ASX Weekly Wrap 26/08 - 30/08

Again it’s been a little while since we last spoke but there is a lot to talk about in regards to our local and global markets. Last week was our best for August as we finished up 1.27% or 83.90 points. This was helped by a +1.48% rally on Friday as trade tensions between the US & China dissipated. August was our first negative month for 2019 falling almost 3%. Obviously the trade war between the US/China was a concern, but also soft global macro data continued to worry equity markets. The risk of a global recession has increased as global PMI figures hit lows they haven’t seen since August of 2009. Locally we had our main reporting season where 138 of the 200 top companies reported full year results. Reporting season is always volatile, but we tended to see poorer earnings reports than good ones this time around. I did flag this weeks ago when I said we would probably have a soft earnings season, but would see gradual improvement come the February 2020 season and a really strong August 2020 reporting season. I will get into the nitty gritty of it all in a little bit.

Despite the bearish sentiment that surrounded August the XJO remains in a real bullish pattern/trend overall. We continue to respect the uptrend (orange) we started in February and have broken out of a small down trend (red) we had during the last month. For me the risk remains to the upside as we will look to test 6,650 next and then onto our previous highs. The XJO has returned 17.32% for 2019, so it has already been a wonderful year for Aussie equities. It’s even better when you add in the dividend aspect to it. I continue to remain bullish on the XJO for the near future (24 months) as global rate cuts & stimulus help improve the economy once again. The can will be kicked down the road at least one more time before we see any major correction/crash in my opinion.

As I mentioned before we have just wrapped up our earnings season for August where 138 of the ASX200 companies reported full year earnings and 31 companies reported half year. Below are just a few statistics from this year’s reports:

· 92% of companies who reported full year results, reported a profit. This is above the average of 88%.

· Only 52.2% of companies were able to increase profits and this down from the 61.5% average but better than the 48.6% reported in February.

· Aggregate statutory earnings were up 17% on a year ago but if you exclude BHP & WES it was only +1.2%, which probably better reflects the period.

· Aggregate revenues increased by 6.0%, expenses increased 6.8%, dividends lifted by 4.9% and cash fell by 0.1%.

· Total cash holdings of the ASX200 is at $110.7bill. 58% of companies lifted their cash holdings over the year.

· Profits of BHP, TLS, WES, WOW & CBA accounted for 44% of all full-year profits.

· 88.4% of companies elected to pay dividends, which is above the 86.3% average. Of those who reported a dividend 54.9% increased it, 21.3% cut it and 23.8% left it unchanged.

In summary if we exclude BHP & WES from the reporting season wrap up it was a very soft period with profits only up 1.2%. I think this does reflect the economy and where we are at. As I have said many times the election put corporate Australia on hold and we saw that in statistics from November 2018 onwards. This type of reporting season was to be expected and we saw some rays of light with revenues being able to lift strongly and most dividends increased or maintained. Cash levels remained stable despite the lift in expenses. If you want a full comprehensive breakdown of the reporting season please click here for an in-depth summary by Commsec.

Nickel has been the flavor of the month for the past week as major supply disruptions caused the price to spike 8%+ in two consecutive trading days. Indonesia, who are the world’s second largest Nickel producer, announced Friday night that they would bring forward an export ban on nickel from 2022 to the 1st January 2020. It wanted all of its domestic producers to have their contract obligations wrapped up by the end of the year. This is massive for the Nickel market as Indonesia represent 9% of the world’s nickel supply. Stockpiles for the metal on the London metals exchange were already at multi year lows regardless, this has just further worsened the situation. In 2018 the Nickel market was 146,000t in deficit and it was expected to be 84,000t in 2019, of course this figure will be far worse. As I mentioned before this has sent the nickel price soaring in the last few days and the metal is now up 80% for the year as well.

So why has Indonesia decided to take such drastic steps? Their mineral resources minister said it was to secure the country’s nickel reserves which were quickly being depleted, with less than seven years’ worth in stockpiles. He also mentioned the government plans on ramping up production of lithium ion batteries to step up their electric vehicle market, which had recently become a priority. Every electric vehicle lithium ion battery has roughly 70kg of nickel within it.

On top of this ban we have had a major mine in the Philippines, which produces about 400kt of Nickel a month, set to close at the end of the year due to depleted nickel reserves. This has promoted Goldman Sachs to up its price target on Nickel from $US17,000t to $US22,000t over the next 12 months. There is very limited new supply due to come online in the next few years and it’s more likely more mines shut their doors due to reserves depletion than there is for added supply.

