Acquisitions feature as market cap growth remains modest | October 2018

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WA Index

Acquisitions feature as market cap growth remains modest | October 2018

Welcome to the 179th edition of the Deloitte WA Index, a monthly review of Western Australian stocks and indices.

The Deloitte WA Index reveals modest growth in September, as the market capitalisation of Western Australian listed companies increased marginally to close out the month at AU$193.2bn.

In a special report this month, Deloitte has revisited the performance of mining services companies included in the WA Index since commenting in June 2017 that mining services are a lead indicator to the overall health of the mining industry, and that a positive turning point had been identified.

Download the list of WA’s top 100 listed companies, as of 30 September 2018, explore the sections below and if you don’t currently receive our WA Index, please register to be added to our distribution list.

WA Index Special Report - Mining Services

Commodity review

September saw considerable diversity in commodity market results. The global shift to more renewable energy sources supplemented the strong performance of battery metals as of late whilst the impact of U.S. trade wars and sanctions imposed on the Middle East reverberated throughout multiple commodity markets, including copper and crude oil.

Copper rose 5% in September up to US$6,264/MT. Despite ongoing trade war tension between the U.S. and China, increased global demand on the back of electric vehicle trade has pushed the copper price upwards across the month. Currently accountable for 50% of global copper demand, China’s intentions to dominate the electric vehicle market is anticipated to further bolster the price of related battery metals in the coming months given 70% of its copper requirements are currently imported.

The zinc price climbed to US$2,659/MT, representing an 8% increase across the month. Shanghai Futures Exchange inventory levels reached their lowest level since September 2017, plummeting to 29,204 tonnes. Depleted zinc reserves over the past few years have resulted in several mine shutdowns. However, the base metal price looks to have turned around following increased zinc mine investment, as demonstrated by the official opening of New Century Resources’ $50m Lawn Hill zinc mine in Queensland . The price hike was further aided by heightened demand for zinc stems from US energy company, NantEnergy, who recently announced the development of a zinc-air battery designed to be a considerably cheaper alternative to lithium ion batteries4.

The price of Iron Ore increased to US$69.70 per tonne after Beijing decided that they will not renew the blanket steel production and coal use cuts during the upcoming heating season. China’s National Bureau of Statistics revealed that production of iron ore fell to an eight year low, whilst news that China will reduce its import tariff from 11.5% to 8.4% in November further bolstered the price.

Coking coal rose US$25 (14.8%) in September to a price of US$194/MT. Coking coal prices have been experiencing elevation for the last two years with a shortage of new mine projects and continuing demand for the commodity. Further, the commodity is feeling the impact of Chinese government measures which is continuing to aim to control pollution, which saw the Chinese city of Tangshan announce during the month they would continue to implement out anti-pollution policies by ordering steel mills, coke producers and power generators to shut part of their production. These shut downs impact supply of the commodity, which further pushes up coking coal prices.

The conclusion of trade disputes between the U.S., Canada and Mexico saw Crude Oil rise 5% to $81.59/BBL. September saw the end to fears surrounding growth in turn affecting oil demand as the International Brent Crude price hit its highest level since November 2014. Sanctions imposed by the US on Iranian crude oil has drastically reduced demand from European producers and some of China’s top oil refiners, such as Sinopec Corp, who have halved their demand of Iranian crude oil in September . These sanctions have led to demand shifting elsewhere, with Russia attempting to supply Asian oil demand. With eastbound oil infrastructure to the Asian market already at full capacity, this tightened supply has further driven prices higher.

Commodity and Precious Metal Prices
Commodity and Precious Metal Prices
Select above image to enhance the Commodity and Precious Metal Prices

Performance of WA Index and global indices

Performance of WA Index and global indices
Select above image to enhance the Performance of WA Index and global indices

WA Index movement

WA Index movement
Select above image to enhance the WA Index movement

The Deloitte WA Index reveals modest growth in September, as the market capitalisation of Western Australian listed companies increased marginally to close out the month at AU$193.2bn.

Deloitte Assurance & Advisory Partner Dave Andrews said the WA Index inched higher in September, up 1.7%, opposing the movement in the All Ordinaries, which was down by 1.6%.

“The WA Index increase was mainly influenced by the execution of acquisitions during the period, while the All Ordinaries was impacted by the downwards correction to banking stocks following the release of the Financial Services Royal Commission interim report,” Mr Andrews said.

“Globally, the trade war tension between the US and China made waves initially but did not have any lasting impact over the month.”

