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A rocky start to 2016

Deloitte WA Index

11 February 2016: The Deloitte WA Index decreased during January 2016, with the market capitalisation of Western Australian listed companies falling by 2.2% and closing the month at AU$119.3bn.

Deloitte Clients & Markets Partner Western Australia, Tim Richards, said the major contributing factor was the continuing sustained slump in commodity prices.

“The Western Australian economy is intrinsically linked to the health of the global commodity markets and is being hurt by the continued slowdown in the Chinese economy and the decoupling of its future growth from the investment driven industrial model of the past,” he said.

“Waning Chinese demand has contributed to the slump in commodity prices that is also exacerbated by increases in commodity supply, which are forecast to continue in 2016.”

Among major Index players:

  • Brockman Mining Limited’s market capitalisation decreased by AU$243m (down 20.9%) to AU$922m due to the fall in commodity prices, specifically iron ore.
  • Programmed Maintenance Service Limited’s market capitalisation fell by AU$115m (down 18.6%) to AU$501m following the drop in commodity prices and the announcement to the market regarding the sale of a few of its vessels (which were originally picked up as part of the recent acquisition of Skilled Group) for AUD$25m.
  • Saracen Mineral Holdings Limited’s market capitalisation rose by AU$87m (up 18.0%) to AU$571m after delivering strong quarterly production results and indicating its goal of doubling production will be reached earlier than expected.

Key commodities surveyed in January included:

  • Iron ore, of particular importance to Western Australia’s economy, fell 2.3% to end the month at US$42.80 due to the Chinese industrial slow down and the associated decrease in steel production. This was further intensified by the jockeying for market share among the world’s largest ore producers, increasing the availability of low-cost supply in the market with new mines coming online, placing significant pressure on higher-cost producers.
  • Crude Oil (Brent) finished the month at US$34.53 per barrel, having dropped 3.3% during January. Uncertain global growth has impacted demand while the United States’ fracking revolution has helped to move the nation towards oil autonomy. At the same time, supply has increased and will continue to do so as OPEC countries maintain production in an attempt to preserve their market share. Sanctions have also been lifted on Iran which will culminate in its re-entry into the oil exporting community.
  • Palladium decreased by 9.7%, a victim of the recent stock market sell off in China, the rising US dollar and minimal sustainable impact from record car sales on palladium demand.
  • Gold was the shining light in the commodity slump. Its 5.2% growth during the month was a reflection of its ‘safe haven’ status in an environment of low global income growth. 

All equity markets surveyed slumped during January:

  • The All Ordinaries fell 5.4%. The combined effects of the slump in oil prices and the latent repercussions of the increase in interest rates by the Fed last month, saw most blue chips affected including the big four banks, BHP, AMP and Macquarie Group.
  • The FTSE 100 followed suit given its significant exposure to the resources sector, decreasing by 5.3%, with significant losses coming in early January as Chinese trading halts designed to prevent abrupt share losses inadvertently triggered negative sentiment in other global markets.
  • The S&P 500 fell 6.9%, impacted by energy companies suffering from the drop in oil prices and decreased foreign revenues as a result of the appreciating American dollar.
  • The Nikkei posted the biggest decrease, with a fall of 12.2%, which was again due to the Chinese slowdown and falling oil prices.

Top Deloitte WA Index Movers and Shakers in January included:

  • Galaxy Resources Limited (GXY), posted a 52% increase in market capitalisation, up from AU$147m to AU$223m. The shares rose as General Mining Corporation Limited (GMM) set out its planned $7 million spending program for the Mt Cattlin mine in Western Australia which is owned by Galaxy. GMM has a deal with Galaxy under which it was granted the right to solely operate the project and which also includes an option to purchase 100% of Mt Cattlin at any time during the next three years.
  • ResApp Health Limited (RAP), posted a 38% increase in market capitalisation, up from AU$59m to AU$81m. The company is still in the early stages of commercialising software to assist in the diagnosis of respiratory diseases via a mobile smartphone application. The jump in share price is due to the request made to the United States Food and Drug Administration (FDA) for the approval of their application.
  • Eden Energy Limited (EDE), posted a 37% increase in market capitalisation, up from AU$51m to AU$70m. The company’s share price climbed following the announcement that Eden’s wholly-owned Australian subsidiary, Adamo Energy Ltd, had agreed to sell its investments in UK petroleum and exploration development licences to UK Onshore Gas Limited. This will occur via the sale of all the issued share capital in Adamo (UK) Ltd and is subject to shareholder approval.

Distressed Mines

Within this month’s edition of the WA index we also focus on distressed mines and the brave decisions companies need to make in order to survive the current low price environment.

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