|Newsletter Update||wednesday, 1st August 2012|
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Market opening: Markets remain sceptical ahead of the US Fed policy decision later today. The FTSE 100 futures were trading 12 points down at 7:00am.
New York: Wall Street closed lower as investors adopted a wait-and-watch approach ahead of the US Fed policy decision later today and the ECB meet on Thursday. The S&P 500 closed 0.4% down.
Asia: Weak Chinese manufacturing data and worries over stimulus action from the US Fed and the ECB undermined investor sentiment. The Nikkei 225 closed 0.6% lower, while the Hang Seng was trading 0.4% up at 7:00am.
Continental Europe: European equities closed lower on renewed doubts over the ECB taking concrete steps to resolve the debt crisis. Germany’s Finance Ministry reinforcing opposition to giving the European Stability Mechanism a full banking license compounded investor concerns. The German DAX closed flat, while the French CAC 40 was down 0.9%.
UK small caps: The FTSE AIM All-Share index was down 0.2% yesterday. To read our latest small cap research, click here.
Manufacturing activity in China hits eight-month low
Eurozone unemployment reaches record levels
Sources: Bloomberg, Reuters, Consensus forecasts
Fresnillo (FRES.L, 1,456p) – Hold
Fresnillo released results for H1 2012 ended 30th June 2012 yesterday. Revenues were up 2.7% y-o-y to US$1.09bn as higher gold prices and record gold production compensated for declining silver prices and poor silver output stemming from lower ore grades at the flagship Fresnillo mine. Production costs climbed 37.3% owing to start-up expenses at Noche Buena mine and increased operational costs from the Saucito mine. Consequently, EBITDA declined 9.2% to US$684.4m. Profit before tax decreased 22.3% to US$603.3m and net profit fell 21.4% to US$434.7m. Net profit attributable to shareholders was down 25% to US$366.7m. Basic EPS decreased 25% to US$0.51. Gold production was up 20.5% to 248,795 ounces (oz), while silver production, including Silverstream, fell 6.5% to 20,072 kilo ounces (koz). In terms of price realizations, Gold fetched US$1,645.5 per oz, up 12.5%, whereas silver prices fell 13.3% to US$30.97 per oz. The San Julian pre-feasibility study was on track to be completed by H2 2012. Also, there were encouraging exploration results at Noche Buena with increasing gold reserves. CEO Jaime Lomelín was pleased with the record gold production levels in H1 2012 but added that the challenging economic climate had put downward pressure on silver prices. The management said the company was on track to produce 41 million oz of silver and 460,000 oz of gold in 2012. The company announced that Octavio Alvidrez would take over as CEO from Jaime Lomelin, who would soon retire. The Board cut the interim dividend to US$0.15 per share from US$0.21 per share.
Our view: Fresnillo’s H1 2012 results were marred by lower silver prices, as uncertain economic environment continued to put downward pressure on pricing. The decline in silver production at its flagship Fresnillo mine remain a concern as production levels will not improve until newer mines are in full operation. Even as management remains confident of meeting production targets, banking on the new Saucito mine to yield high output, we remain cautious on the stock and do not see a near-term recovery in demand for silver. We maintain a Hold recommendation.
Kefi Minerals (KEFI.L, 3.02p) – Speculative Buy
Yesterday, Kefi Minerals released an exploration update for its Jibal Qutman Licence in Saudi Arabia. The update confirmed the presence of high-grade gold and silver in the deposits. The grades were 27.7 grams per tonne (g/t) of gold and 262 g/t of silver at 3.2 metres. Managing Director Jeff Rayner was pleased with the encouraging results at the Jibal Qutman Licence and said the company would build on this initial phase and also undertake diamond drilling in the current quarter. KEFI Minerals is the operator of the Gold & Minerals Joint Venture at Jibal Qutman Licence with a 40% stake. Abdul Rahman Saad Al-Rashid & Sons Company Limited owns the balance 60%.
Our view: The exploration update revealed promising results for Kefi Minerals at the Jibal Qutman Licence in Saudi Arabia. The management said that it would carry out further studies to identify new regions for drilling and would also begin diamond drilling at the site. Furthermore, the Selib North prospect has also seen steady progress. Despite the fact that the results pertain to early stages of the project, we are optimistic that the company could deliver exploration successes going forward. We issue a Speculative Buy rating on the stock.
