Making money from terrible financial advice

Royal Commission Australian banks financial advice
WEEKLY MARKET REPORT

You don’t have to be an actual victim to be horrified about some of the very real and personal stories coming out of the Royal Commission into Australia’s banks and financial advice industry.

It is blindingly obvious that the interests of the customer have often come a distant last to other considerations such as maximising commissions by selling questionable insurance policies and investment “products”.

What more evidence do you need than Commonwealth Bank’s admission that it had been charging dead people for potential advice that they obviously – and perhaps fortunately – never had an opportunity to implement.

The really important points as an investor is firstly to make sure that you are minimising your own investment fees and getting full value for them but secondly, to find a way to profit from the share price misfortunes of our misleadingly labelled “wealth’’ industry.

Horror stories could provide trading opportunities

No matter how bad the stories get in the Royal Commission – and only a brave person would venture a guess at how wildly unscrupulous the greedy advisers and lenders could get – at the end of all of this we will still have the big banks and the wealth companies such as AMP.

The raging question is how much will they be worth and what sort of future will they be able to carve out in what will obviously become a more tightly regulated space serving a hopefully more sceptical and financially literate customer base.

In simple terms, the share prices of the big banks and wealth managers are now trading in a very wide arc as the share market responds to every new revelation and that should make for a smorgasbord of long and short term trading opportunities.

AMP shares dive hard and then jump as CEO walks the plank

AMP is a really good example, with its share price diving very hard and its market cap shrinking by almost $1.3 billion on the strength of the incredible stupidity of a company repeatedly telling outright lies to the corporate regulator, the Australian Securities and Investments Commission.

It is one thing to actually charge your own clients for receiving financial advice they never got but it is quite another to then repeatedly tell actual lies to the regulator about the steps you had taken to fix the problem.

Short term and long term opportunities abound

That created an excellent short term trading opportunity to pick up some discounted AMP stock and then sell it into the market when the inevitable happened and departing chief executive Craig Meller was shown the exit quite a bit earlier than intended.

He won’t be the last executive or board member to depart as the Royal Commission continues and this is sure to be a share market story that is repeated many times – the real trick being to judge the point when the share price of the company getting slammed has reached its short term nadir and then profitably ride the relief rally when boards find the appropriate sacrificial lambs to sack.

In the longer term, there is also a case for very selectively loading up on the downtrodden banking and financial services sector, being careful to select those companies that are already well on the way to “solving’’ the many conflicts and issues that have been so chillingly revealed by the Royal Commission.

One potential target might even be Commonwealth Bank, which has labelled itself as the gold medallist of charging dead people and others for financial advice they never received.

With the share market separation of its wealth division colonial first state now underway through new chief executive Matt Comyn and a strong and profitable banking franchise, the long term price of Commonwealth may well be higher than the mid-scandal price it is trading at now.

It is a judgement call all investors have to make for themselves but at least they know they literally can’t afford to ask the “wealth’’ advisers for an opinion!

Stronger earnings vs greater uncertainty

As I predicted last week, world markets have been oscillating between rises to reward some quite impressive quarterly earnings numbers and falls to reflect the highly uncertain political and military situation involving the US, Syria and Russia, among others.

One of the interesting highlights was an impressive eight per cent surge in the price of nickel on the London Metal Exchange to US$15,335 a tonne, the highest in more than three years he biggest jump in more than six years.

Nickel wasn’t alone in recent weeks as other base metals, iron ore, aluminium and oil prices rose on fears of a supply surge as the US looks to impose sanctions on Russian producers, potentially leading to a supply squeeze.

Shares in Australian miners and energy producers have done quite nicely, with the mining index up ten per cent since the start of the month on the back of surging commodity prices.

Netflix was another notable result, showing exceptionally strong global growth as it continues to assemble a world audience for its expensively produced original content.

In common with many tech companies profits are elusive at Netflix but the game is to do an Amazon and grow the biggest global footprint possible, then watch the profits really start to burst through at scale.

This tug of war between quarterly earnings reports and global political machinations looks set to be a continuing theme this coming week as well.

The week in small caps

It’s been quite a week in small caps this week resource explorers and miners dominating the news.

A big legislative change relating to mining companies coming from Tanzania, once again puts Africa in the spotlight. This week has seen several ASX-listed companies report progress from their African-based operations, with in particular eyeing up a company spin-off on the back of the growing buzz in battery metals.

Not to be outdone by their intercontinental counterparts, Australian authorities have also tweaked legislation regarding fracking in the Northern Territory which has put the cat amongst the pigeons from a political standpoint.

Australian explorers are not doing too bad with some branching out into other sectors altogether…

Queensland Bauxite (ASX: QBL)

Queensland Bauxite has grown from strength to strength within a week.

Having launched Australia’s first grown and processed hemp seed oil soft-gel capsules, the company added to its momentum by arranging a deal to supply hundreds of Coles stores around Australia with various products and oil blends that have hemp ingredients.

If that wasn’t enough, the resources company that’s branching out in medical cannabis then entered into a binding memorandum of understanding with Burleigh Heads Cannabis to provide import and storage services for QBL’s subsidiary (Medical Cannabis Limited) with international medical cannabis products.

This deal provides QBL’s 55%-owned subsidiary with immediate access to the required Australian licenses and secured storage facilities that are required to import its Canntab medical cannabis pharmaceutical extended release pills from Canada.

