Stock market continues to perform in 2018, as reporting season takes hold

In Australia, January is generally a time in which businesses slowly return to normal after holidays and markets take a bit of a break from the frenetic pace of trading.

This year wasn’t quite like that with some very healthy gains mixed up with some days of intense volatility, mostly courtesy of some very choppy trading in the United States.

An unusual start to the year can be a harbinger of things to come and as we discussed last week, volatility in share markets, bonds and currencies seems to be in the forecast for 2018 according to some key indicators and some well-known investors and pundits.

Time for companies to stand up and be counted

This week as we move deeper into February the tone should change quite quickly, with the company reporting season hitting high gear.

That means the hazy picture of forecasts and analyst guesstimates is finally replaced by the cold hard facts of corporate performance, accompanied by a detailed look at how the company sees the rest of the year unfolding.

Reporting season is a vital time for all share market investors, not just because it shines a light through company accounts but also for the tone it sets for the whole market and the dividends it provides back to investors.

Dividends and results can drive markets higher – or lower

If investors are feeling particularly bullish, many of those fat dividends will get ploughed back into the market to buy more shares, so the effect is very real.

Take this coming Wednesday’s report from Commonwealth Bank and Thursday’s by NAB.

As two of the big four banks, their juicy dividends will put many billions of dollars into the pockets of investors and super funds and where they put that money is of vital importance in setting a market direction.

For example, will it be into smaller cap stocks, big cap stocks or straight into cash?

Of course, company financials will be of interest for more than just dividends.

Commonwealth Bank is struggling at the moment after its latest money laundering scandal cost current chief executive Ian Narev his job, with this being his last reporting hurrah as chief executive before handing over to insider Matt Comyn on April 9.

Operationally, Commonwealth seems to be running very well, despite the distractions of the Banking Royal Commission and the money laundering scandal but until we see the numbers it is hard to know exactly how well.

With potentially very hefty fines for the past Austrac violations in prospect, investors will be weighing up whether Commonwealth continues to deserve a market pricing premium over the other large banks – a premium that has already been reduced by the scandal.

Similarly NAB’s result will provide an interesting contrast given that the smaller Melbourne based bank is arguably further down the road to improving its internal culture under chief executive Andrew Thorburn.

Of course they are not the only companies reporting results this week – watch out for Rio Tinto on Wednesday, AGL Energy, big fund manager AMP, Mirvac and Tabcorp on Thursday and Skycity Entertainment on Friday – along with many others.

Taken together, the results being released over the next few weeks will either support our rising market if companies outshine forecasts or tend to drag the market back down to earth if they disappoint investors.

Inflation still weak

Similarly last week’s relatively weak inflation numbers – which came despite higher petrol and fresh food prices – tend to suggest that there are no interest rate rises coming soon for Australia.

That is unlike the situation in the United States where their Federal Reserve is confident inflation is finally firming and that their increasingly confident economy can absorb a series of small interest rate rises.

Reserve Bank pointers will be closely watched

That provides an interesting backdrop for this Tuesday’s decision on official interest rates by our Reserve Bank board.

Let’s be clear, nobody is expecting a surprise rise in interest rates out of this meeting.

But what will be closely watched is the statement and eventually the minutes from the meeting, a speech on Thursday by Governor Philip Lowe and the quarterly report on monetary policy which is due on Friday.

All will be exhaustively analysed to see if Australia will follow the US glide path a little further down the track or whether the board believes inflation will remain low for the foreseeable future in Australia, marking a continuation of the steady as she goes approach to our current official cash rate of 1.5 per cent.

Democratic Republic of Congo dramatically raises cobalt taxes

One issue that is sure to lead to plenty of market action this week is the immediate raising of cobalt and general mining taxes in the Democratic Republic of Congo.

While higher taxes had been expected, the extent and immediacy of rises on not only cobalt but potentially a range of other minerals mined in the DRC is almost certain to boost the prices of companies with alternative supplies.

Under the new regime the new taxes will not have a ten year exemption for current miners in the country, in what is a huge blow for mines and projects run by Glencore, Randgold Resources, China Molybdenum, Eurasian Resources Group, MMG and Ivanhoe Mines.

They will immediately be subjected to higher royalties on metals including copper, cobalt and gold, as well as a new 50 per cent tax on so-called super profits.

Super profits are defined as income earned when commodity prices rise 25 per cent above levels included in a project’s bankable-feasibility study – which would at the very least include copper and cobalt.

The new code also permits the DRC to raise the royalty on cobalt to 10 per cent from 2 per cent if the government categorizes the mineral as a “strategic substance.”

Cobalt is one of the hottest commodities in the world at the moment due to the boom in demand from electric vehicles and a potential supply shortage, with around 60 per cent of world supply coming from the DRC as a by-product of nickel and copper mining.

The DRC has now tightened its grip on that vital cobalt supply as Glencore restarts its Katanga mine, ERG’s $1 billion RTR operation comes on stream later this year and Nzuri Copper’s advanced Kalongwe project enters production.

The news will be a strong positive for many Australian and other companies developing alternative cobalt supplies amid perceptions of political instability and uncertainty in the DRC.

ASX small cap stocks this week

With reporting season in gear it’s no surprise that many small cap companies reported zero to little revenues.

Many of these companies are based on future earning projections or potential.

That’s not to say there isn’t any stocks in the small cap and micro cap space making money, there certainly is.

