failed to suffer to the extent of its peers throughout the year (albeit after a tough late-2007).

QBE’s stock rose gradually over 2009 as the market noted the company boasts strong businesses and a robust balance sheet, with the substantial majority of its products and businesses producing returns above its 15% minimum return on equity (ROE) requirement.

QBE even felt robust enough to seek out M&A opportunities, in late July 2009 confirming it had acquired 75% of Elder’s insurance unit.

Finally buckling under pressure

QBE’s stock was starting to fall coming into 2010, and in February the company confirmed the market’s worst fears.

QBE reported disappointing FY09 results on 26 February, with net profit up only 6% to $1.97 billion.

The average analyst forecast was for a net profit of $2.01 billion.

Breaking down the result, QBE saw insurance premium rates rise 4%, yet its insurance profit margin declined to 17%, from 19.7% a year earlier. This was at the lower end of its guidance of between 17% and 18%.

QBE declared a final dividend of 66 cents, bringing the total 2009 dividend to $1.28 per share.

At the time, QBE provided guidance for an insurance margin of 16% to 18% for FY10, and forecast its net earned premium to grow 3%.

With almost 80% of its earnings being generated offshore, QBE cited a strong Aussie dollar as a threat to FY10 earnings.

QBE forecast continuing difficult conditions for the global insurance industry in 2010.

Catastrophe strikes

In late April, QBE advised that its estimated large risk and catastrophe claims for 2010 have so far totalled $470 million.

For comparison, QBE’s large risk claims totalled $410 million at the same point in 2009.

QBE set aside $1.28 billion for large risk and catastrophe claims in 2010, so it still has a buffer of around $810 million for the remainder of the year.

This is a decent enough result given the unusually high number of catastrophes that have occurred so far in 2010, though the fact remains that these catastrophes have taken a large chunk out of QBE’s piggy bank.

Downgrade doldrums

On Monday, QBE warned that it expects 1H10 net profit to fall by about 40% on-year, primarily due to lower investment income.

More worrying is that QBE downgraded its insurance margin guidance to 15.7% in the half, which was below its target range of 16% – 18%, and last year’s result of 17.5%.

QBE attributed the downgrade to lower risk free rates used to discount the outstanding claims in the last few weeks of June.

QBE maintained its interim dividend at 62 cents, but it wasn’t enough to prevent a 5.6% slide in its share price on the day of the announcement.

Outlook

QBE’s new downgraded 1H10 outlook is disappointing and foreshadows a tough time for global insurers in the coming year.

The company has forecast 1H10 net profit to fall around 40% on-year and has downgraded its insurance margin guidance to 15.7% in the half, below the prior year’s half result.

Yesterday saw QBE’s peer Insurance Australia Group (IAG) confirming it expects to report a 50% drop in FY10 net profit to $91 million, from last year’s $181 million.

IAG stated that that profit and insurance margin were affected by substantial losses in its UK business, and like QBE the company has been hit by natural peril claim costs.

QBE is also facing difficulty on another front, noting that a strong Aussie dollar is a threat to FY10 earnings as it earns almost 80% of its earnings offshore. Our dollar has been stronger in recent weeks and is now sitting at around 90 US cents.

Looking ahead, QBE forecasts continuing difficult conditions for the global insurance industry in 2010.

Having said that, we feel the stock has already been significantly punished and may start to find its feet around current levels.

QBE looks cheap on a P/E basis following recent share price weakness; it is only trading at 9.0 times current P/E and 11 times forward P/E, which is at a considerable discount to the market and domestic insurance peers. IAG and SUN are trading at current P/E of 35 and 25 times respectively.

The company looks cheap on fundamentals, which should make it attractive for investors with a long term view; however we expect QBE to continue to face margin pressure in the near term.

The Australian share price for QBE has dwindled down from above $25.00 to around $16.50. It last closed 3.2% down to settle at $16.43 a share.

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Stock of the Week – Avoca Resources Ltd (AVO)

Avoca Resources Ltd (AVO) is a gold producer focused on becoming the next Australian mid-tier gold mining company, and is currently one of the hot stocks in the ASX 200.

AVO’s base operation is its Higginsville Gold Project in Western Australia, which contains the Trident Underground Mine, AVO’s trump card.

Higginsville is an emerging new gold belt, and AVO is the most active company operating in this area. The region has also provided for a string of impressive resources upgrades for AVO, as recently as last month.

