The week in Small Caps: Lithium Australia pilot trial, DRG Global sees BHP interest, Consolidated Zinc begins mining

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WEEKLY MARKET REPORT

Despite Australia’s strengthening GDP, the markets took a hit this week with the ASX 200 and All Ords both shaving off more than 3% before recovering slightly – albeit, not enough to drag themselves out of the red.

The ASX 200 lost 2.78% to finish the week on 6,143.8 points, while 2.73% disappeared from the All Ords, leaving the index to end Friday at 6,252.3.

The slump in major indices followed mixed figures from the Australian Bureau of Statistics (ABS) and the Reserve Bank of Australia’s (RBA) latest decision to keep the official cash rate on hold at 1.5% for the 25th consecutive month.

GDP continues to firm

The ABS revealed this week that the nation’s economy continued its upward momentum with GDP gaining 0.9% during the June 2018 quarter.

Even healthier was the fact that GDP jumped 3.4% to the same period in 2017. Overall, the Australian economy strengthened 2.9% in the 12 months ending June – higher than the Reserve Bank of Australia’s official forecast of 2.75%.

The RBA anticipates the economy to continue its expansion, forecasting 3.25% growth this financial year.

“Growth in domestic demand accounts for over half the growth in GDP, and reflected strength in household expenditure,” ABS chief economist and former RBA economist Bruce Hockman said.

However, the moderate growth in household disposable income and increased consumption led to the household saving ratio falling to 1% – the lowest it has been since the global financial crisis hit.

Against the country’s strengthening GDP, Australia’s current account deficit blew out to $13.5 billion, despite forecasts it would only hit $11 billion.

The ABS attributed the blow out to a deficit in net primary income. Additionally, the country’s net foreign debt gained another $15.3 billion during the June quarter to tip $1.036 trillion.

Despite the mounting debt, exports of goods and services rose 3% during the quarter and accounted for 0.1% towards GDP growth for the period.

Retail flatlines in July

Meanwhile, the retail figures for July exposed the sector had flatlined with retail turnover of 0%, following a 0.4% increase in June.

“There were falls in three of the six industries,” ABS director of quarterly economy wide surveys Ben James said.

“Household goods retailing led the falls, and there were also falls in clothing, footwear and personal accessory retailing, and department stores,” Mr James added.

Household goods dropped 1.2%, while clothing, footwear and personal accessories declined 2%, and department stores shaved off 1.9% – with the Northern Territory and WA experiencing the biggest downswings in retail turnover.

However, other retail divisions like food gained 0.3%, and cafes, restaurants and takeaway food services grew 0.6%.

Amazon joins US$1 trillion club

As Amazon claws more of Australia’s retail scene, the online retailer briefly managed to breach the trillion-dollar glass ceiling this week when its share price peaked at US$2,050.50 before sliding to end trade at US$2,039.51 – taking its market cap to just under US$1 trillion.

Highlighting the increased adoption of consumers to purchase goods online rather than head on into a bricks and mortar shopping centre.

Amazon is the second company to enter the exclusive club in recent months, with Apple joining in early August when its share price hit US$207.39.

Housing market continues to lag

Not faring much better than the retail sector, Australia’s housing market has continued to decline, with the nation’s average house price falling a further 0.3% in August after a 0.6% slump in July.

It was the 11th consecutive month national dwelling prices had dropped, with the median dwelling price plunging 2% for the 12-month period ending August.

“Weaker housing market conditions can be tied back to a variety of factors, foremost, of which, is the tighter credit environment, which has slowed market activity, especially among investors,” CoreLogic head of research Tim Lawless said.

“Fewer active buyers has led to higher inventory levels and reduced competition in the market,” he added.

“Collectively, these factors have been compounded by affordability challenges, reduced foreign investment and a rise in housing supply,” Mr Lawless explained.

Sydney experienced the biggest annual fall in dwelling value of 5.6%, while Darwin was the second largest drop at 4%, Perth declined 2.1% and Melbourne dipped 1.7%.

Bucking the trend was Hobart with a 10.7% rise.

