Steel: Will Chinese demand catch up to production?
China’s production in early March has continued to rise, will mills reluctant to cut ahead of the anticipated seasonal pick up. Weather is improving, although no major construction projects have commenced, and inventories of construction steel and flats increased 10% last week. Anecdotes on Chinese prices were mixed, with poor weather reducing demand in Eastern China offsetting impacts of a positive PMI. Iron ore prices fell 0.74% to $133.25/t, with port stocks rising to 67Mt from 66Mt on lower demand from Chinese buyers. Scrap prices were again mixed, with increases of up to 6.3% in UK scrap, stainless up 3.3%, US and European up by 2.6%, while Turkish and Chinese domestic fell by 1.9% and 3.5% respectively. Prices for all metallurgical coals fell this week, with Peak Downs finishing down 2.3%, low vol PCI down 2.5% and semi soft down 3.9%. Chinese buying interest remains low on fears of further price falls and poor cashflows among end-users. Chinese steel production rose 2.5% to 2.085Mt from the end of February. US crude steel production fell 2.4% to 1.785 million short tons in the week, with mill capacity utilization of 74.5%.
Iron Ore Stocks: Currency Woes
On an Iron ore assumption as low as US$88/tonne CFI China 62% Fe, or A$74/tonne FOB Australia, as has been put forward in the market recently, some existing Australian mines would be losing cash, depending on the AUDUSD level assumed. This is a very harsh position for a long term average price, and is more representative of a cyclical price low. Probably a greater influence on Australian resources is the gradual loss of faith by the market that the AUDUSD will decline, with the rise in consensus long term from 0.84 to 0.896 in the last month. This currency assumption revision will likely lead to a fall in value for miners such as AGO and FMG to the order of around 10%, while the earlier stage miners such as FMS see far greater reductions in NPV.
IAG: Asian business in focus
IAG CEO Mike Wilkins has been in the press talking up the Asian business and strategy. They have a stated goal of 10% of total written premiums coming from Asia, currently it makes up 8%. We see profitability as the problem as it is now a tiny piece of IAG's $800m insurance profit, at around $3m. We see the Asian strategy as a risk but small bikkies in the scheme of the total business, certainly a smaller risk than what their failed UK venture was. IAG’s Australian insurance business is in a sweet spot at the moment and even a blow up in Asia really won’t impact that in the short term.
Macmahon Holdings: Pay 5x and no more
After the sale of its civil business to Leighton Holdings, Macmahon Holdings is a 100% mining services company. The new CEO (previously the head of the mining division and before that, the CFO) is committed to steering a new course for MAH which is expected to include no more bad contracts and the maintenance of margins. In our view, bad contracts are still possible, but less likely than they were in the civil business. We are not so sure on the maintenance of margins because: 1) miners are in-sourcing; (2) miners are looking for cost savings; and (3) more contractors are fighting for less work which should result in margin pressure. Weakness in the share price has caused our recommendation to change from Underperform to BUY. We maintain our 12 month target price of A$0.30/sh (FY14 PE of 5x) which is equivalent to NTA.
Roc Oil: Credible Management Delivering
Roc Oil share price has re-rated from an undervalued level in October 2012, and is now consolidating following the recent record profit result. Investors have visibility on project delivery (Beibu Gulf and Balai Cluster), growth options from the portfolio and confidence in credible management with a track record of delivery. Key near term catalysts for ROC’s shares to trade higher include better than expected production performance from Beibu Gulf, successfully completing the Balai Cluster pre-development phase by 3Q13 as well as unlocking upside potential in newly awarded Block 09/05. We have made some changes to our forecast and our DCF valuation of ROC’s shares increased by A$0.04ps (+2%) to A$0.61ps. Our recommendation is Buy (previously Strong Buy).
Karoon Gas: Zephyros-1 update
Yesterday, KAR announced that Zephryos-1 well in the Browse Basin penetrated gas bearing Plover Formations sands, similar to that seen at Kronos-1. Zephyros-1 is the 2nd of a 3 well program in the offshore Browse Basin, with the next one being Proteus-1. Although Zephyros-1 well will not be production tested, KAR is suggesting that there is good permeability and porosity from MDT tools. There are no definitive comments on gas quality (liquids content or levels of inerts such as carbon dioxide, CO2 etc) all of which affect future the economics of any development. The previous well, Boreas-1 was drilled and successfully flowed 30mmcf/d gas through constrained facilities. The gas was moderately liquids rich ~18bbl/mmcf and contained ~16% CO2. KAR is slowing de-risking the resource potential within in Browse Basin permits, such that the range of the prospective un-risked resource of 3-15tcf gas can be tightened up (i.e. narrowed).
NAB Group Strategy & Technology Update, Initial Thoughts
Overall, there were no major surprises included in today’s update and as a result we aren’t looking to change our numbers on the back of it. Today’s update was more or less focused on their technology program. As a result of the implementation costs, expense growth will exceed income growth from FY 12 to FY13. We have previously allowed for this in our forecasts. We still expect NAB to produce no EPS growth from FY12 to FY13, but it is currently our number two pick of the four majors after WBC and before CBA and ANZ.
Kina Petroleum: Waiting for catalysts
The company has been updating the market on its progress over the last year since listing, and investors have been surprised by the progress in developing its current assets led by the PRL 21 JV as well as the quality of the recent acreage acquisitions which provide potential for future discoveries. The market continues to wait for a deal from Horizon (HZN), which will provide a look through valuation of KPL’s holding in the PRL 21 JV which is expected to be soon. Looking for progress on a farm-out of PRL 337/340 as well as watching the ongoing work on the Tingu well, which will all provide news flow this year.
Pharmaxis: A lot of upside, limited downside
Pharmaxis announced last week that the 485 patient Phase 3 trial is complete for Bronchiectasis. Bronchiectasis has a larger market than the Bronchitol drug. Based on their previous Phase 3 trials, results should come in 4-10 weeks. Final FDA decision on Bronchitol in CF is due March 18, with the expectation of a negative decision, the interest being whether a new clinical trial with be asked for. With existing approvals worth more than the current share price, PXS has limited downside.