The company now calls itself “The New Avoca” after its recent takeover of fellow West Australian goldfields company Dioro Exploration. With a much larger resource base under its belt, AVO is targeting 400,000 ounces per annum in FY13.

The group has recently impressed with stellar 1H10 results, where it swung a profit from a prior-year loss, and its 1Q10 results, which bode well for a profitable full year for Avoca Resources.

The company is also well-placed owing to strength for its metal of choice, gold. Though gold has come down from recent highs over the last few weeks, the precious metal is expected to enjoy further gains on current global economic volatility.

Another Upgrade

The Higginsville mine has seen plenty of resource upgrades since it was purchased by AVO.

The mine has garnered a lot of positive attention owing to its low cash operating cost, which is very impressive for an underground mine.

AVO has released a number of resource upgrades for Higginsville, the most recent coming last month.

The company upgraded the Higginsville mining reserve to 803,000 ounces of gold.  Including production of 254,000 oz, the reserve has increased 38% from the previously published 763,000 oz.

AVO is confident that it can maintain the mine’s production at 180,000 to 200,000 oz per annum.

Additionally, AVO announced that its South Kalgoorlie operations produced a record 12,222 ounces of gold during May 2010.

A Lucrative Takeover

Further broader production upgrades may be in AVO’s future, now that the group has taken over West Australian goldfields group Dioro Exploration, a group which boasts a 49% interest in the Frog’s Leg mine and control of the Coolgardie to Jubilee belt.

The addition of Dioro to AVO means the combined group will have annual production of +280K oz, two 1.2Mtpa plants, +1.2M oz in reserves and +3.7M oz in resources.

AVO will have access now to the largest tenement holding and complete treatment coverage of Australia’s richest gold belt, the 150 km Kalgoorlie to Norseman belt.

AVO is presently mulling over buying the 51% of the Frogs Leg gold mine that it didn’t acquire through the takeover.

The owner of the stake, Canada’s La Mancha Resources, says the stake is not for sale. However, if it becomes available AVO has pre-emptive rights over the stake.

The Safe-Haven Metal

Whilst miners have struggled with volatile metals prices of late, gold has been considered the one safe-haven metal, and is forecast to continue strongly into the future.

Gold offers investors protection against inflation and is also seen as a store of value when other asset values are falling.

Although global markets have to an extent stabilised, panic surrounding equity markets has not been completely erased. Even though gold has now dropped to its lowest level in six weeks, this is off recent record highs – and further strength is forecast.

A Bloomberg survey found the majority of analysts are forecasting a climb for gold next week.

Gold is expected to make continued medium-term gains on financial turbulence in Europe and on concern the global recovery may slow.

A String of Stellar Results

In February, AVO posted a net profit of $34.6 million for its December half, impressively spun from a loss of $14.7 million in the previous year’s December half.

Revenue for the half more than doubled to $121.6 million whilst AVO did not pay an interim dividend, in line with last year.

The company confirmed gold production of 101,536 ounces, meaning it’s well on track to achieve its full year forecast of 190,000 oz.

In late April, Avoca Resources reported its 1Q10 results, clocking production of 58,946 troy oz of gold.

Gold sales totalled 62,422 oz at an average price of $1,215/oz.

The result showed the benefits of AVO’s acquisition of fellow West Australian goldfields Dioro Exploration.

The company expects production in the June quarter of about 77,000 oz.

It forecasts full year production of 238,000 oz – 198,000 oz from its Higginsville project and 40,000 oz from its South Kalgoorlie mine.

Outlook

AVO posted a net profit of $34.6 million for its December half, remarkably spun from a loss in the previous year’s half, whilst 1H10 revenue doubled, impressing the market.

AVO’s strength comes from its lucrative resource base. The company recently yet again upgraded the Higginsville mining reserve, this time to 803,000 ounces of gold.

The Higginsville reserve has increased 38% from the previously published 763,000 ounces.

AVO’s takeover of Dioro Exploration is a massive boon for the company: the combined group will have annual production of +280K oz, two 1.2Mtpa plants, +1.2M oz in reserves and +3.7M oz in resources.

AVO will now also have access to the largest tenement holding and complete treatment coverage of Australia’s richest gold belt, the 150km Kalgoorlie to Norseman belt.

Though gold prices have slipped slightly in the last few weeks, the majority of analysts are forecasting a climb for gold next week and generally into the future on concerns the global economic recovery may slow.

