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This months highlights... Macro: Whipsaw Market - Neutral View Industrials: Health Care Sector Reveiw - March 2013 Rare Earths: Weak hands create opportunity in a rare producer
IN THIS ISSUE...
Macro Investment Strategy Whipsaw Market - Neutral View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Australian Outlook RBA benchmark rate stays at 3.00%; February retail sales surprise on upside . . . . . . . . . . . . . . . . . . . . . . . 8 Quantitative Focus Using a Multifactor Model to Identify Investment Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
SECTORS
Banks Competition in the Australian Home Mortgage Space is Hotting Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Industrials Health Care Sector Review - March 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Energy Oil & Gas: Oil prices rebound during March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Mining and Metals Gold The hurt continues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Specialty Metals Rare Earths: Weak hands create opportunity in a rare producer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
All information and advice is condential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this rm or any member or employee thereof.
All information and advice is condential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this rm or any member or employee thereof.
Page 3 continued
Commodities Back to the future - Oscillation around the marginal cost of production
Materials and Commodities are messing with traders minds, as it is hard to separate what is actually happening from what traders want to happen. Metals look like they are going back to times when they traded just above and below the average marginal cost of production. Though iron ore, tin and copper all look to still be holding reasonable buffer margins, but the stock market is not a believer and is factoring in potential for a decline in prices going forward. This back to the future effect will return the stock market focus in regard to Materials companies towards grade and production costs. With China showing only lacklustre signs of growth, the hope for the Materials side now appears to be if the US can eventually drag the rest of the worlds economy higher, assuming its recovery continues. Chinese export import gures are released 10 April, these being one of the more accurate measures of Chinese economic performance. Of late they have tended to show a picture of reasonable exports lead by US demand, while imports, in part a reection of domestic activity, remain comparatively weak. Authorities in China are drying up liquidity and the country looks like it is still trying to absorb the excesses and a misallocation of resources following Global Financial Crisis (GFC) stimulatory policies.
All information and advice is condential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this rm or any member or employee thereof.
Japan continues to defy the economic laws of gravity recently signicantly expanding its asset purchase and stimulatory efforts. The country is targeting 2% ination to lift hard asset values and stop what has been a deationary spiral via simply more of the same policy that has not worked for 20 years. It is certainly an interesting experiment, but Japan has an aging population, strong competition from China and requires innovation to extract itself from such a downturn. But when do you hear support for innovation to aid competitiveness mentioned by central banks? At the time of writing Japanese Bonds are under pressure following the increased stimulatory moves. Central banks are trying to return to a world where signicant money was made buying assets that where then sold on to others at higher prices. Its a grand experiment. The US may just get away with it, because it is historically a country of signicant innovation, this assisting its competitive position. European Central Bank (ECB) efforts do seem to be sustaining a reduced risk prole in measures such as Credit Default Swaps (CDS) and periphery yields. The ECB has done a good job of acting as a back stop to demand, but the Eurozone remains in slow growth mode and it is essentially a trade-off between future economic growth levels and how long the ECB can support the Bond markets. The Japanese approach suggests a signicant amount of time, but perhaps not forever.
Outlook Whipsaw
The XAO is likely to range in a whipsaw pattern through what is commonly a weaker seasonal period for stock markets following the strong Christmas period. We are Neutral on the market on a month view, but still favour yield payers as defensives. At this stage we lack evidence for an upside catalyst in the Materials sector. We see the Materials sector as yet to base and are Neutral until we see a basing catalyst or technical reversal. The Materials sector is trading down as the market unwinds after the failure of the Chinese economy to bounce signicantly following the change of leadership and Chinese New Year. LME metals are yet to return to their trading bases. The Materials sector base is 9,000 (Current 9310). However, if US employment data is favourable a technical short term bounce of the sector could take place before base levels are hit. The market in the US has been supported on the US growth story and its continuance. This will add emphasis to the 5 April US NonFarm Payrolls (Consensus: 195,000, Prior 236,000) numbers, and housing numbers going forward. A signicant miss on US Non-Farm Payroll numbers would create the impression of a slowing in the US recovery picture which could result in a change in US market sentiment. However, a deterioration in the housing sector would be needed to complete a picture of the US economic recovery failing, and as yet this is not the case. However, if such a situation was to eventuate traders should lighten positions given alternative global markets and economies do not look strong. Concerns remain for both the Japanese and Chinese economies, while slow growth continues in the EU.
KEY DATES:
5 April US Non-Farm Payrolls. 8 April US 1 QTR Earnings season starts (unofcial). 10 April China Import Exports. 30/1 April/May FOMC meeting. 7 May RBA meeting. 19 May US Debt Ceiling extension.
Continued page 6
MONTHLY STRATEGIC OUTLOOK 5
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MARKET STRATEGY: April 2013: 1-Month: Neutral. 12-Months: Neutral/Bullish. The All Ordinaries (XAO) is trading down in what we expect to develop into a whipsaw trading pattern. US markets have touched record highs. US economic numbers remain mostly positive against a background of strong stimulatory policy. Chinese economic numbers are mixed, while EU credit risks as measured by CDS remain contained. Japanese Bond market and North Korea pressures are a market concern. The current belief that economic recovery is taking place will need to continue to be reected in economic numbers in the year ahead to maintain market support. Yields on the Australian market remain attractive. Chinese policy lacks aggression, probably due to stress in the shadow banking system and property market and this is pressuring commodity prices. The Australian economy is slightly underperforming on interest rate, government, offshore and dollar pressures. US, EU, UK and Japanese monetary policy is set at extreme stimulatory levels in an effort to lift demand. We maintain a yield and stock specic catalyst focus. We suggest long term holders ensure dividends are reinvested and so compounded through time. The twelve month technical target is 5,200.
Key theme The market is likely to long term range trade suggesting the need to recycle dividends, time, and trade positions. A specic stock focus is recommended. Testing range resistance.
Technical (XAO 4,900) Support Resistance Near: 4,950 Medium: 5,000 Primary: 5,200
Sovereign credit risk and nancial structural Near: 4,900 pressures/ US Debt Ceiling negotiations/ Japanese Bond market Next: 4,750 1- Month view Neutral/Bullish Pressures on growth in China The pace and sustainability of global growth given high debt levels Neutral capital gains in a cyclical ranging market Next: 4,650-4,600
COMMENT Interest rates, a weaker consumer outlook and pressure from internet purchases have taken some of the edge off the sector outlook. Technically upside momentum is coming out of the sector. More defensive than the Consumer Discretionary sector and offering some good yields. Technically upside momentum is coming out of the sector. The oil price continues to be heavily inuenced by OPEC, geopolitical factors and the global growth outlook. EU Iranian oil sanctions are also an inuence. Middle East and Northern African risk is oil price supportive. Technically the sector is ranging. Tight credit markets, margin contraction and loan book risks are negatives for the sector. Margin pressure, from tighter wholesale money markets, combined with a weak Australian property sector are primary inuencing factors in the market. However, yields remain attractive and RBA policy with a downward bias is of assistance. Technically upside momentum is coming out of the sector. Expected to benet long-term by the aging population and government support. Technically upside momentum is coming out of the sector. Australian dollar will hamper exports for some companies. Slow offshore demand will also drag. Technically the sector is testing resistance, with some momentum coming out of the market. Looks vulnerable to the downside. The Information Technology Index is stock specic. Technically the sector is just below resistance. Traders in the sector had anticipated a better performance by the Chinese economy by now, however this has not taken place causing the sector to sell off. China is continuing to signicantly drive metal demand. Chinese efforts to manage its economy remain the primary short term risk. Technically the sector is trading down looking for support. A short term technical bounce could take place if US employment data is favourable. We believe the worst for the sector is behind us and the majority of ASX 200 REITs are in good health and well set for the next upturn. Outside the ASX 200 investors still need to be cautious and selective, given many of these trusts have not recapitalised. We like the sector as a long term four year play for recovery with a good yield in the interim. Technically the sector is trending higher on a longer term chart, while some momentum is coming out of the market. The sector has regulatory, competitive and technological change pressures. Difculty predicting forward earnings adds sector risk. However, yields remain attractive. Technically upside momentum is coming out of the sector and it is ranging sideways. Many stocks in the Utilities sector are moving to more vanilla models and so the sector is in the midst of structural change. Avoid stocks with excess leverage and renancing risk. Yields make the sector attractive. Technically ranging.
6
Financials
Healthcare Industrials
Property Trusts
Over weight
Telecommunications
Index weight
Utilities
Over weight
All information and advice is condential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this rm or any member or employee thereof.