Aura Energy (ASX: AEE)

Aura Energy could potentially become one of the world’s largest suppliers of vanadium, according to its 13.1-billion-pound inferred vanadium resource. Aura intends to spin-out a new company called Häggån Vanadium and to maintain a 78-80% stake in the newly-formed battery metals company once it’s floated on the ASX.

This week saw the company deliver more technical information to backup its growing understanding of its project and how best to commercialise it.

Originally, Häggån’s focus was on uranium but given the strong rise in vanadium prices and the stark improvement in market conditions relating to battery metals, Aura is switching focus.

The company highlighted the fact its vanadium grades were 18 times higher than its uranium grades at the project.

Spectur (ASX: SP3)

Spectur took its first commercial steps into the defence sector by unveiling a new client: the Australian Department of Defence.

The security company has already secured Lend Lease, Rio Tinto and Iluka Resources as clients from the private sector but has now met its long-standing goal of servicing large public-sector clients.

The order from the Australian DoD, worth around A$50,000, represents the company’s first foray into servicing military clients and will potentially serve as the first of many more as it widens its addressable audience in Australia. Potential sales into overseas markets are also on the cards although Spectur has not confirmed any firm deals as of yet.

A source of high demand for Spectur’s products is originating from miners, especially from Western Australia — Australia’s resources heartland.

Hiring multiple security guards to protect dozens of remotely-located sites is rather impractical and not cost-effective which where Spectur currently makes a market by supplying a range of novel range of camera systems including advanced detection and connection capabilities.

Interpose Holdings (ASX: IHS)

Zimbabwe’s political shift from dictatorship to democracy begun in November last year with Interpose Holding swooping in with a bargain-basement deal to develop one of Africa’s largest gas-condensate prospects.

To spearhead its path into Zimbabwe, Interpose has secured the services of former Woodside Petroleum business advisor Scott Macmillan.

Interpose has commenced the process of acquiring the Cabora Bassa project via a planned buyout of Invictus Energy Resources based in Zimbabwe’s far north.

According to initial indications, Interpose will acquire a highly-prospective permit for around US$500,000 and go directly into a low-cost, high-impact work program to progress the prospect to become farm-out or drill ready, as soon as possible.

There is already some geological data to go on following previous work by Mobil in the 1990’s and the development could be one of the first for the country’s new President Emmerson Mnangagwa.

Zimbabwe is desperate to develop both oil and gas projects to support its anaemic resources sector and almost complete reliance on foreign imports for all its domestic energy needs including energy.

Baraka Energy & Resources (ASX: BKP)

With fracking being given the green light in the Northern Territory (NT), several explorer’s interests in the region have perked up accordingly.

Baraka Energy controls around 4 million acres in the Georgina Basin in the NT which is currently considered as one of the most highly prospective oil/gas regions anywhere in Australia.

The news sent Baraka Energy shares from their land-locked position of $0.01 to $0.03 — a 200% leap in less than 1 day.

Clearly, the news means that Baraka could be in-line to become one of the first explorers to tap the NT for large oil reserves, although it will have to find substantial funding in order to do so, which could potentially welcome joint-venture partners over the coming months.

Real Energy Corporation (ASX: RLE)

Real Energy provided an update on its trifecta of wells, operating in the “Goldilocks zone” of Australia’s Cooper Basin — and the results indicate the company is now another step closer to commercial gas production. Kicking off its drilling campaign this week, Real Energy is keen to progress several avenues of commercial interest.

The company currently has three focus points — Tamarama-1, 2 and 3.

Real Energy spudded Tamarama-2 this week at its Windorah gas project in Queensland’s south-west, with strongly encouraging accompanying results.  The well has been drilled to 1,900m of its planned 2,700m depth and is on course to complete in the near future. Tamarama-3 is also scheduled to be spudded with the assistance of  Ensign International

Meanwhile, its Tamarama-1 well which was first spudded in 2014, has achieved gas flow rates between 500,000 and 2 million cubic feet per day.

Managing director Scott Brown told Small Caps this week that the company’s flagship Windorah project’s 13.7 trillion cubic feet gas resource had the potential to supply a “big chunk of the east coast demand”.

Once Tamarama-2 and Tamarama-3 have been successfully established, Real Energy plans to begin pilot production to distribute gas to Australia’s east coast market with a new reserve assessment expected before the end of this year.

Celsius Resources (ASX: CLA)

Celsius delivered what its shareholders have long been waiting for: a maiden JORC Resource at its Opuwo cobalt project in Namibia covering a hefty 1,470 square kilometres.

Celsius reported a confirmed 126,000 tonnes of contained cobalt, which exceeded its expectations. The full maiden resource is 112.4 million tonnes grading 0.11% cobalt, 0.41% copper and 0.43% using a 0.06% cobalt cut-off grade.

Metallurgical test work has indicated the mineralisation is amenable to conventional flotation processing with more detailed results “anticipated imminently”.

Week to come

This is an interesting week because as well as the continuing tug of war between quarterly earnings and political announcements, there is a significant slate of meetings of the International Monetary Fund and World Bank in Washington.

Statistical releases will take a back seat as players including IMF Managing Director Christine Lagarde and World Bank President Jim Yong Kim face the media and also meet behind closed doors.

Here in Australia markets will be closed on Wednesday for Anzac Day and inflation numbers will be released on Tuesday but global factors look like being the biggest influence on our market.

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