The Australian shares graph for AVO has surged from approximately $1.50 to a high of almost $3.00 since February 2010, maintain a strong up trend. Its share price last closed at $2.80.

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Stock of the Week – CSR Limited (CSR)

CSR Limited is currently a hot stock in the news at the moment and is well known as the largest producer of raw sugar in Australia, with 40% of Australia’s raw sugar produced by CSR.

However CSR is also largely involved in three other principle businesses: building products, aluminium and property development across Australasia.

CSR has been talking about demerging its business into two new separately listed companies: one for sugar and renewable energy, and another for its building products, property and aluminium businesses.

China’s Bright Food Group has approached CSR about acquiring its sugar and renewable energy business for $1.75 billion, though today CSR positively surprised the market by revealing it has agreed to sell the division to a new bidder, Asian company Wilmar, for around $1.75 billion.

The asset sale will help CSR offset some of its debt, putting the company in a stronger place after recent trials.

Two Struggling Divisions

CSR’s shares dropped dramatically over 2008 into 2009 as the company suffered from two angles: a poor sugar industry and a dire building sector.

The writing was really on the wall back in October 2008, when CSR admitted to poor sales on a soft housing market, driven by higher interest rates, higher energy costs and slumping consumer confidence.

Although conditions have since improved, the stock still underperformed the market as investors were unsure of the combined effect of its exposure to two completely different industries.

On the one hand was a subdued housing market whilst on the other was a less cyclical, fairly defensive sugar industry.

CSR was facing challenges from a softer Australian housing market while its sugar business enjoyed improving refining margins and volumes.

Bright News

In a bid to stage a recovery, CSR made the decision to demerge its business into two new separately listed companies: one for sugar and renewable energy, and another for its building products, property and aluminium businesses.

The market has been expecting a break-up of the company since 2003, when CSR spun off its Rinker heavy construction-products unit.

Early this year market attention regarding CSR switched to Chinese food producer Bright Food Group, which approached CSR about acquiring its sugar and renewable energy business for up to $1.5 billion.

In late January, CSR officially rejected the offer, stating it is committed to demerging its sugar and renewable energy unit.

Deal Is Done!

CSR pleasantly surprised the stock market today when it revealed it has reached an agreement with Asian agribusiness Wilmar International to sell Sucrogen for $1.75 billion.

The deal effectively closes the door on the Bright Food offer. Reportedly, Wilmar’s offer was higher in value and more certain than a formal offer Bright Food was planning.

CSR has now deferred its demerger plans for Sucrogen, pending the outcome of the sale process. If the deal falls through, CSR said it may proceed with the demerger.

The Wilmar deal, which should be complete by 4Q10, offers net sale proceeds of around $1.6 billion for CSR, or around $1.06 per share.

CSR said it would consider a range of capital management initiatives to utilise these funds efficiently, which the market is taking as implying it may consider an acquisition.

It is expected that the deal will also lead to some form of capital return to shareholders.

The deal is subject to the approval of Australian and New Zealand regulators.

FY10: Hanging in There

On 12 May, CSR reported an FY10 net profit before significant items of $173.4 million, representing a 29% increase from a year ago.

The result, which topped analyst expectations, was driven by a strong performance in CSR’s Sucrogen and aluminium divisions.

On a post-significant item basis, CSR reported a net loss of $111.7 million, which was largely due to a $250 million write-down in the value of its Viridian glass business.

CSR maintained a cautious outlook for its property division, although it was more optimistic over its sugar business.

CSR declared a full-year dividend of 6 cents per share.

Looking Ahead

Market attention regarding CSR has recently been focused on its demerger move and the takeover offer from Bright Foods – a story that has been ongoing since last year.

CSR’s stock started to fall as talks stalled over whether CSR is demerging or accepting a takeover offer. However, today’s news of a deal with Asian agribusiness Wilmar has seen the stock finishing the session up 3%.

CSR may use the net sale proceeds of around $1.6 billion to seek out acquisition opportunities or to offset some of its debt.

Investors should be heartened by the fact that CSR will likely use the cash to issue some form of capital return to shareholders.

Though CSR has faced market challenges of late in two of its divisions (building products and aluminium & property development), the news of the Sucrogen sale is a boon for the company, which has received a considerable cash boost.

As a result of today’s news, we are upgrading our rating on CSR from a Sell to a Hold.

The Australian stock price for CSR has been relatively choppy as of late, trading between $1.60 and $1.85, last closing at $1.715.