Speak to your Patersons Adviser or contact Patersons Accolade services team today at accolade@psl.com.au or 1300 582 256.
www.psl.com.au
Patersons Securities Limited ABN 69 008 896 311 AFSL 239 052
Australian Outlook
MONDAY 20 APRIL 2009 APRIL 2013
Tony Farnham - Economist
RBA BENCHMARK RATE STAYS AT 3.00%; FEBRUARY RETAIL SALES SURPRISE ON UPSIDE
RBA reiterates the appropriateness of policy accommodation and the scope for more cuts if required
The April RBA board meeting saw the bank keep its benchmark interest rate unchanged at 3.00%. Given its relatively relaxed view on the medium-term direction of Australias ination rate, the RBA overtly stated that scope still existed for rates to be further reduced should it be necessary to perk up demand levels. For the moment though the bank was happy to note that with ination expectations contained and with our GDP growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy was appropriate. The bank stated that while global growth remained a little below trend, the downside risks had in its view reduced over recent months. Europe remained the proverbial y in the ointment with the RBA rates decision commentary blandly stating that the Continent remained in recession. On the upside though, the US continued to enjoy a moderate expansion and growth in China had stabilised at a fairly robust pace. Across the broader Asian region, the bank noted that growth was dampened by the earlier slowing in China and the weakness in Europe, but some signs of stabilisation were at least apparent. The RBA highlighted further improvement in global funding conditions for nancial institutions. It specically noted that long-term interest rates faced by highly rated sovereigns, including Australia, remained at exceptionally low levels and that borrowing conditions for large corporations are similarly very attractive. Share prices were, at the same time, substantially above their low points. However, the RBA also conceded that the task of putting private and public nances on sustainable paths in several major countries was still very much work in progress, meaning nancial markets remained vulnerable to setbacks. With regard to domestic economic developments the April RBA rate decision commentary stated that while the peak in resource investment was now close, there was more scope for some other areas of demand to strengthen in short, sector rebalancing rules OK! It specically stated that the 175 basis points of rate cuts implemented since late 2011 were having an expansionary effect on the economy and that further such effects would eventually emerge. The bank made mention of the moderate growth now apparent in private consumption spending a point reinforced by the recently released February retail sales data, which are examined blow. The bank warned though that any expectations households would go on a spending binge any time soon were wide of the mark. The RBA conceded that the near-term outlook for investment outside the resources sector was relatively subdued, but continued to hold out hope that a modest increase would become apparent over the coming 12 months. The much-anticipated revival in Australias dwelling construction sector remained a slow burn. On the costs front, the RBA remained relaxed about recent shifts in the Australian CPI and noted that labour costs were contained. In an additional positive, the bank had identied an increased focus on cost efciencies across the domestic business sector. And looking ahead it believed our ination would remain consistent with the target band of 2-3% underlying over the next 12-24 months. However, the RBA continued to show some frustration that the A$ remained quite elevated despite the observed decline in export prices. A still muted demand for credit was also seen as something of a surprise, although the RBA has for years now impressed upon both households and rms the merits of lower gearing.
Retail sales again surprise on upside, but unambiguous bounce in housing construction still to occur
Headline retail sales surged by 1.3% seasonally adjusted in February, well up on market expectations of around 0.3%. Adding to the joy, the already large 0.9% gain reported over the previous month was upgraded to 1.2%. All six of the broad retailing categories provided in this ABS-prepared release managed 1.1%+ advances across the month of February. However, putting things in perspective, the value of retail sales over the three months to February 2013 was just 1.9% above the total recorded in the corresponding period of late 2011/early 2012 and this would be much smaller again in ination-adjusted terms. While the retail sales revival marries up with the recovery seen of late in consumer sentiment, it does not correlate closely with the cries of pain still coming from many major and small retailers, who continue highlight the need to offer discounts to get consumers opening their wallets. What is more, even if the January/February bounce does reect reality, will it be long lasting? We wait with baited breathe for a meaningful package of individual retailer guidance statements on whether the robust January/February sales data does indeed approximate their reality.
MONTHLY STRATEGIC OUTLOOK 8
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The ABS also recently released its February building approvals stats which in our view were only satisfactory on the surface. Yes, the headline number was up 3.1% in February, above economists consensus forecast of 2.5%. However, digging deeper, the allimportant private sector houses segment edged 0.5% higher. And the approvals data were also patchy from a geographic angle, with SA enjoying an out-sized intermonth gain of 20%+, with the latter surge in large part driven by its public sector houses component (a jump that is unlikely to be reprised in March). The major disappointment was NSW, which booked a 7.7% intermonth decline.
Retail Sales Extend Their Early 2013 Revival
0.9 Mthly % Chg Mthly % Chg 5 4 Trend (LHS) 0.6 Seasonally Adjusted (RHS) 3 2 1 0.3 0 -1 0.0 -2
$B
$B
0.7 0.6
0.5 0.4
2 0.3 1 Residential (LHS) Non-Residential (LHS) Alterations/Additions (RHS) 0 0.2 0.1 0.0
Feb-03
Feb-05
Feb-07
Feb-09
Feb-11
Feb-13
We still expect further RBA rate cuts and/or additional mortgage rate reductions
The robust retail sales numbers had interest rate hawks salivating simply because they bolstered their thesis that the chance of another RBA increase is remote (assuming of course the data align with reality!) More immediately, the stats will have economists upgrading their current March 2013 quarter GDP projections. We nevertheless remain of the view that the RBA will cut rates further over coming months and this is without any downside shocks occurring in key overseas economies. While some wealth effects will ow from recent house price increases, the RBA rate cuts already in place and the modest bounce in our stock market over 2013 to date, we would be surprised if these are enough to deliver sustained gains in household spending. At the same time, the contribution by the all-important mining sector to medium term investment ows looks set to underwhelm and the A$ would be sticky downwards if offshore monies seeking safe havens continue to enter our market. In the background remains the potential for some slippage in consumer condence owing from political uncertainties ahead of the 14 September Federal election.
All information and advice is condential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this rm or any member or employee thereof.
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Quantitative Focus
MONDAY 20 APRIL 2009 APRIL 2013
Kien Trinh - Quantitative Analyst
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Price Momentum This factor simply refers to the rate at which a stock goes up or down over a specied time period relative to the market. The success of momentum based investing is regarded as an exception to the efcient market hypothesis. Eugene Fama, refers to momentum as the premier unexplained anomaly. A simple way to measure price momentum is to consider the proximity of a stock to its 52-week high or low. Another technique might be to compare its shorter moving average with its longer moving average relative to the rest of the market. Stocks that scored a momentum ratio of 70% or higher tend to outperform. A few points to note: Certain factors work better than others in particular industries, so a more focussed sector based model may yield better returns than this model which is designed for the entire market. Although earnings growth is a primary driver of stock market returns (ie. high growth companies tend to outperform), earnings growth alone, is not predictive of future stock market returns. Rather it is the consistency of earnings growth which drives excess returns. Unprotable companies that are issuing large amounts of shares should be avoided. Application of analyst forecasts works slightly better than the application of trailing 12 months gures. Interestingly, nancial leverage ratios, such as debt to equity, do not work very well. However, this strategy was particularly useful during the nancial crisis but not so much now.
ROIC = free cash ow to invested capital; ROE = return on equity; Quant rank has a maximum of 1
Continued page 12
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Page 11 continued
ROIC = free cash ow to invested capital; ROE = return on equity; Quant rank has a maximum of 1
ROIC = free cash ow to invested capital; ROE = return on equity; Quant rank has a maximum of 1
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Banks
MONDAY 20 APRIL 2009 APRIL 2013
Tony Farnham - Economist
Amongst the Big-4 banks, NAB holds onto price-leadership-powered home loan market share gains
This potential for competition-induced margin contraction in the Australian mortgage sector must continue to be monitored by investors. The latest Australian Prudential Regulation Authority (APRA)-compiled market share statistics highlight the effects of the most recent sustained round of price competition in the Australian home loan market. The charts below, derived from the abovementioned APRA data show up the success of the NABs price leadership campaign in the mortgage space although it does not show the margin contraction that accompanied the initiative!
Loans & Advances - Big 4
27
% Share
24
ANZ NAB
CBA WBC
28
ANZ NAB
CBA WBC
21
24
18
20
15
16
12
12
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Macquarie Bank and Yellow Brick Road attempt to create a fth pillar in home loan market
In late 2012 it became apparent that another major nancial institution, Macquarie Bank (MQG), was keen to wade into the Australian home loan market, in the process creating a so-called fth pillar in this sector. It looks like the bank is reprising its PUMA nancing vehicle of old, which was operating in the halcyon easy money days ahead of the Global Financial Crisis (GFC). This push is being done in partnership with mortgage originators, headed this time round by Yellow Brick Road Holdings (YBR).