Vedanta Resources (VED.L, 976p) – Buy
Vedanta Resources issued a production update for Q1 2013 ended 30th June 2012 yesterday. Total revenue increased 9% to US$3.7bn. EBITDA rose 27% y-o-y to US$1.3bn. Core earnings increased 27%, as strong growth in power sales offset the impact of lower metal prices and zinc volumes. Integrated silver production increased 70% to 2.6 million ounces (oz) while integrated lead production rose 79% to 29,000 tonnes, boosted by a ramp-up at the SK mine. Integrated zinc production was 157,000 tonnes. Total production of zinc-lead metal-in-concentrate and zinc metal was 106,000 tonnes. The average daily gross operated production increased 20% to 206,963 barrels of oil equivalent (boe). Oil and Gas revenues were US$822.7m. Iron ore sales were 2.9 million tonnes (mt) whereas production of iron ore was 3.4mt versus 4.4mt in Q1 2012. The decrease was due to the Karnataka mining ban and continued logistics constraints in Goa, India. Zambian copper cathode output rose 12 % y-o-y to 41,000 tonnes. Aluminium production increased 7% to 185,000 tonnes on a LFL basis. The company sold 2,329 million units of power, substantially higher than 1,415m units in Q1 2012, pushing up the power revenue by 29% to US$157.8m. Management said the consolidation of the business was on track for completion in CY2012. Vedanta Resources closed 5.2% up on the London Stock Exchange yesterday.
Our view: Vedanta reported a strong production update with significant increase in core earnings, led by a 70% increase in silver production and robust performance at its power division. The company saw steady growth across a majority of its portfolio and the Karnataka mining ban had a lesser bearing on overall performance. Robust growth in its commercial power sales and ramping up of its Oil & Gas, and copper production will fuel growth for the company going forward. Furthermore, the stock is currently available at an attractive valuation, having declined almost 38% from its peak of £1,502.00 in February this year. We believe the stock is likely to see a meaningful appreciation in the future. We upgrade the stock to a Buy rating.
Xstrata (XTA.L, 848.1p) – Hold
Xstrata released a production report for H1 2012 ended 30th June yesterday. Total mined copper output rose 7%q-o-q in Q2 2012, helped by increased volumes from the recently commissioned Antamina expansion. However, volumes in H1 2012 were down 18% y-o-y to 354,612 tonnes, owing to replacement of ageing mines and expansion projects, which would boost production in H2 2012. Consolidated coal output increased 13% to 43.4 million tonnes (mt) due to increased thermal and coking coal volumes. Nickel production volumes were up 3% to 52,800 tonnes, led by strong performance at the Sudbury and Raglan mines. Zinc production remained flat compared to H1 2011. Lead metal production increased 11% to 119,785 tonnes, boosted by higher production at Mount Isa Mines and improvements to shipping schedules for lead bullion to the UK refinery. Gold production declined 28% on account of lower volumes and poor grades at Ernest Henry and Tintaya. In a separate statement, the company said that it had begun open pit mining at the Mount Margaret copper project in north-west Queensland, with first ore production expected by the end of August.
Our view: Xstrata reported mixed results in its production report, underscored by a significant drop in copper output. Copper production levels are expected to remain lower until the transition from older end-of-life mines to newer mines is completed. The expansion activities in H1 2012 are expected to yield higher production levels towards the end of FY2012. The thermal coal business is likely to benefit further from growing demand in emerging markets. The merger with commodities giant Glencore is currently locked as Glencore continues to hold talks with Qatar Holdings over the terms of the proposed deal. Given that an additional ten major projects would be commissioned in 2012, the company is likely to see steady growth in the medium to long-term. We upgrade our rating to Hold.
Sources: Bloomberg, Reuters, Consensus forecasts
UK GfK consumer confidence survey
Gfk’s monthly survey released yesterday revealed the consumer confidence index for July was -29, same as the last month and in line with market expectations. The measure for the general economic situation over the past year dipped 1 point to -59. Expectations for the general economic situation over the next 12 months gained 1 point to -30. The balance of consumers forecasting their personal finances over the next year edged up 1 point to -8, whereas the measure of changes in personal finances during the last 12 months remained the same at -23. Consumers’ assessment of whether the economic climate was right for making major purchases, nudged up two points to -26, but that was still 5 points lower than in July 2011.
Eurozone CPI estimate
Eurozone CPI rose 2.4% on an annualized basis in July, remaining unchanged for the third consecutive month, the Eurostat said yesterday. Economists had expected Eurozone inflation to be 2.5% in July. The inflation figure for July was above the European Central Bank’s core target of maintaining inflation just below 2% by the end of the year.
US consumer confidence
The US consumer confidence index rose to 65.9 in July, from the revised 62.7 in June, the Conference Board said yesterday. Economists had forecasted a reading of 61.5. The present situation index, a gauge of consumers’ assessment of current economic conditions, dipped to 46.2 from 46.6 the previous month. Consumer expectations for economic activity over the next six months climbed to 79.1 in July from a revised 73.4 in June. The current employment differential fell slightly to -33.0 from -32.9 in June, as the decrease in consumers reporting jobs as “plentiful” outpaced the decline in consumers reporting jobs as “hard to get”.
Sources: Bloomberg, Reuters, Consensus forecasts
Sources: Bloomberg, Reuters, Consensus forecasts
During the three months to end-July 2012, the number of stocks on which HB Markets has published recommendations was 149, and the recommendations were as follows: Buy – 70; Speculative Buy – 10; Hold – 51;
Full definitions of the recommendations used by HB Markets in its publications and their respective meanings can be found on our website here.
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