So how can we take advantage of this situation on the ASX? Well there are few companies who have exposure as producers, such as BHP and EVN, but nickel only makes up a small part of their revenues and thus the impact on earnings will be minimal. In my eyes there are probably four pure Nickel producer plays that exist on the ASX:

· Western Areas Ltd (ASX: WSA) $3.17- Probably the purest Ni play on the ASX as it is the only mineral they produce. Look set to produce 22,000t of Ni in 2020 from its 100% owned mine in WA. Whilst their current mine has a short life on it a newer mine (Cosmos) with a longer life is expected to hit full production FY23 offsetting any drop off. It is also noted that many of their offtake agreements lapse in 2020 meaning they should receive higher prices in newer agreements and it will act as a catalyst for the stock. Remarkably WSA have hit guidance figures for seven years straight. This means they are reliable when it comes to forecasts as they obviously know their nickel production capabilities. Production costs are around $A2.98lb and the nickel price currently sits around $US8.00lb (or $A11.50lb), thus have large margins at this point in time. They only have around 112.1kt of reserves left but have 1.0485mt in resources on which to expand that upon, which includes 265.5kt from Cosmos. Thus with more exploration and drilling they should be able to easily increase those reserves. WSA just paid a 2.0cps dividend for the FY18/19.

· Independence Group NL (ASX: IGO) $6.23- Probably the second purest Ni play on the ASX with 40%+ of revenues coming from Gold & Copper as well. IGO produce about 25-30kt of Ni per year with 273kt in reserves and a further 275kt in resources. Their Nova mine in WA, Australia, is where their main source of Ni comes from. IGO’s share price has outperformed that of WSA for the last 12 months due to its Gold exposure and hence probably has less upside to it. Although their Nova mine cash costs are a lot lower than WSA as they sit around the $A2.17lb mark at the moment. Risk is somewhat mitigated here as you are buying into a multi commodity company, but this also means the Ni leverage is far less. IGO paid 10cps in dividends for the FY18/19.

· Nickel Mines Ltd (ASX: NIC) $0.64- NIC have an 80% interest in the Hengjaya Nickel Mine in Indonesia. They have an agreement with Tsingshan for the production of 300ktpa of Nickel Pig Iron, which uses very low grade Nickel (sub 1.7%) for the production of iron to subsequently make steel. They also produce higher grade Ni with only 5.3kt produced in 2019 but this is lifting to almost 30kt pa next year. Cash costs are very high at around $US3.56lb and you do have the sovereign risk of being located in Indonesia. EBITDA is expected to reach $US111mill in FY20 up from the -$US2.5mill this year. No dividends have been paid to date and none are forecast at this stage.

· Mincor Resources (ASX: MCR) $0.63- The smallest by market cap ($186mill) of the group and the only non-producer I have put on this list. This is mainly because it is highly likely to be a producer again in FY19/20. MCR have a long rich history in Ni production, producing the mineral from the Kambalda district in Western Australia for over a decade. Production shut down in 2016 when the Ni price slumped to lows and it became unprofitable for them to mine any more. In the last year they produced a mere 2.5kt of Ni, but in their last full year it was 9,000kt and it often got to 12-15kt pa throughout the life of their production. Recently they entered into a binding agreement with BHP to allow them to process 400-600kt pa of ore in their Kambalda processing facilities. MCR then have the rights to sell the produced Ni concentrate to BHP at a price linked to the benchmark. The exact details of which will be kept confidential. BHP then will use this Ni to turn into high grade Ni Sulfate to sell into the lithium-ion battery market. From the processing this could produce as much as 18kt of Ni pa depending on recoveries and based on past production in the area. To date MCR have 175,300t in mineral resources & 28,500 reserves of Ni in their tenements, with a lot of exploration upside to come. They also have $30mill in cash and no debt. Probably the riskiest of all the Ni plays, but they also have the most upside. Especially with such a blue chip offtake partner in BHP.

As you can see there aren’t many pure exposures to Nickel production on the ASX, mainly due to the fact Ni hit such lows a few years ago. This saw operating mines sold or shut down and a shift away from the mineral. Personally WSA & MCR are my favourites and I am looking for exposure in both. I am sure with a sustained bullish Ni price we will see hundreds of new explorers hit the market and a very select few will become producers in their own right, but the risks on these will be high and a lot more than any I have mentioned above. Please note all comments made in regards to the stocks above are general in nature and you are encouraged to seek out professional advice in regards to your personal circumstances before investing.

Just a quick note on the events of today. The Chinese commerce minister has revealed, in phone talks with the US yesterday that they would be flying to Washington early October to continue trade talks. It is also expected that there will be further dialogue this month. This has seen Asian markets remain very buoyant for the day.

That wraps up the newsletter for another week. I hope all Father’s out there had a wonderful day on Sunday. I spent my day with my wife and two boys at the Royal Adelaide show. Whilst I was spoilt with presents & love my favourite part of the day was seeing the smiles on their faces looking at all the animals, rides, sights & sounds. It truly was the perfect day. This is where I will end it for today. Company news is quiet again for a little while as most have divulged all the information they can in their earnings reports. Lots to keep an eye on from a global perspective, but it’s funny that how bearish things can feel one minute, and within 24 hours can start to feel bullish again. Have a wonderful and safe week everyone and I’ll speak to you all soon. Go Crows & thanks for everything Tex!

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.