An additional article is included in this month’s edition, revisiting the performance of mining services companies included in the WA Index since Deloitte’s observation in June 2017 that mining services are a lead indicator to the overall health of the mining industry, and a positive turning point was witnessed.

Fifteen months on, it examines mining services participants fared under a backdrop of improved global sentiment and increased stability in commodity markets. The report delves into the relative performance of peer companies and explores themes that have helped deliver relative outperformance.

Major index players in September:

  • Market capitalisation for Ausdrill Ltd increased by AU$357.1m (61.1%) in the month of September due to a significant movement in volumes of shares traded over the period and the flow-on effect from the acquisition of underground miner, Barminco Holdings. Ausdrill acquired Barminco Holdings in August in a deal worth AU$271m. The offer from Ausdrill created an increase in the supply of shares, as part of the buyout consisted of AU$150.7m worth of shares, which incurred a flow on effect from August. Barminco also secured a five-year contract extension at Sunrise Dam by AngloGold Ashanti, worth AU$700m.
  • Northern Star Resources saw a AU$1,038.5m (24.3%) increase in market capitalisation following the decision to acquire the Pogo underground goldmine in Alaska for a total of US$260m. The acquisition is a potential third Tier 1 asset for the miner, increasing market optimism in Northern Star’s ability to continue to grow into the future.
  • South32 Limited market capitalisation increased AU$2,206.7m (12.4%) in the month to AU$20,019.3m. The mining company rolled out a share buyback during September, and performance backed by its strong annual financial results, which resulted in South32 announcing a US 6.2 cent dividend, raising the dividend total for the year to US13.8 cents on the back of a 16% profit increase for the year.

The equity markets surveyed mostly strong results throughout September:

  • The US S&P 500 remained relatively consistent with a 0.4% increase across the month. As has been the trend for most of 2018, the S&P was at the wrath of political figureheads as trade disputes began the period on the back foot. Following a downgrade of tensions over possible damage from these trade disputes, the S&P 500 began to rise. The market subsequently grew steadily to the end of the month on the back of interest rate hikes from the Reserve Bank, which influenced greater consumer sentiment and improved the investing outlook within the US.
  • The All Ordinaries finished 1.6% down from the previous month. The index recovered from a steep decline in the early part of the month when the political agenda of China and US took centre stage, with the market wary as it awaited where these issues will lead. The decrease was mainly evidenced in financial stocks, which saw a downwards correction to banking share prices following the Financial Services Royal Commission interim report released during the month.
  • Continuing the trend of the rest of the market, Britain’s FTSE 100 felt negative pressure following the heating up of US-China trade negotiations. The multiple Brexit negotiations held throughout September also depressed the market, as the date of Britain leaving the EU draws closer. The FTSE bounced back towards the end of the period as the trade wars began to soften and oil prices saw a four-year high, finishing 1% up from August close.
  • The Nikkei saw some impressive gains towards the end of the September month as they hit a 27-year high and closed 5.5% higher than last month. US dollar appreciation and increases in the interest rate by the Federal Reserve created heavy debts for emerging markets, making the Nikkei a more interesting destination for funds. The lowering of the Yen against the US dollar made the market more attractive for investors as corporate earnings growth is positively impacted, specifically for manufacturers and exporters in the Japanese market.

Top performers of the month

Western Australian top performers over the past month by growth in market capitalisation

Top performers of the month
Select above image to enhance the Top performers of the month

The top Deloitte WA Index Movers and Shakers in September included:

  • Poseidon Nickel Limited’s market capitalisation rose by AU$78.7m (125.5%) following an entitlement issue during the September period which saw the raising of approximately AU$69.0m in capital, with the amount being fully underwritten. The company also entered into a memorandum of understanding with Estrella Resources Limited during the month to enable a binding final agreement for the toll treatment of Ore from its Estrella’s Carr Boyd Rock Nickel Project.
  • Global Construction Services Limited (GCS) saw an increase in market capitalisation of AU$154.1m (99.9%), stemming from the merger of equals with SRG Limited, resulting in the creation of SRG Global. The details of the merger revealed GCS would give SRG shareholders 2.479 shares for every share they own.
  • Sheffield Resources Limited market capitalisation increased by AU$51.2m (24.5%) in September. The Company signed a Co-existence agreement in relation to its Thunderbird Mineral Sands Project, following the clearing of an in-principle and non-binding term sheet with the Traditional Owner Negotiation Committee. The share price hit an all-time high on the back of an announcement that the government had approved a AU$95m loan for the construction of the Thunderbird project, allowing for Sheffield to have its own gas-fired power station, storage facilities and workers camp.
Elevator Reflection

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