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Stock of the Week – Energy Resources of Australia (ERA)

Energy Resources of Australia (ERA) is one of the largest uranium producers in the world, providing over 10% of the world’s uranium production through long-term contracts.

ERA sells its product, drummed uranium oxide, to power utilities in Asia, Europe and North America, under strict international and Australian Government safeguards.

The company is majority-owned by mining bigwig Rio Tinto (RIO), which has a 68% stake in the company.

ERA’s flagship asset is the Ranger mine (east of Darwin), the world’s second largest uranium mine, which currently accounts for 100% of ERA’s production.

The first three quarters of 2009 saw ERA making gains on an upbeat outlook for uranium, though since then the company has been struggling on renewed concerns about uranium’s strength.

The group’s FY09 failed to impress the market on unimpressive guidance and ERA’s 1Q10 results were similarly downbeat.

Uranium U-Turn

Uranium prices were dragged higher with overall commodity prices during the bull market, from 2003 to 2007 exploding from about US$10 to more than US$130 per pound.

However, the global financial meltdown sent uranium crashing down to as low as US$45 in October of 2008.

The Australian Bureau of Agricultural and Resource Economics (ABARE) forecast uranium to be the one resource gainer in 2009, in both volume and value terms.

However, uranium price movements stalled in 2009 and into 2010. A survey released last week by Resource Investing News revealed that fewer investors were placing their bets on uranium companies, down to 12% from 16.9% at the end of 2009.

Moreover, uranium spot prices have slipped almost 20% since October 2009.

By the end of last year, uranium production had responded to rising prices and a positive long-term demand outlook, increasing global uranium production to around 132 million pounds.

There are now rampant fears of a uranium surplus, explaining the cap on uranium spot price appreciation and the decreased interest from uranium investors.

2009 Blues

ERA released a string of financial results across 2009, most of which were fairly decent.

Volatility has been evident across 2010, however, beginning with the company’s release of its fourth quarter results and a 1H10 production downgrade.

In the company’s fourth quarter, production from the Ranger mine fell 30% on year to 1,140 metric tonnes, well below market expectations.

On 29 January, ERA reported a 23% rise in annual profit to $272.6 million and declared a final dividend of 25 cents per share, up from 20 cents in 2008.

Earlier in the month, the company confirmed 2009 production fell 2% on year to 5,240 tonnes whilst sales rose 4% to 5,497 tonnes on stockpiled ore.

ERA forecast 2010 production, sales and average realised sale prices to be broadly similar to those of 2009 but expects the Ranger expansion plus higher maintenance costs to hit FY earnings.

The downbeat guidance did nothing to help support ERA’s stock halt its downturn over the last few months.

Quarterly Quandaries

On 13 April, ERA reported a 27% on-year drop in uranium production for 1Q10.

The drop was largely due to seasonal rainfall resulting in lower ore grades.

In its outlook, ERA advised that 2Q production will be similar to 1Q, and that average realised sales for 1H10 were expected to be similar to 2009 levels.

ERA cited soft market conditions and lower spot prices as key factors behind the disappointing production numbers and weak sales outlook.

Outlook

ERA’s 1Q10 result disappointed the market, helping the company’s stock slide further in 2010.

The group’s FY09 results were also disheartening, with production down slightly and a forecast for higher maintenance costs in FY10.

With the coming full year likely to be impacted by higher costs, ERA will no doubt also suffer from a sluggish market for uranium, which has seen uranium spot prices slipping almost 20% since October 2009.

ERA’s Ranger mine is showing signs of a slowdown, a worrying turn, as Ranger is ERA’s only operating production vehicle at present.

With uranium not making the impressive gains forecast by this time, and with production issues crimping ERA’s results, the short-term looks to be tough for the miner.

Australian share price for ERA has dwindled since October 2009 from over $25.00 to under $15 as of late. This may be one of the shares to sell if it continues to break lower.

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Transpacific Industries Group Ltd (TPI), listed on the ASX since 2005, is an integrated industrial services company performing waste management, resource recovery and transport solutions across Australia and New Zealand.

TPI’s network of operations includes collection operations, transfer stations, waste-to-energy sites, composting facilities, and recycling plants.

These assets enable TPI to offer a full range of environmental services to industrial, municipal, and commercial customers.

TPI’s debt problems have been long known by the market. The group was officially suspended for five months last year as it struggled to address its massive $2.18 billion debt problem.