Continued page 14
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Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
13
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In November last year YBR announced the creation of some aggressively priced mortgage products. It intends launching additional banking and wealth management offerings further down the track. More recently, the company achieved record loan settlements during January 2013, with this total more than double that delivered in the rst month of 2012. This uplift indicates that YBR has gained traction via its heavily publicized Empower Home Loan product, which has a rst-year teaser rate. YBR noted that around three quarters of the January settlements total were renancings. From MQGs viewpoint, mortgages accounted for around 30% of total lending growth over its latest reporting period (the six months to September 2012). Looking at the APRA data, MQGs lending for housing (both owner occupied and investment) was $6.25B at the end of February 2013, more than double the total reported just 12 months earlier. Yes, all this is coming from a low base, but reports abound that the bank has materially beefed up the headcount of staff that liaise with mortgage brokers. The bank has also recently ramped up its marketing of MQG-branded home loans. This all makes sense when one considers the tough trading conditions being experienced in its traditional investment banking activities. Whether this new competitive threat has legs will be crucially dependent on the recent trend towards cheaper funding in the residential mortgage-backed securities market being long-lived. The cheaper this funding, the more scope is there for lenders utilizing it to more keenly price their mortgage product offerings. Banks on the other hand, with more reliance on relatively expensive term deposits, have less scope to play the pricing game (unless they opt to cross-subsidise or realise efciencies in other facets of their operations). The strategic response of Australias traditional listed banks will indeed be interesting.
We still prefer ANZ and WBC; investors over-exposed to banks should consider option strategies
We retain our long-held view that both ANZ and WBC appear better placed from an asset quality angle. These two banks also have the strongest capital positions under the Basel III regulatory regime. ANZ continues to differentiate itself from other Australian banks with a steadily growing Asian-based franchise. This said, ANZ will need to quickly demonstrate that the key man risk associated with the loss of its muchrespected head of International Alex Thursby can be quickly neutralised. The adjacent table outlines key dates in the upcoming reporting cycle.
Upcoming Bank Reporting Dates Result BOQ ANZ WBC NAB CBA 1H13 1H13 1H13 1H13 3Q13 Due 18-Apr 30-Apr 3-May 9-May 15-May Ex-Div 2-May 9-May 13-May 30-May na Record 8-May 15-May 17-May 5-Jun na Payable 27-May 1-Jul 2-Jul 16-Jul na
More generally, with bank share prices now up appreciably over the past year and their prospective dividend yield metrics now less enticing, some investors particularly those heavily over exposed to banks might want to consider some conservative options strategies. For those in the latter grouping with a view that bank share prices will track sideways from here a covered call strategy might be worth a look (making sure to protect pending dividends). For those concerned that bank prices could give back some of their recent gains, a bought put strategy may have attraction.
HIGHLIGHTED STOCKS
SECTOR WEIGHTING COMPANY ANZ Banking Group Ltd (ANZ) Index/Over Weight RECOMMENDATION ACCUMULATE COMMENT ANZ Banking Group announced an unaudited cash prot for the three months to 31 December 2012 of $1.53bn, up 6.2% on the same period in 2012 (rst quarter 2012: $1.49bn). Unaudited statutory prot after tax was $1.36bn. Revenue growth reected the constrained business environment. Reasonable volume growth, particularly in Asia, was offset by margin pressure in NZ and in the International and Institutional Banking division. The groups APRA Basel III CET1 ratio at 31 December 2012 was 7 .7% which equates to 9.7% on a fully harmonised basis, unchanged from the 2012 full year. Payment of the nal 2012 dividend had a 30 basis point impact towards the end of the quarter. The group had completed circa 50% of the 2013 full year term wholesale funding task by the end of December 2012.
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Industrials
MONDAY 20 APRIL 2009 APRIL 2013
HEALTH CARE
Ben Kakoschke - Industrial Analyst
Pharmaceuticals & Biotechnology Acrux CSL Mesoblast Sirtex Medical Ansell Cochlear Fisher & Paykel Healthcare Primary Health Care Ramsay Health Care ResMed Sonic Healthcare Sigma Pharmaceuticals ACR CSL MSB SRX ANN COH FPH PRY RHC RMD SHL SIP 3.88 59.23 6.15 11.07 16.07 68.05 2.10 4.96 32.30 4.36 13.93 0.74
Continued page 16
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Page 15 continued
Capitol Health
CAJ
HOLD
0.175
75.2
(2.1)
Demonstrating MDI margin benets More gap-charging services Expansion of MRI incentives Further acquisitions Solid industry organic growth Potential takeover target Meeting FY13 guidance SUBACAP approval in Europe Relaunch of Kapanol in Australia FDA approval of Doryx News ow from pipeline of 17 products US launch Mayne Pharma products through Metrics distribution Launch of injectables in Australia
Mayne Pharma
MYX
HOLD
0.48
270.2
(11.5)
Source: Patersons
Sector Performance
Figure 3: 12-month index performance
180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80%
Aug-12 Apr-12 Jun-12 Jul-12 May-12 Feb-13 Mar-12 Sep-12 Nov-12 Mar-13 Jan-13 Oct-12 Dec-12
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
S&P/ASX 200 (XJO) S&P/ASX 200 Health Care (XHJ) Pharmaceuticals & Biotechnology (J3520) Health Care Equipment & Services (J3510)
S&P/ASX 200 (XJO) S&P/ASX 200 Health Care (XHJ) Pharmaceuticals & Biotechnology (J3520) Health Care Equipment & Services (J3510)
Source: IRESS
Source: IRESS
Source: IRESS
TIS PXS IVX NRT PAB ANP PRR GTG POH OBJ NEU MVP PBP AVH BIT MSB BNO AVX ACR SPL LCT CSL CUV VLA SUD ACL SRX CIR PBT CTE CDY CZD QRX PVA MYX VSC
Source: IRESS
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PXS TIS PRR AVH POH IVX AVX CIR ANP LCT SPL ACL QRX OBJ BIT BNO MSB GTG VLA CZD PAB ACR PVA PBP CUV PBT NEU CSL SUD CDY NRT SRX MYX MVP CTE VSC
-50%
16
200%
100%
0%
-15% -20%
-100%
Source: IRESS
AJJ GID UNS OIL UBI SDI ADO ELX AHZ SOM ACG RVA IPD VEI NAN COH ITD HIN ONT PME OSP PHG PRY RHC API FPH ANN RMD SHL ISN CGS BRC SIP GXL CLV CAJ
Source: IRESS
All information and advice is condential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this rm or any member or employee thereof.
IPD UNS OIL GID ADO RVA NAN UBI AHZ ELX BRC ISN PHG ANN ONT SHL COH SOM ACG SIP FPH OSP HIN API CGS RMD AJJ CLV RHC ITD PRY PME GXL VEI CAJ SDI
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Sirtex Medical (SRX) market cap $0.6bn (up 2% for month) SRX has developed an effective treatment for liver cancer that involves the infusion of radioactive microspheres that selectively target liver tumours. Sales growth has become consistently strong despite the treatment still being used chiey as a last resort. Large scale trials in progress should signicantly promote use. Gross margins are in excess of 80%. Risks include weak intellectual property protection, SRXs limited resources, and single product portfolio along with the more generic risk of obsolescence. The Company delivered a very solid rst half result. A 31% surge in dose sales drove revenue 25% higher to $46m. NPAT rose 28% to $7.8m. Net operating cash ow increased 132% to $13.2m. There is no interim dividend. A 10 cent dividend was paid in October 2012, 43% above the 7 cent dividend in 2011. At the end of December 2012 SRX had net cash of $51m, up $10m on pcp and representing almost a dollar per share. The Company continues to look for worthwhile investments including additional product to sell via its established distribution network.