ANZ and Commonwealth prove punters right

In the banking space, punters’ fears were realised this week when the Commonwealth Bank of Australia (ASX: CBA) and ANZ (ASX: ANZ) followed Westpac’s (ASX: WBC) rate hike example.

Last week, Westpac rocked the boat with its customers and industry spectators when it increased its variable home loan interest rate by 14 basis points.

This week, ANZ upped its variable home loan interest rate by 16 points, while Commonwealth added 15 basis points.

However, ANZ made some conciliation for the country’s drought affected clients by saying customers in these regional areas would not be subject to its hike.

All three banks cited increased funding costs for the rises.

Eyes remain on the fourth member of the Australian banking cartel, NAB (ASX: NAB), to see if they fold in on the peer pressure.

Small Cap stock action

The Small Cap index was unable to fight the overall red tide of the larger indices and was pulled down for the second week running.

The slipped 2.99% to close the week at 2,803.7 points.

However, there were some shining stars within this week’s small caps, including:

Lithium Australia (ASX: LIT)

Lithium Australia had a productive week after reporting its first stage SiLeach pilot trial had generated “outstanding results”.

The trial was carried out at ANSTO Minerals’ facility in NSW and extracted up to 97.5% lithium from the leach circuit, which exceeded the company’s target. The second stage of the trial will involve processing the lithium further into a lithium chemical for the battery sector.

Successful results from the SiLeach trial followed Lithium Australia officially recommissioning its wholly-owned subsidiary VSPC’s plant which is Australia’s only cathode powder pilot plant and battery testing facility.

Lithium Australia plans to apply VSPC’s proprietary technology to process the lithium chemical generated under the stage two pilot to create a lithium-ion battery.

Magnis Resources (ASX: MNS)

AL Capital scooped up a $11.1 million stake in Magnis Resources (ASX: MNN) this week, with Magnis planning to use the extra cash to advance its flagship Nachu graphite project in Tanzania and battery plants.

The cornerstone investor’s $11.1 million gave it a 4.98% stake in Magnis and follows on from new Magnis’ partly owned subsidiary Imperium3 Pty Ltd had received a $3.1 million grant from the Queensland Government.

According to Magnis, the grant to the Imperium consortium, will partly fund a feasibility study into building a 15 gigawatt hour lithium-ion battery manufacturing plant in Townsville’s Woodstock advanced technology precinct.

Magnis is also part of a consortium that is establishing a 15Gwh per year lithium-ion battery gigafactory in New York.

Leigh Creek Energy (ASX: LCK)

Leigh Creek Energy is on the cusp of producing its maiden synthesis gas (syngas) from its namesake project in South Australia.

The company received its final approval to begin the pre-commercial demonstration stage and anticipates it will begin producing syngas during the current quarter.

In parallel with the approvals process, Leigh Creek has been completing onsite construction and drilling.

Once the pre-commercial demonstration has been successfully completed, Leigh Creek plans to start working on approvals to begin operating at a commercial level.

YPB Group (ASX: YPB)

YPB Group has edged further into China’s market after announcing it had secured a contract with CCN Technologies.

CCN provides anti-counterfeit technologies and has teamed up with YPB to distribute YPB’s patented, covert forensic anti-counterfeit to its clients in China.

According to YPB, the CCN contract will generate between $100,000 and $1 million a year.

A second contract was announced this week, with YPB reporting it would provide its ProtectCode solution suite to Australian company Bluey Merino, which produces Merino wool-based activewear and outdoor clothing.

YPB anticipates the Bluey Merino deal will bring in “modest revenue in the year ahead”.

In the last few weeks, YPB has also achieved several milestones after reporting it had developed a smartphone readable anti-counterfeit technology. YPB also teamed up with emerging cannabis producer Namaste Technologies to provide the medical cannabis company with industry-wide authentication and consumer engagement solutions.

Fastbrick Robotics (ASX: FBR)

Fastbrick Robotics has entered a partnership with the world’s largest brick producer Wienerberger Group.

The agreement paves the way for Wienerberger to develop, manufacture and test clay blocks optimised for Fastbrick’s Hadrian X construction robot.