The company has since failed to recover, with the share market disappointed in TPI’s 2009 capital raising, its recent 1H10 results, a forecast lack of dividends into the future and ongoing struggles in the waste management sector.

Money Problems

Earlier last year, TPI was one of the main shares to sell before it was suspended from official quotation due to a capital structure review.  It was then reinstated to official quotation in July 2009.

This came hot on the heels of serious questions surrounding TPI’s cash situation. In March 2009, TPI admitted to battling debt of around $2.18 billion.

TPI was hoping for a waiver of a debt covenant breach from the lenders, and opened itself up to any potential takeover rescue (which was not to come).

In June, TPI finally detailed its recapitalisation plans, almost four months after suspending its shares from trading so it could sort out its crippling debt.

TPI hoped to raise up to $800 million though a placement and a rights issue.

In July, the company confirmed it had raised around $560 million from the institutional component of its share entitlement offer.

TPI sold about 467 million new shares at $1.20 each in a fully underwritten 1.77-for-1 offer, with eligible institutions taking up more than 86% of their entitlements.

The news wasn’t well received, with TPI shares dropping as much as 20% on the day of the announcement.

A Dismal Year

In August, TPI reported a $237.4 million FY09 loss, swung from a profit of $175.3 million a year ago, largely on asset writedowns and losses on interest rate hedges.

Normalised full year net profit was $72.3 million, roughly half of FY08’s $141.7 million.

TPI wouldn’t pay a final dividend and said at the time that it doesn’t expect to pay any dividends this FY, in accordance with the strict conditions set by financiers after TPI breached loan covenants.

What Went Wrong

After a massive stock dive from 2007 to early 2009 on the global economic downturn and TPI’s glaring debt troubles, the stock failed to regain ground over the course of 2009 and into this year.

The problem was that, whilst overall waste volume and revenue should be generally resilient across a given economic cycle, TPI needs substantial public sector work to keep going. The company relies on winning big contracts from works that are driven by government initiatives.

However, lower economic growth prospects saw less construction activity over the period of TPI’s stock decline. Government stimulus packages over the period of the downturn were not beneficial to all of TPI’s key markets, which include manufacturing and resources.

TPI has continued to suffer on volatility for commodity prices, making its revenue stream more cyclical in nature. The group’s revenues also rely on construction activity and activity in “heavy” industries such as manufacturing owing to the processing of specialised waste volumes.

The company is also struggling to keep its hold as a leader in its markets, as the industry is highly fragmented with a large number of competing companies not much smaller than TPI, including WSN, Wanless, Tox Free and Thiess.

A Hairy Half

On 21 January, TPI forecast a fall in 1H010 earnings on sluggish activity in its commercial vehicles, construction and liquid waste units.

TPI predicted operating earnings for the December half of $197-$200 million, down from $255.7 million in 1H09.

In late February, TPI reported its 1H10 results. Revenue was down 16.1% on 1H09 to $998.1 million.

However, writedowns and impairments weren’t a major problem for the company this time. Operating earnings slid an unimpressive 21.5% to $200.5 million, whilst normalised NPAT crashed 67% to $18.6 million.

Though many other companies reported improved 1H10 results on a stronger economic environment, TPI noted conditions in 1H10 were similar to 2H09.

Net debt was consistent between 30 June 2009 Pro Forma ($1.64 billion) and 31 December 2009 ($1.63 billion).

The group declined to pay a half dividend and said  it anticipated no final dividend for 2H10.

Outlook

The last few years have been disastrous for TPI , with the company consistently in the headlines owing to its massive debt problem.

The market has remained unimpressed with TPI’s measures to address the debt to date, and a “takeover rescue” of the company looks unlikely.

TPI’s revenues have remained soft on a lack of demand for the construction and, in particular, the manufacturing sector. The group’s revenues rely on construction activity and activity in “heavy” industries such as manufacturing, owing to the processing of specialised waste volumes.

The company is also struggling to keep its hold as a leader in its markets, as the industry is highly fragmented with a large number of competing companies not much smaller than TPI in size.

TPI has failed to pay a dividend in 1H10 and forecasts no final dividend for 2H10.

The group says that FY10 net profit is expected to be impacted by a one-off expense of about $10 million on warrants.

In terms of stocks to watch, TPI’s finances are currently in a messy shape, which is not positive looking ahead.  It is likely TPI will suffer continued difficulty in the coming half on an operational and profit front.