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and together generated around 20% of group revenues. The radiology division grew revenue 6%, while IPN grew revenue 15%. Both enjoyed strong margin expansion. SHL disappointingly lowered full-year guidance and now expects EBITDA to be at the lower end of guidance released in August 2012 for 5 10% growth. Key reasons for the lower guidance are larger than expected unfavourable industry funding changes in Germany, unexpected anatomical pathology fee cuts in the US ($6m pa), and lower than expected growth in the US (revenue fell 2%) including the impact of Superstorm Sandy. Cochlear (COH) market cap $3.9bn (down 4% for month) COHs implantable device is the gold standard for enabling profoundly hearing impaired patients to hear. The Company is an innovative leader in not overly competitive and growing markets. Growth stems from further penetration of existing markets and entry into undeveloped markets such as South America, Eastern Europe and China. Acquisition of Entic extends the presence to the larger partially-impaired market. COH invests 12% of sales in research and development to remain at the technology forefront. This is a strong cash generator with impressive operating margins around 30% and modest capital expenditure requirements. First half scal 2013 revenue at $392m was 1% higher than pcp. Excluding the negative $130m impact of the product recall on pcp prot, EBIT fell marginally to $108m while NPAT fell 3% to $78m. The stronger AUD had a negative impact of $21m on the bottom line. The EBIT margin was little changed at 28.5%, a good achievement given the stronger AUD. Earnings per share weakened 3% to $1.36. The Board raised the dividend 4% from $1.20 to $1.25 per share. Franking is 40%, down from 60% in the pcp. The result was below market expectations. Unit sales of cochlear implants (80% of revenue) rose 27% but resulted in only a 6% increase in dollar sales to $330m. In constant-currency sales rose 10%. The lesser revenue growth reects both low-priced government tender sales into China and distortion due to the product recall. A more telling statistic is that units grew 11% on a sequential half basis suggesting the Company is holding market share. Primary Health Care (PRY) market cap $2.5bn (at for month) PRY and Sonic Healthcares Independent Practitioner Network (IPN) are leaders in Medical Centre management while its pathology division is part of an oligopoly with Sonic Healthcare and Healthscope. These strong industry positions and the non-discretionary nature of medical services imply usually reliable and modestly growing earnings, underpinned by the ageing population. Managing director Edmund Bateman is PRYs principal founder and is responsible for delivering phenomenal returns through the development of 24-hour medical centres. The acquisition of Symbion Healthcare in 2008 transformed the asset pool. The merged group is the largest domestic pathology provider. Earnings are: Medical Centres 47%, Pathology 36%, Radiology 12% and Health Technology 5%. While the Pathology division has caused headaches, the Medical Centre division, which contributes around 45% of group EBITDA, continues to perform well, posting around 6% EBITDA growth in scal 2011, scal 2012 and rst half scal 2013. PRY is adding doctors to ll existing capacity in centres and does not plan material incremental investment in the division. The smaller Imaging division around 20% of group EBITDA is also displaying healthy growth, beneting in particular from the new fee-for-service model which ties radiologists pay more closely to revenue generation. Investment in equipment and information technology is also paying off. Imagings EBITDA jumped 30% to $35m in 1H13. The Company benetted from a material fall in borrowing costs from $56m to $40m. Ansell (ANN) market cap $2.1bn (up 2% for month) ANN is a global leader in protective health and safety protection solutions. Operations spread across four business segments covering industrial and medical gloves, and condoms. Products are predominantly made of natural and synthetic latex, exposing ANN to price uctuations in rubber and latex concentrates. Low levels of debt offer prospects for further capital initiatives or acquisitions. No franking credits means free cashow is distributed predominantly through share buybacks. First half scal 2013 NPAT fell well short of market expectations. This was a function of softening demand in Europe and to a lesser extent in emerging markets. Organic sales were at despite management expectations for mid single-digit growth. Total sales rose 6% to US$648m, but EBIT fell 8% to US$69m. NPAT and EPS fell 14% to US$57m and US$0.42 respectively. Gross margin weakened slightly to 41.3%, but materially higher marketing costs caused the EBIT margin to fall from 12.2% to 10.5%. Indicating its condence in a better outlook for the second half, the Board increased the interim dividend 1 cent to 16.0cps, unfranked. Fisher & Paykel Healthcare (FPH) market cap $1.1bn (up 1% for month) FPH is the worlds leading provider of Respiratory Humidication (RH) products and commands a high market share. It also produces CPAP and masks for treatment of Obstructive Sleep Apnea (OSA). The Company has unveiled a slew of new products and interfaces in respiratory and sleep apnea which should boost revenue and earnings over the long term. North America is a key growth area for FPH and a critical market for Obstructive Sleep Apnea (OSA). Earnings are sensitive to the NZ$/US$ exchange rate.
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Page 19 continued
FPH raised its earnings guidance from NZ$69-72m to NZ$75m, mainly due to strong trading in the second half so far. Sales growth was particularly impressive for the rms respiratory and acute care (RAC) business which is likely to achieve constant-currency revenue growth of 18%. In the rst half RAC grew by 11%. Obstructive Sleep Apnea (OSA) is also likely to see a lift in constant-currency growth from 3% in the rst half to 10% in the second half but the second half growth is below our forecast of 13%. FPH also expects an improvement in operating margins as a result of new products, operating efciency gains and cost savings from the Mexican manufacturing plant. Sigma Pharmaceuticals (SIP) market cap $0.9bn (up 12% for month) SIP is one of Australias three pharmaceutical wholesalers. Earlier in its history it impressed on a number of fronts and successfully grew both organically and by acquisition. In late 2005, it merged with Arrow Pharmaceuticals, a rapidly growing generics player, which proved an expensive exercise after protability in the generics sector plummeted. In late 2010, SIP sold its manufacturing and generics business to Aspen Pharmacare, allowing it to reduce debt. SIPs scal 2013 underlying result of $52m was broadly in line with expectations. New management has stabilised the business in the face of Pharmaceutical Benet Scheme (PBS) price reforms and we expect the severity of such reforms to moderate. Operational efciencies and expanding retail brand membership will support modest earnings growth. With $83m net cash on the balance sheet, capital position is healthy. The continued share buy-back is positive for investors and combined with a healthy full franked dividend of around 6.7%, provides some share price support.
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Pharmaceuticals & Biotechnology Antisense Therapeutics Drug development company focused on developing antisense drugs. The Company has sufcient funding well into 2014 (including the ATL1103 Phase II clinical trial) and its technology platform was validated in January 2013 by Isis receiving FDA approval for the worlds rst antisense drug administered systemically (injected). Mayne Pharma Specialty pharmaceutical company that develops and manufactures proprietary and generic products. In November 2012 it acquired Metrics, a USbased provider of contract development services to the pharma industry which also develops and manufactures niche generic products. Health Care Equipment & Services Capitol Health Through organic growth and acqusitions, CAJ has become Victorias largest community-based diagnostic imaging provider with 48 clinics. CAJ operates clinics and associated practices across Melbourne and regional Victoria and offers a full range of procedures ranging from basix X-rays through to Nuclear Imaging. The Company was focused on providing diagnostic imaging services in Victoria predominantly under a Bulk Billing model. In March 2013, it acquired MDI Group, a specialist diagnostic imaging company with 11 clinics throughout the Melbourne metropolitan area that employs both a Bulk Billing and a fee-paying (gap) charging model. Defensive revenue base with consistently strong protability. Margin upside potential from increasing fee-paying services above rebate levels. Highly-scalable & low cost model. Supportive regulatory environment including expansion of MRI incentives. General health care operating risks: complex government health regulations; intense competition; loss of key personnel; potential liability; integrating acquisitions into existing business; additional capital requirements. ATL1103 targets diseases associated with excessive Growth Hormone and Insulin Growth Factor-I action such as Acromegaly. ATL1102 is an antisense inhibitor of VLA-4 protein, a clinically validated target in MS and potentially asthma and stem cell mobilisation. ATL1101 is an inhibitor of Insulin Growth Factor-IR, an emerging target in oncology. The combined group has a signicant product portfolio and pipeline, global reach through distribution partners in Australia, US, Europe and Asia and manufacturing facilities located in South Australia and North Carolina (US). Pipeline of 17 products under development post Metrics acquisition. Exclusive world-wide rights to three compounds in- licensed from Isis Pharmaceuticals Inc, the world leader in antisense drug development and commercialisation. ANP also has a strategic alliance with Tianjin International Joint Academy of Biotechnology and Medicine (TJAB) for its ATL1102 studies. The Company has a 30-year track record of innovation with its intellectual property portfolio built around the optimisation and delivery of oral dosage form drugs. ATL1103: re-rating following outcome of Phase II trial. ATL1102: re-rating on move into longer term Phase II studies. ATL1101: progress of potential partnering / development plans. Clinical progress or transactions involving antisense drugs external to ANP . General pharmaceutical operating risks: long lead times and uncertainty of result outcomes; complex government health regulations; intense competition; loss of key personnel; potential product liability; additional capital requirements.
Meeting FY13 guidance following acquisition of Metrics. SUBACAP approval in Europe. Relaunch of Kapanol in Australia. FDA approval of Doryx.
General pharmaceutical operating risks: long lead times and uncertainty of result outcomes; complex government health regulations; intense competition; loss of key personnel; potential product liability; additional capital requirements.