According to Fastbrick, the clay blocks will be tested in a Europe-based pilot project and once the pilot has been successfully completed, the new clay blocks will be launched into Wienerberger’s markets along with the Hadrian X.

“We are very happy to have found the best partner in Wienerberger, the world’s largest brick manufacturer, to develop bricks for our construction robot and to further scale our technology,” Fastbrick chief executive officer Mike Pivac said.

Consolidated Zinc (ASX: CZL)

Consolidated Zinc has begun mining at its Plomosas zinc-lead-silver project in Mexico’s north following a toll treatment agreement with the country’s largest miner Grupo Mexico.

As part of the agreement, Grupo will process one to four lots in 2,500t batches of Plomosas ore at its Santa Eulalia concentrator.

The processed ore will then be transported to Grupo’s San Luis Potosi for smeltering and the agreement with Grupo will be reviewed annually.

In the first month of mining, Consolidated Zinc will extract 3,000t of ore and will steadily ramp output up to reach 7,500tpm by the end of December.

DRG Global (ASX: DGR)

Investment house DRG Global had a big news week with four of its mineral exploration daughter companies reporting recent business developments.

DRG’s 12%-owned SolGold (LSE: SOLG) revealed BHP Billiton (ASX: BHP) had scooped up 6.1% of its issued capital at a 20% premium to the stock’s 20-day volume weighted average price – equating to about US$35 million.

On London’s AIM DRG’s 24.3%-owned IronRidge Resources (LSE AIM: IRR) revealed high grade lithium from first-phase drilling at the Ewoyaa project in West Africa including 128m at 1.21% lithium from 3m.

Back in Australia, DRG has a 18.2% interest in Aus Tin (ASX: ANW) which confirmed it was advancing pre-regulatory approvals for stage one of its flagship Taronga tin project in NSW.

DRG also hold a 17.2% stake in Dark Horse Resources (ASX: DHR), which announced it was acquiring the 366sq km San Jorge lithium brine project tin Argentina’s Catamarca province.

Alliance Resources (ASX: AGS)

Alliance Resources revealed a maiden resource of 1.09Mt at 5.1g/t gold for 181,000oz gold for its Weednanna gold deposit, part of the Wilcherry project in South Australia.

According to Alliance, the gold shoots contributing to the resource are open at depth or down plunge, with the resource posing “outstanding economic potential” for the project.

Alliance has secured a 75.1% interest in Wilcherry and can up this to 83.6% by spending a further $3.2 million on exploration during the 2019 financial year.

Drilling at Weednanna has unearthed 9m at 25.1g/t gold from 7m, including 4m at 53.9g/t gold and numerous other high grade and thick intersections.

Respiri (ASX: RSH)

Respiri revealed on Friday that it had signed a manufacturing agreement with SRX Global for the production of its next generation breath and asthma wheeze detection sensor.

The sensor makes up the hardware component of Respiri’s asthma monitoring ecosystem.

Respiri stated that four factors guided its selection of production partner, including: local operation to control synergies across the ecosystem, manufacturing innovation, strong engineering and the ability to quickly scale to volume to meet global demand.

Following product testing and verification, Respiri anticipates it will launch into full production by April 2019 for its wheeze detection device.

The week ahead

Business confidence and consumer sentiment data is due out early next week to that will provide some insight into which way the economy is headed.

The ABS is scheduled to release its labour force numbers on Thursday, with the July figures showing the unemployment rate remained steady at 5.4%.

Oversees the European Central Bank and Bank of England are scheduled to meet. Rates are tipped to remain steady for both, with the English central bank having already raised rates 25 basis points in August.

Tensions brewing in Syria could see markets take a hit, with western nations itching at the opportunity to carry out military strikes on the middle eastern nation yet again.

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Lorna has more than 10 years' experience as a finance journalist and editor. She has written for numerous industry publications reporting on various sectors, including: resources, energy, construction, biotech, pharma, science and technology, agriculture, and chemicals. Specialising in resources, Lorna has also covered a myriad of small and large cap ASX and dual-listed stocks.