Now, let’s take a closer look at some of the companies worth noting from this week.

Knosys (ASX: KNO)

One of the top performers this week was information management enabler Knosys, who locked in a $6.1 million deal with Singapore Telecommunications (Singtel) and its Australian subsidiary Singtel Optus for the deployment of Knosys’ knowledge management platform, KnowledgeIQ.

KnowledgeIQ is an enterprise-grade digital platform that uses artificial intelligence to enable companies to find, manage and deliver personalised information to staff and customers to transform productivity and engagement.

Prior to the Singtel announcement shares in KNO were trading at $0.055, and closed this week at a high of $0.18, after having reached a high of $0.24.

Intiger Group (ASX: IAM)

Financial planner enabler Intiger Group has struck three independent agreements with financial planning licensees which are all subsidiaries of the Commonwealth Bank of Australia (ASX: CBA).

The deal means Intiger’s services will now be trialled and potentially used on a recurring basis once due diligence has been completed by the licensees (Commonwealth Financial Planning, Financial Wisdom and Count Financial).

It is yet unclear as to how much revenue will be generated from the agreements, however being linked to a big four bank is certainly going to boost Intiger’s credibility and could mean its services are used on a much wider scale and attract a larger addressable audience.

iCandy Interactive (ASX: ICI) and Animoca Brands (ASX: AB1)

Fans of MasterChef will soon be able to download a blockchain-powered mobile game of the widely popular TV reality series.

iCandy Interactive, Animoca Brands and NITRO Interactive will team together in making the app which will include key features of cryptocurrency and blockchain integration.

A specific date for the app’s release has yet to be set.

The news comes a week after Animoca announced it will be the exclusive distributor in China of the first major blockchain-based game, CryptoKitties.

Poseidon Nickel (ASX: POS)

In anticipation of the rising nickel price, Poseidon Nickel has secured all regulatory approvals to restart its high-grade Silver Swan nickel sulphide mine in Western Australia, while kicking-off an integrated restart study for the mine and its nearby Black Swan processing plant.

An earlier definitive feasibility study into resuming operations at the 9% nickel Silver Swan underground mine revealed a potentially quick restart opportunity that posed minimal risk with low operating and capital costs.

The definitive feasibility study indicated a restart capital cost of A$25 million and revenue of A$120.7 million over two years, based on a nickel price of US$6.50 per pound.

Poseidon reported it was also in discussions with potential offtake partners for the ore from Silver Swan.

King River Copper (ASX: KRC)

Hydrometallurgical testwork on King River Copper’s Central deposit at Speewah has continued to improve purity in its vanadium pentoxide and titanium dioxide products, with a titanium dioxide product assaying 99.5% and further optimisation studies continuing.

TSW Analytical is undertaking hydrothermal and chemical precipitation testwork to set a framework for a scoping study into commercially producing vanadium electrolyte products for vanadium flow batteries.

Testwork to date has produced vanadium pentoxide grading 99.5% and titanium dioxide up to 99.5% – a substantial improvement on initial recoveries which were 99.1% vanadium and 85% titanium.

The Central deposit alone has a resource estimate of 520mt grading 0.36% vanadium, 2% titanium and 14.8% iron, and according to King River, Speewah hosts the largest titanomagnetite vanadium resource in Australia.

Vivid Technology (ASX: VIV)

Flying under the radar until recently was Vivid Technology, which reported strong sales for the quarter of $4.8 million, with current cash at hand of $3.9 million.

Vivid installs and operates energy efficient lighting technology solutions for companies through multi-year service agreements.

Notches on the belt of Vivid are a number bluechip clients including Coca-Cola Amatil, Woolworths, Stockland, Linfox and Dulux.

With Vivid’s technology seemingly validated by such well regarded names, the tech company is poised to continue its growth in 2018.

American Patriot Oil & Gas (ASX: AOW)

American Patriot is close to finalising a flurry of recent deals that are expected to generate annual revenue of more than US$10 million, according to its second quarter results.

The company announced several new acquisitions over the last quarter (ended 31 December 2017), which have collectively added 500 barrels of oil equivalent per day to its production profile and, based on current market prices of US$65 per barrel, is expected to generate about US$95 million in revenue over a period of time.

American Patriot also achieved maiden production and booked first cash flows from its recently acquired Anasazi assets in South Texas, with net income during the quarter coming in at A$56,146.

Botanix Pharmaceuticals (ASX: BOT)

Dermatology company Botanix, announced this week that its synthetic cannabidiol-based BTX 1503 acne treatment has performed better than leading topically applied acne products in reducing acne lesions during a four-week trial.

Data from the phase 1b study revealed topical application of BTX 1503 had demonstrated an excellent safety profile and reduced the number of papules and pustules acne lesions, as well as white heads and black heads during four weeks’ treatment.

Botanix plans to begin a phase 2 study for BTX 1503 in the June quarter after it secures FDA and pre-investigational new drug approvals.

The phase 2 study will include about 400 subjects across Australia and the US.

The week ahead

Other than the RBA decision on Tuesday and a rash of company profit results, there are some interesting statistics release this week.

Retail sales for December which includes the vital Christmas shopping season are released on Tuesday and it would not be a surprise to see some share price reactions from some of the listed retailers, including Myer and JB Hi Fi.

There are also releases on job advertisements, new car sales and international trade.

Offshore there are a lot of international trade and economic releases out of China and the US, which will feed into the overall market action.