Source: Patersons
MONTHLY STRATEGIC OUTLOOK
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Recent Announcements
Antisense Therapeutics (ANP) 22 March 2013 Dr Peter Trainer, Professor of Endocrinology, The Christie NHS Foundation Trust, UK, and Chief Investigator for the Companys ATL1103 Phase II study, will present on the ATL1103 project and the previously announced Phase I trial results at a scientic meeting entitled 9th Consensus Conference on Medical Treatment of Acromegaly. This is the rst occasion that the ATL1103 Phase I trial results have been presented at a scientic meeting. Antisense Therapeutics (ANP) 19 March 2013 ANP had nalised preparations for a chronic toxicology study to be conducted to support a potential future Phase IIb study of ATL1102 in multiple sclerosis patients. The Company will execute an agreement with Pharmaron to conduct the chronic toxicology study. ANP estimates that the costs for completing the study will be less than $0.3m and is expected to be completed by the end of 2013. ANP will own all the data and associated intellectual property rights generated from this study and no benets will accrue to TJAB unless and until all of the conditions precedent to the joint venture proposal are fullled. In parallel, TJAB will undertake a stem cell mobilisation study at their cost.
Disclosure: Patersons Securities Ltd acted as Lead Manager to the Share Placement and Share Purchase Plan that raised $5.0m at 1.8 cents per share for Antisense Therapeutics Ltd in March 2012. It was paid a fee for this service. Patersons Securities Ltd is retained as a Corporate Adviser.
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Energy
MONDAY 20 APRIL 2009 APRIL 2013
HIGHLIGHTED STOCKS
SECTOR WEIGHTING COMPANY Sino Gas and Energy Holdings Ltd (SEH) Index/Under Weight RECOMMENDATION BUY COMMENT Our buy rating for SEH is predicated on SEHs 5.6tcf 2C gross resources (recently upgraded), high retained interests and projects located in the Ordos basin (Chinas 2nd largest gas basin) close to nearby infrastructure with strong gas demand from large population centres. SEH completed a $100m farm out with MIE Holding Corporation in June 2012 a key step in the development and commercialisation of SEHs Chinese projects and removes funding risk. Key Catalysts 2013: 25 well drilling programme completed by Q3 2013, Chinese reserve reports and pilot gas projects in 2H 2013, and Chinese gas price reform. Price Target: A$0.45ps. JKA is an emerging Oil & Gas company in Africa backed by management who have a proven track record in developing emerging plays in Africa. JKA is in the early stages of developing a portfolio with near term production and attractive exploration targets in relatively unexplored territory via recent farm in acquisitions in Somaliland and Tanzania. The recent farm out of 50% of the Somaliland acreage to growing UK E&P Genel Energy (A$4bn market cap) is a positive endorsement of JKA management. Price Target: A$0.42ps. Key Catalysts: Q1 2013: Hammamet West 1 well. Mid 2013: Aje well drilling and H2 2013 Tanzania exploration and farm out. CTP holds 40m acres in 4 basins at high retained interest in central Australia, targeting conventional and unconventional oil & gas. CTP has now completed 2 farm-out transaction with Santos and T otal for $300m over 25m acres in the Amadeus/Pedirka/Southern Georgina basins at an attractive price of $11/acre and $26/acre. These deals re-inforce the deal making abilities of new CEO Richard Cottee. Recent reserves report on Surprise eld was below expectations however majority of the value lies in STO/T otal exploration acreage. Price target of $0.34ps. Key Catalysts H1 2013: Petro frontier exploration, H2 2013: STO/T otal JV exploration results. TAP has a portfolio of oil and gas assets focused in Australia/Asia/Africa. It has a strong nancial position and near term upside is expected through production growth from the development offshore Thailand and exposure to high risk/high reward wells in offshore Ghana & Australia. We value existing cash and third party gas contracts at $0.59ps with limited value attributed to the development and exploration portfolio. BUY with a Price Target of $1.10ps.
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Speculative BUY
Speculative BUY
BUY
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$0.155
A$/sh 0.35 0.17 0.07 0.01 (0.04) (0.04) 0.00 0.53 0.45 0% +10% 0.53 0.53 0.60 0.49 Commodity Assumptions US$/A$ RMB:US$ Crude Oil - WTI (USD/bbl) Sales Gas Price - USD Production Summary Linxing PSC Sanjiaobei PSC Total (bcf) Linxing PSC Sanjiaobei PSC Total (mmscf/d) Prot & Loss (A$m) Sales Revenue Other Income Operating Costs Exploration Exp. Rolayties Corporate/Admin EBITDA Depn & Amort EBIT Interest Operating Prot Abnormals Pre-Tax Tax expense Minorites Other NPAT Normalised NPAT Cash Flow (A$m) Adjusted Net Prot + Interest/Tax/Expl Exp - Interest/Tax/Expl Inc + Depn/Amort +/- Other Operating Cashow - Capex (+asset sales) - Working Capital Increase Free Cashow - Dividends (ords & pref) + Equity raised + Debt drawdown (repaid) + Other Net Change in Cash Exchange rate effects Cash at End Period Net Cash/(Debt) Balance Sheet (A$m) Cash Total Assets Total Debt Total Liabilities Shareholders Funds Ratios Net Debt/Equity (%) Interest Cover (x) Return on Equity (%)
2010A 2011A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
2010A 2011A 0.0 2.0 0.0 0.0 0.0 1.6 0.4 0.0 0.4 0.9 (0.5) (3.9) 0.0 0.0 0.0 (4.4) (0.5) 0.0 (0.5) 0.0 0.0 0.0 3.1 (3.7) 0.1 (3.7) 0.3 (4.0) (0.1) 0.0 0.0 0.0 (4.0) (4.0)
Sanjiaobei PSC - 2P & 2C Linxing PSC 2P & 2C Prospective Resource Upside Cash
Production Summary
1.00 0.80 0.60 0.40 0.20 0.00 2010A 2011A 2012F 2013F Linxing PSC Sanjiaobei PSC Sales Gas Price - USD 10.00 8.00 6.00 4.00 2.00 0.00
Production (bcf)
2010A 2011A (0.5) (4.0) 0.9 0.3 5.4 8.4 0.0 0.1 (1.7) 1.1 (6.6) (10.9) 0.0 0.0 0.0 0.0 (6.6) (10.9) 0.0 0.0 23.6 7.0 (13.6) 0.0 (0.1) (0.0) 3.3 (4.0) (0.8) 0.0 8.3 4.3 8.3 4.3 2010A 2011A 8.3 37.4 0.0 6.3 31.1 na na na 4.3 44.4 0.0 8.9 35.5 na na na
Reserves & Resources Reserves - as at Mar 2013 Net Reserves 1P 2P 3P 2C Contingent Resource P50 Prospective Resource Directors Name Gavin Harper Robert Bearden Bernie Ridgeway Peter Mills Colin Heseltine Substantial Shareholders Imdex Ltd SHL Pty Ltd Position Executive Chairman Managing Director & CEO Non-Executive Director Non-Executive Director Non-Executive Director Shares (m) 251.9 77.2 % 20.3 6.2 Oil/Cond (mmbbl) 0 0 0 0.0 0.0 Gas Total (bcf) (mboe) 32 5.3 94 15.7 199 33.2 653 885 108.8 147.5
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$0.54
A$/sh 0.18 0.49 0.55 0.32 (0.16) 0.00 1.38 1.10 0% +10% 1.38 1.38 1.47 1.37 Commodity Assumptions US$/A$ Crude Oil - WTI (USD/bbl) Gas Price - contracted ($/GJ) Production Summary Harriet JV Area (mmboe) Woollybutt (mmboe) Manora (mmboe) Total (mmboe) Harriet JV Area (kboepd) Woollybutt (kboepd) Manora (kboepd) Total (kboepd) Prot & Loss (A$m)
2011A 2012A 0.75 0.16 0.00 0.91 2.06 0.43 0.00 2.49 0.25 0.06 0.00 0.31 0.69 0.16 0.00 0.85
2011A 2012A 39.4 14.9 19.9 3.4 0.0 14.8 16.1 9.8 6.3 0.0 6.3 (25.1) 1.5 0.0 0.0 (20.2) 4.9 41.5 4.7 21.5 8.7 0.0 15.5 0.6 0.0 0.6 0.5 0.1 0.0 3.4 0.0 0.0 (3.3) (3.5)
Corporate
Manora Field
Production Summary
1.50 1.20
(mmboe)