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Stock of the Week APA Group

APA Group (APA) is Australia’s largest natural gas infrastructure business, owning and/or operating more than $8 billion of gas transmission and distribution assets, and can be considered as one of the shares to buy in the Australian stock market.

Its pipelines span every state and territory in mainland Australia, delivering more than 50% of the nation’s gas usage. Unique among its peers, APA has direct management and operational control over its assets and investments.

APA also holds minority interests in energy infrastructure enterprises including Envestra, SEA Gas Pipeline and Energy Infrastructure Investments (EII).

Gas volumes are growing at an average annual rate of 3.4% (compared with 1.4% for primary energy sources), driven by population growth, GDP growth and government policies encouraging lower carbon emissions.

The high level of mining activity operating in Australia is also a driver of increased gas demand and thus a boon for APA.

APA recently reported 1H10 operating profit of $63.6 million, up 28.3% on the previous year as capacity expansions on gas pipelines helped boost earnings.

A Booming Business

APA boasts 12,000 km of transmission pipelines and an interest in 21,000 km of distribution networks.

APA’s infrastructure thus allows transportation of around 70% of natural gas used in east Australia, and around 50% across Australia.

The natural gas APA transports and delivers is from all major production sources to all major markets. Because of this, APA has an unrivalled gas asset footprint and is the largest transporter of natural gas across Australia by pipeline length, capacity and volume.

With natural gas playing a lucrative part in Australia’s international renowned resource sector, APA is well placed. Its integrated portfolio of gas pipeline assets provide revenue and operating synergies as the group’s pipelines serve major growth markets across Australia.

APA’s revenue is contracted and regulated, allowing the group to produce a stable cash flow, and revenue looks set to increase based on an increase demand for natural gas on climate-driven legislation changes.

Taking Care of Business

Last September, APA Group confirmed that it completed a $1.03 billion syndicated bank facility after signing agreements with three domestic and nine offshore banks.

The syndication was oversubscribed, and brought the total amount of facilities finalised since July to $1.37 billion.

The new facility completed the refinancing of all of APA’s debt maturity obligations until July 2011.

Although APA has reduced debt, the company expects an additional $10 to $15 million in net interest costs in FY10.

However, the market was impressed by APA’s update, with the group re-affirming target growth in distributions by at least 5% for 2010.

APA’s distribution yield is approximately 9%.

Major Stakeholding

On 8 April, APA confirmed it had increased its stake in Hastings Diversified Utilities Fund (HDF) from 4.5% to 14.9%, at a cost of $72.3 million.

APA did not rule out upping its stake in HDF if forced to protect the value of its investment.

HDF’s assets include gas transmission pipelines that flow through to APA’s own pipelines, so the acquisition makes sense from a strategic point of view.

The acquisition followed APA’s recent purchase of AGL Energy’s gas pipeline in Queensland.

The market applauded APA’s move to up its stake in HDF, with the latter’s EPIC assets constituting a natural fit for APA. Brokers also noted that the acquisition price was reasonable.

APA advised that the acquisition will not affect its guidance of 5% distribution growth in FY10.

Promising Profits

On 24 February, APA Group released its 1H10 results, impressing the stock market.

The trust reported an operating profit of $63.6 million, up 28.3% on the previous year as capacity expansions on gas pipelines helped boost earnings.

The result was impressive, considering revenue only grew by 1.2% to $495.9 million.

Earnings per share (EPS) of 12.6 cents were up 21%, helped by paying down some interest as well as the previous year’s results being influenced by significant one-off items.

The trust gave core earnings (EBITDA) guidance for its full year of $445-$460 million, and said its distributions should increase by at least 5% this year.

The results pleased the stock market, as the units closed 4.6% higher at $3.42 on the day of the announcement.

Outlook

In terms of stocks to watch, APA is a unique company exposed to Australia’s lucrative natural gas assets. The natural gas APA transports and delivers is from all major production sources to all major markets.

As such, APA has an unrivalled gas asset footprint and is the largest transporter of natural gas across Australia by pipeline length, capacity and volume.

The company has noted that in Western Australia, the delivery of gas for power generation in the mining sector will be key to continued growth, and that the development of the coal seam gas (CSG) reserves in Queensland should also provide longer term opportunities for APA.

APA’s 1H10 results impressed the market, with the group clocking an impressive operating profit increase of 28% on year.

The stock market is also excited to hear that APA intends to increase distributions by 5% this year.

APA is well poised to be a strategic consolidator in the east coast gas network and looks set to benefit from the implementation of renewable energy targets.

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