Sales Revenue Other Income Operating Costs Exploration Exp. Rolayties Corporate/Admin EBITDA Depn & Amort EBIT Interest Operating Prot Abnormals Post-Tax Tax expense Minorites Other NPAT Normalised NPAT Cash Flow (A$m) Adjusted Net Prot + Interest/Tax/Expl Exp - Interest/Tax/Expl Inc + Depn/Amort +/- Other Operating Cashow - Capex (+asset sales) - Working Capital Increase Free Cashow - Dividends (ords & pref) + Equity raised + Debt drawdown (repaid) + Other Net Change in Cash Exchange rate effects Cash at End Period Net Cash/(Debt) Balance Sheet (A$m) Cash Total Assets Total Debt Total Liabilities Shareholders Funds Ratios Net Debt/Equity (%) Interest Cover (x) Return on Equity (%)
2011A 2012A 4.9 4.9 61.3 9.8 68.0 26.3 42.2 0.0 (15.8) 0.0 0.0 0.0 0.0 (15.8) (0.9) 82.5 82.5
2011A
2012A
2013F Woollybutt
2014F Manora
Harriet JV Area
Reserves & Resources (net TAP) Reserves - as at Dec 2011 2P Reserves Manora Total Group 2C Contingent Resource John Brookes GSA Resource (est.) Directors Name Douglas Bailey Troy Hayden Michael Sandy Douglas Schwebel Position Chairman / Non Exec.Director MD and CEO Non Executive Director Non Executive Director Shares (m) % 37.7 15.6 13.8 5.7 13.4 5.5 Oil/Cond (mmbbl) 6.1 6.1 0.0 0.0 Gas Total (pj)(mmboe) 0.0 0.0 0.0 26.3 6.1 6.1 42.2 3.9
(3.5) (7.4) 12.6 16.6 24.3 31.6 0.0 0.0 30.9 0.0 15.7 (22.4) 1.5 35.2 0.0 0.0 14.2 (57.6) 0.0 0.0 0.0 0.0 0.0 20.0 0.0 0.0 14.2 (37.6) (0.3) 0.0 96.5 58.8 96.5 38.7 2013F 58.7 267.1 20.0 110.7 156.4 na na na
2011A 2012A 81.8 301.1 0.0 90.2 211.0 na na na 96.4 254.5 0.0 55.1 199.4 na na na
Substantial Shareholders M&G Investment Management DFA Group Northern Gulf Petroleum Holdings Ltd
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Gold has been held as a US dollar proxy and substitute to currency while interest rates globally have been low. If the global economy continues to improve the reasons for holding gold diminish. While early days yet, the spectre that global interest rates will one day start to lift could increase the opportunity cost of carrying physical gold which does not pay an interest rate or yield. If US rates were seen by the market as potentially lifting, and this would of course be rst undertaken by the FOMC reducing asset purchases, the US dollar would also hold potential to lift, which in turn could see gold reduce in value as a currency substitute. While this may be true, an improving $US may offer some respite for domestic gold producers. Our technical analysis of the gold price suggests that US$1550/oz is an important resistance level which is currently being tested with the next support level at $1480/oz. We recently reduced our forecast gold prices this month to better reect consensus estimates. Prices trend towards $1600/oz from current levels to CY16 then revert to our long term gold price of $1450/oz. An important consideration is our AUD/USD assumptions which are also included in the table below. Figure 2: Patersons Gold and Currency Forecasts 2011A Currency Gold Gold A$:US$ US$/oz A$/oz 1.032 1566 1518 2012A 1.034 1662 1607 2013E 1.027 1582 1540 2014E 0.980 1580 1612 2015E 0.950 1570 1653 2016E 0.920 1600 1739 LT Average 0.900 1450 1611
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Mounting pressue has been enough to see the likes of Navigator Resources and Kentor Gold call in the administrators while the rest of the sector has wiped off 25% since January 1. We believe deep value still exists in the sector with high margin, domestic gold producers presenting the safest investment in these uncertain times. Our preferred picks in the space are Doray Minerals, Northern Star and Millennium Minerals which all present compelling investment cases.
HIGHLIGHTED STOCKS
SECTOR WEIGHTING COMPANY Doray Minerals Ltd (DRM) Index Weight RECOMMENDATION BUY COMMENT A recent site visit reiterated out positive view on the Company and rst gold production remains on track for August 2013. A maiden resource for the high grade Judy-South Lode last month gives us good condence in extending the mine life to ~5 year mine life which is impressive for a high grade narrow vein gold mine. Open pit mining is nearing completion which will dovetail into establishing an underground network at the end of the month and we expect production stoping to be the mainstay of ore supply by late November. DRM will produce ~75kozpa for cash costs around $600/oz. BUY price target $1.03/sh. Millennium Minerals (MOY): All is going well operationally for MOY with March performance being well above budget and compensating for a cyclone-disrupted February. With previously announced production for January of 6,726oz of ne gold, we believe our forecast of March Q output of 19,700oz should be matched or exceeded. The good operational performance is starting to deliver solid cash generation with approximately $3m of cash being generated for the March Q after the $1m debt repayment. We are condent the Company will hit guidance of ~80koz in CY13 for cash cost in the order of $850/oz. BUY price target $0.055/sh. Northern Star (NST): NST is primed for a record breaking year with the Paulsens mill expansion complete and mining rates outperforming expectations. We remain condent the Company will achieve at the high end of CY13 guidance to produce ~115koz at a total operating cost of ~$870/oz. The increased scale and improved operating efciencies will translate to ~$55m free cashow this CY allowing NST to meaningfully explore growth options and maintain its commitment to paying dividends. BUY price target $1.13/sh.
BUY
BUY
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$0.57
A$/sh 0.77 0.17 0.01 (0.09) 0.00 0.00 0.27 (0.10) 1.03 Commodity Assumptions A$:US$ Gold (US$/oz) Silver (US$/oz) Gold (A$/oz) Target Price Sensitivity FX (A$:US$) Gold Price Operating Costs Production Summary Production (koz) Andy Well Total 2012A 1.03 1671 33.05 1622 -10% 1.20 0.84 1.11 2012A 0.0 0.0 na na na 2012A 0.0 1.6 0.0 0.3 5.2 (3.9) 0.2 (4.2) 0.0 0.0 (4.2) 0.0 0.0 (4.2) (4.2) 2012A
+10% Change 0.86 1.19 0.98 2014F 85.3 85.3 491 841 1,576 2014F 134.4 1.2 41.8 0.0 4.1 89.7 29.8 59.8 3.4 0.0 56.4 13.9 0.0 42.5 42.5 2014F (19%) 11% (8%) 2015F 73.1 73.1 640 990 1,632 2015F 119.3 1.7 46.8 0.0 4.2 70.0 25.6 44.4 0.6 0.0 43.8 13.2 0.0 30.7 30.7 2015F
1.03 1.17
Exploration 14%
Cost Summary Cash Costs (A$/oz) Total Costs (A$/oz) Price Received (A$/oz) Prot & Loss (A$m)
Sales Revenue Other Income Operating Costs Exploration Exp. Corporate/Admin EBITDA Depn & Amort EBIT Interest Abnormals (pre-tax) Operating Prot Tax expense Abnormals (post-tax) NPAT Normalised NPAT Cash Flow (A$m) Adjusted Net Prot + Interest/Tax/Expl Exp - Interest/Tax/Expl Inc + Depn/Amort +/- Other Operating Cashow - Capex (+asset sales) - Working Capital Increase Free Cashow - Dividends (ords & pref) + Equity raised + Debt drawdown (repaid) Net Change in Cash Cash at End Period Net Cash/(Debt) Balance Sheet (A$m) Cash Total Assets Total Debt Total Liabilities Shareholders Funds Ratios Net Debt/Equity (%) Interest Cover (x) Return on Equity (%)
Reserve and Resource Reserve Andy Well Resource Wilber Lode/Shear Webbs Patch Judy Lode Total Directors Name Peter Alexander Allan Kelly Heath Hellewell Leigh Junk Jay Stephenson Substantial Shareholders Directors/ Management Domestic Institutions Ramelius Resources Renaissance Top 20 shareholders Position Non-Executive Chairman Managing Director Technical Director Non-Executive Director Non-Executive Director % 11.1 34 5.3 5 52.6 Kt Au g/t Au koz 733 11 250 831 44 393 875 13 5 8 11 339 7 106 452
(4.2) (3.9) 0.0 0.3 4.5 5.8 0.2 0.0 0.0 0.0 (8.4) (9.4) 9.2 78.8 (1.8) (0.4) (15.8) (87.8) 0.0 0.0 1.0 41.0 0.0 50.0 (14.7) 3.2 5.2 8.4 5.2 (41.6) 2012A 5.2 28.6 0.0 2.0 26.6 na na na 2013F 8.4 116.1 50.0 52.4 63.7 65.3 na na
42.5 30.7 17.3 13.7 21.4 17.9 29.8 25.6 0.0 0.0 68.3 52.1 15.3 32.3 0.0 0.0 53.0 19.8 0.0 0.0 0.0 0.0 (20.0) (30.0) 33.0 (10.2) 41.4 31.2 11.4 31.2 2014F 41.4 138.6 30.0 32.4 106.2 na 17.6 40.0 2015F 31.2 139.1 0.0 2.2 136.9 na 76.2 22.4
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$0.018
A$/sh 0.07 0.00 (0.01) 0.00 0.00 0.00 0.00 (0.01) 0.055 0.055 Commodity Assumptions Gold Gold Price (US$/oz) Gold Price (A$/oz) Production Summary Production (koz) Nullagine Gold Project Total Production Cost Summary 2012A 1.03 1662 1607 2012A 12 12 2012A na na na
Year December 31
2013F 1.03 1608 1565 2013F 81 81 2013F 873 1086 1629 2013F 132.2 0.2 70.9 5.1 5.1 51.4 17.3 34.1 2.9 31.2 0.0 0.0 31.2 31.2 2013F 31.2 8.0 13.0 17.3 0.0 43.4 8.1 0.0 0.0 35.3 0.0 0.0 (26.7) 8.6 11.4 (16.0) 2013F 11.4 167.3 27.5 55.3 112.1 14.3 11.7 27.8 2014F 0.98 1610 1643 2014F 79 79 2014F 836 1049 1635 2014F 128.7 1.2 65.8 2.1 5.2 56.8 16.8 40.0 1.4 38.7 0.0 0.0 38.7 38.7 2014F 38.7 3.4 5.5 16.8 0.0 53.4 5.2 0.0 0.0 48.2 0.0 0.0 (16.0) 32.2 43.6 32.2 2014F 43.6 189.7 11.5 38.9 150.8 na 29.5 25.7 2015F 0.95 1620 1705 2015F 76 76 2015F 836 1049 1642 2015F 124.5 2.8 63.3 3.2 5.3 55.5 16.1 39.4 0.2 39.1 11.7 0.0 27.4 27.4 2015F 27.4 15.1 3.4 16.1 0.0 55.3 5.3 0.0 0.0 50.0 0.0 0.0 (11.5) 38.6 82.2 82.2 2015F 82.2 217.0 0.0 38.9 178.2 na 185.8 15.4
Exploration 4%
Weighted Ave C1 Costs (A$/oz) Weighted Ave Total Costs (A$/oz) Realised price (A$/oz) Prot & Loss (A$m)
2012A 0.0 0.6 1.9 0.0 7.5 (8.9) 4.4 (13.2) 4.2 (17.5) (0.7) 0.0 (16.8) (16.8) 2012A (16.8) 3.6 5.1 4.4 0.0 (13.9) 72.2 (1.6) 0.0 (84.5) 0.0 23.2 54.2 (7.9) 2.8 (51.3) 2012A 2.8 155.9 54.2 75.0 80.9 63.4 (3.1) na
1200
Sales Revenue Other Income Operating Costs Exploration Exp. Corporate/Admin EBITDA Depn & Amort EBIT Interest Operating Prot Tax expense Abnormal Losses / Minorities NPAT Normalised NPAT Cash Flow (A$m) Adjusted Net Prot + Interest/Tax/Expl Exp - Interest/Tax/Expl Inc + Depn/Amort +/- Other Operating Cashow - Capex (+asset sales) - Working Capital Increase - Other Investing Free Cashow - Dividends (ords & pref) + Equity raised + Debt drawdown (repaid) Net Change in Cash Cash at End Period Net Cash/(Debt) Balance Sheet (A$m) Cash Total Assets Total Debt Total Liabilities Shareholders Funds Ratios Net Debt/Equity (%) Interest Cover (x) Return on Equity (%)
Reserves & Resources Resources Nullagine Gold Project Total Reserves Nullagine Gold Project Total Directors Name Peter Rowe Brian Rear Richard Procter Ross Gillon Simon Durack Substantial Shareholders LinQ Resources Fund Merrill Lynch Nominees CitiCorp Nomineees Pershing Australia Position Chairman CEO Non Executive Director Non Executive Director Non Executive Director % 17.5 12.6 8.7 6.3 Mt Au g/t Au koz 34.7 1.2 1329 34.7 1.2 1329 Mt Au g/t Au koz 16.4 1.4 741 16.4 1.4 741
(koz)
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$0.895
A$/sh 0.81 0.17 0.01 (0.03) 0.00 0.01 0.16 0.00 1.13 1.13 Commodity Assumptions A$:US$ Gold (US$/oz) Silver (US$/oz) Gold (A$/oz) Target Price Sensitivity FX (A$:US$) Gold Price Gold Grade Operating Costs Production Summary Production (koz) Paulsens Gold Mine Total Cost Summary Cash Costs (A$/oz) Total Costs (A$/oz) Price Received (A$/oz) Prot & Loss (A$m) 2012A 1.03 1669 33.05 1620 -10% 1.28 1.00 0.98 1.19 2012A 67.2 67.2 713 964 1,621 2012A 99.5 2.6 45.5 2.1 5.5 49.1 17.4 31.7 0.2 0.0 31.4 9.5 0.0 22.0 22.0 2012A 22.0 11.6 25.6 17.4 0.0 25.4 20.3 (12.9) 18.0 0.0 48.0 (1.2) 58.3 75.0 75.0 2012A 75.0 134.0 9.4 39.5 94.5 na 128.3 23.2
+10% Change 1.01 1.26 1.29 1.07 2014F 118.0 118.0 582 832 1,575 2014F 185.7 4.8 68.7 2.0 4.5 115.4 29.5 85.9 0.1 0.0 85.7 25.7 0.0 60.0 60.0 2014F 60.0 27.8 41.2 29.5 0.0 76.2 12.3 0.0 63.9 17.0 0.0 (4.7) 42.2 126.4 126.4 2014F 126.4 209.4 0.0 28.5 180.9 na 627.1 33.2 (11%) 12% 14% (5%) 2015F 118.0 118.0 610 860 1,632 2015F 192.6 7.2 72.0 5.9 4.6 117.3 29.5 87.8 0.0 0.0 87.8 26.4 0.0 61.5 61.5 2015F 61.5 32.3 36.8 29.5 0.0 86.5 12.5 0.0 73.9 17.0 0.0 0.0 57.0 183.4 183.4 2015F 183.4 253.8 0.0 28.3 225.5 na na 27.3
1.05 1.24
2500 2000 1500 1000 500 0 2012A Total 2013F 2014F 2015F 2016F Price Received (A$/oz) Cash Costs (A$/oz)
(US$/oz)
60 40 20 0
Sales Revenue Other Income Operating Costs Exploration Exp. Corporate/Admin EBITDA Depn & Amort EBIT Interest Abnormals (pre-tax) Operating Prot Tax expense Abnormals (post-tax) NPAT Normalised NPAT Cash Flow (A$m) Adjusted Net Prot + Interest/Tax/Expl Exp - Interest/Tax/Expl Inc + Depn/Amort +/- Other Operating Cashow - Capex (+asset sales) - Working Capital Increase Free Cashow - Dividends (ords & pref) + Equity raised + Debt drawdown (repaid) Net Change in Cash Cash at End Period Net Cash/(LT Debt) Balance Sheet (A$m) Cash Total Assets Total Debt Total Liabilities Shareholders Funds Ratios Net Debt/Equity (%) Interest Cover (x) Return on Equity (%)
Resources Paulsens Gold Mine Ashburton Gold Project Total Directors Name Chris Rowe Bill Beament Michael Fotios John Fitzgerald Peter OConnor Substantial Shareholders Van Eck Associates Corp Investmet Ltd Paradice Investment management BlackRock Group Position Non-Executive Chairman Managing Director Non-Executive Director Non-Executive Director Non-Executive Director Shares (m) 22.7 21.9 21.8 21.3 % 5.2 5.0 5.0 5.0 Mt Au g/t Au koz 2.4 5.0 0.4 21.3 2.4 1.7 23.7 2.7 2.1
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Specialty Metals
MONDAY 20 APRIL 2009 APRIL 2013
RARE EARTHS
Andrew Harrington - Coal & Specialty Metals Analyst
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Page 31 continued
Residue processing: There is no condition requiring LYC to export waste. The ToL licence condition requires that a permanent disposal facility (PDF) be identied this year for storing all of the solid wastes. The Company has already made the rst of 5 $10m payments for the expected cost of the PDF. Alongside this, LYC has made a voluntary undertaking to reprocess the waste and sell the material as roadbase/construction material. The original plan was for long term storage at site which would have lasted many years but, because of the sensitivity from local community, LYC has made its undertaking to reprocess and export. The material is Iron Phospho Gypsum (IPG), which contains 6 Becquerels per gram (Bq/g) of radioactive material from 1600ppm Thorium. International rules require 10Bq/g before a material needs to be classied as radioactive. LYC has built a trial Synthetic Aggregate Plant for the residue product to convert it to Road Base material known as RB10. LYC aims to combine IPG with Steel Slag to produce a road base which makes it stable in different temperatures/humidity. It is expected the development of this product and market development will take about 12 months but the Temporary Operating License is not dependent on the successful marketability of RB10. As stated above this is a commitment from LYC, but it is not an economic decision because it is likely to be only break-even. It does however, add transparency and sustainability for those seeking a totally green supply chain, especially for those producing green products from Rare Earths. All new licences in Malaysia are temporary. If the plant operates safely and within its licence conditions for the rst 2 years then the licence just becomes a regular operating licence. Court Challenges have all failed: The series of legal challenges brought by the SLSM protest group have all been rejected so far. There is one remaining before the courts against the Ministry of Science, which was due to be heard in February but has now been postponed. We believe the strength and number of legal precedents will stand up well for LYC. REE market developments: Molycorp (MCP) is close to commissioning the rst 20ktpa plant. It has recently written off ~$200m from the NeoMaterials acquisition. The single biggest plant in the world is 16ktpa at Boatou. Rare Earth Prices have at-lined at around $36.00/kg over the past couple of months. This is well below the levels of over $100 from last year but will still provide very healthy margins for LYC, which we expect to have operating costs of about $24/kg in the ramp-up stage and gradually declining to around $12/kg in steady state. Why LYC chose to set up in Malaysia: The key reasons are 1) lower cost of construction and labour, 2) the government actively lobbied to have the plant located there and granted LYC a 12-year tax holiday as an incentive, and 3) the location has many existing chemical and petrochemical plants that can supply cheap energy, water, and consumables for the rare earth process. ICI, BP , and BASF al operate petrochemical plants in the Gebeng Industrial Park immediately surrounding the LAMP . Additionally, LYC buys 10-11 tonnes of consumable materials from domestic suppliers for every tonne of concentrate from Mt Weld. Plenty of Cash: At last report cash on hand is $226m, of which $37m is restricted for the completion of Phase2. There is $90m of spending planned for the March quarter, of which the main items are $27m for Phase2 construction, $40m for the ramp-up of Phase1, and $7m for interest payments. Mt Weld: Still the largest and richest Rare Earth deposit anywhere. The concentration plant has been idled since May 2012 as it has built up more than enough ore and stockpiled concentrate. It has 15.2kt of concentrate at 35% REO, which is about 6 months of supply for the Phase1 plant in Malaysia. It has been shipping material since November 2012. The Phase2 expansion of the Mt Weld mine and concentrator plant is about 70% complete and is expected to be nished by April-13 in order to match the expansion of the LAMP to full capacity. At full capacity the LAMP will only require the mining of about 250ktpa and the production of 65-70ktpa of concentrate. So it is a very small scale mining operation. LYC plans to mine in short campaigns of approximately 750kt, which will then be concentrated over a three-year period for shipping to Malaysia. Paying only for the construction cost and getting the earnings for free: At the current market cap, of $990m at a share price of $0.49, investors are paying for the build cost of the plants at Mt Weld and Kuantan and almost getting for free one of the worlds largest and richest rare earth deposits. Further, there is little value being factored in for the future earnings that are imminent. LYC is trading at 5x and 2x PE on FY14 and FY15 earnings. It is trading at 2x EV/EBITDA on FY15. The recent decline adds further to the value proposition. Accordingly, we retain a Buy recommendation with a price target or $2.08/share.
HIGHLIGHTED STOCKS
SECTOR WEIGHTING COMPANY Lynas Corporation Ltd (LYC) Index Weight RECOMMENDATION BUY COMMENT Lynas is producing rare earths from its plant in Malaysia and is nearing completion of Phase 2 at the plant. By the end of 2013 it will be producing at nameplate capacity of 22ktpa and generating about $100m in revenue per quarter.
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$0.49
A$/sh 2.23 0.01 0.03 0.00 0.02 0.00 (0.13) 0.00 0.11 (0.20) 2.08 2.08 0% +10% 2.08 2.08 2.08 2.39 2.20 1.83 Commodity Assumptions 2012A
A$:US$ 1.03 1.04 1.00 0.97 Mt Weld REO suite (US$/t) 118648 43110 40705 41525 Mt Weld REO suite (US$/kg) 118.65 43.11 40.70 41.53 Lanthanum (US$/kg) 62.77 17.56 26.11 26.64 Cerium (US$/kg) 60.17 15.15 13.06 13.32 Neodymium (US$/kg) 220.63 88.25 81.24 82.87 Praseodymium (US$/kg) 210.07 90.63 81.24 82.87 Samarium (US$/kg) 95.37 34.56 13.78 14.06 Dyprosium (US$/kg) 1686.62 660.84 333.65 340.37 Europium (US$/kg) 3683.99 1740.76 1508.67 1539.07 Terbium (US$/kg) 2867.04 1600.95 1740.77 1775.85 Production Summary Lanthanum Cerium Neodymium Praseodymium Samarium Dyprosium Europium Terbium Total REO Production (t) Cash Cost (US$/kg) Prot & Loss (A$m) Sales Revenue Other Income Operating Costs Exploration Exp. Corporate/Admin EBITDA Depn & Amort EBIT Interest Operating Prot Tax expense Minorities NPAT Signicant Item gains(losses) Normalised NPAT Cash Flow (A$m) Adjusted Net Prot + Interest/Tax/Expl Exp - Interest/Tax/Expl Inc + Depn/Amort +/- Other Operating Cashow - Capex (+asset sales) - Working Capital Increase Free Cashow - Dividends (ords & pref) + Equity raised + Debt drawdown (repaid) Net Change in Cash Cash at End Period Net Cash/(Debt) Balance Sheet (A$m) Cash Total Assets Total Debt Total Liabilities Shareholders Funds Ratios Net Debt/Equity (%) Interest Cover (x) Return on Equity (%) Gearing (%) 2012A 0 0 0 0 0 0 0 0 0 2013F 2014F 2015F
186 2,704 5,242 340 4,956 9,608 135 1,961 3,803 39 564 1,094 17 241 467 1 13 25 3 47 91 0 7 14 728 10,602 20,555 86.25 14.61 11.85 2013F 28.1 3.9 55.1 0.0 40.1 (63.1) 5.7 (68.9) 20.3 (89.1) (12.9) 0.0 (76.2) 0.0 (76.2) 2013F 2014F 434.3 3.4 137.5 0.0 40.7 259.5 10.6 248.9 19.6 229.3 0.0 0.0 229.3 0.0 229.3 2014F 229.3 19.6 19.7 10.6 0.0 239.8 36.6 0.0 203.2 0.0 0.0 0.0 203.2 323.9 (75.1) 2014F 2015F 886.2 10.1 229.7 0.0 41.5 625.1 20.6 604.6 19.0 585.6 0.0 0.0 585.6 0.0 585.6 2015F 585.6 19.0 19.0 20.6 0.0 606.1 35.3 0.0 570.8 0.0 0.0 (50.0) 520.8 844.7 495.7 2015F
Mt Weld 97%
2012A 0.0 2.8 38.1 0.0 31.6 (66.8) 5.0 (71.8) 10.1 (82.0) (10.1) 0.0 (71.8) (15.9) (87.8) 2012A
120 100
(US$/kg)
15 10 5 0
Total REO Production (t) Mt Weld REO suite (US$/kg) Cash Cost (US$/kg)
Reserves & Resources Reserves Mt Weld Mt Grade (%) REO (kt) 9.7 11.7 1,138
Resources Mt Grade (%) REO (kt) Mt Weld - CLD 14.9 9.8 1,465 Mt Weld - Duncan 9.0 4.8 432 Kangankunde- Malawi 2.5 4.2 107 Crown Tantalum & Niobium Deposit 37.7 1.2 437 Total 64.2 3.8 2,442 Directors Name Nick Curtis Liam Forde Eric Noyrez David Davidson, Kathleen Conlon Jacob Klein, Ziggy Switkowski Substantial Shareholders Morgan Stanley Union Investment GM Van Eck Associates Nick Curtis Vanguard Group Position Non-Executive Chairman Deputy Chairman Executive Director, CEO Non Executive Directors Non Executive Directors Shares (m) 87.6 31.7 17.9 16.0 10.4 % 4.5 1.6 0.9 0.8 0.5
(87.8) (76.2) 0.0 7.4 (2.4) 7.4 5.0 5.7 0.5 25.2 (79.8) (45.3) 350.9 205.0 (10.3) 0.0 (420.4) (250.4) 0.0 0.0 1.2 169.7 190.7 (4.0) (228.5) (84.7) 205.4 120.7 (197.6) (278.4) 2012A 2013F
205.4 120.7 323.9 844.7 1023.7 1081.7 1345.8 1921.4 403.1 399.1 399.1 349.1 460.2 451.9 486.7 476.8 563.5 629.8 859.1 1444.6 35.1 na na (54.7) 44.2 na na 26.0 8.7 12.7 26.7 30.7 na 31.9 40.5 0.0
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NOTES
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NOTES
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