War rumblings bumping up hard against rising earnings

War trade economy United States Syria China stock market earnings
WEEKLY MARKET REPORT

One of the great market tugs of war is about to happen between the continuing uncertainty of war and trade rumblings and a raft of stronger than expected March quarter company profit results.

In the past week, the potential for a trade war between China and the US eased a little as it became clearer that President Trump may not be as gung-ho as earlier believed and China made some tentative signs it might want to negotiate rather than act too quickly as well.

President Trump even made the highly unexpected move of ordering National Economic Council director Larry Kudlow and US trade representative Robert Lighthizer to re-enter negotiations to get the US back into the Trans-Pacific Partnership.

Previously Trump has poured scorn on the TPP which was largely crafted during President Obama’s rule and pulled out of genuine negotiations soon after he took office, leaving Japan, Australia, Mexico, Canada and some other smaller Pacific nations to go it alone.

Again, this US action could be more tactical than heartfelt, given that a US negotiation to re-enter the now renamed Comprehensive and Progressive Agreement for Trans-Pacific Partnership could all be about talking tough to the Chinese on trade.

Time will tell but even as the potential for a trade war dimmed, the reaction to the alleged chemical weapons attacks on civilians in Syria brought home the threat of a much more conventional war between some old superpower foes in the form of Russia and the US.

War is bad for business

Understandably the threat of some form of conflict between the Russian-backed Syrian regime of President Bashar al-Assad and the Western NATO powers threw a significant amount of cold water on world share markets.

The situation wasn’t helped by a series of tweets from President Trump which seemed to make it clear he was readying the US for rocket attacks within Syria, although the reality of holding discussions with other world leaders made the chances of a “rush of blood’’ attack seem less likely.

Whatever ends up happening – and some sort of military response from the West seems highly likely – the uncertainty of a potential attack and the possibility of a military escalation will continue to bump up the oil and gold prices and send jitters through world markets.

All of which makes the upcoming US March quarter profit reporting season one of the more interesting ones for quite some time.

Strong profits expected just as share prices have fallen

What many investors may have forgotten is that the Trump corporate tax cuts and buoyant profits are expected to deliver some significant upside at a time when US share prices have eased well-off previous highs set in January.

If current earnings expectations hold up, S&P 500 forward earnings would rise by around 7.5% between the end of March and the end of December with forward earnings also forecast to rise by 11% over 2019.

US research firm FactSet found that earnings expectations have actually been upgraded during the March quarter by 5.4%, compared with the usual earnings downgrade of around 5%.

That means US companies should report earnings around 17% higher than a year ago, which, if it eventuates, would be the best annual growth rate for seven years.

There are some other tailwinds helping profits with the modest falls in the US dollar, rising oil prices and bond yields and some excellent revenue growth helping many businesses as well.

While investors were concerned about the lofty valuation of the US market, recent falls combined with strong profit growth has brought that back a little with the price to forward earnings ratio at a not too unreasonable 16.5 times.

Aussies less confident

All of this volatility on global share markets plus falling house prices put a dent on the confidence levels of Australian households.

They’ve become more pessimistic about the outlook for their finances, dragging overall confidence levels lower in April.

While a noticeable improvement from this time a year ago, Bill Evans, chief economist at Westpac, says the encouraging lift in confidence seen in the second half of last year now appears to be stalling.

“The 10% rally we saw in the index through the second half of 2017 has stalled. Indeed, since the beginning of the year, the Index has fallen by around 2.5%,” Evans said.

Evans added the recent moderation in confidence was due to growing unease about the outlook for finances and the labour market, with unemployment expectations on the rise.

Ghost shares roil South Korea

In one of the biggest cautionary tales to be seen on world share markets for a long while, a A$132 billion stuff up at big broker Samsung Securities had some very nasty real world effects.

The broker was trying to credit its employees with a Samsung Securities dividend but somehow issued 2.83 billion “ghost” shares instead, which on paper were worth more than 30 times the company’s total market value.

Things got much worse when 16 delighted employees decided to sell their ghost shares, sparking a rout in the company’s share price, which fell 12% in a few minutes on 6 April, the biggest fall since the GFC.

The reaction since has been extraordinary with Samsung Securities coming under intense pressure for selling shares in itself that didn’t even exist and having to promise to make good losses to other shareholders who rushed to sell their shares into the market dip as well.

Angry investors have slammed regulators, the 16 employees and Samsung, which has promised to improve controls and punish its own employees who decided to trade their “ghost’’ shares.

Big pension funds have been dropping Samsung Securities and the whole concept of short selling has also come under fire, with more than 200,000 people signing a petition to the Blue House, South Korea’s presidential office, asking the government to ban such trading.

Now the Blue House must respond, although other brokers are concerned that overall confidence in the Korean share market will now take a long time to recover.

Small cap stocks this week

It’s been a case of acquisitions at dawn this week with several small cap companies acquiring other businesses or prospective resource assets in a variety of intriguing resource markets.

Cobalt, mineral sands and lithium are all in the commodity spotlight with several small caps throwing their hats in the ring to define something substantial over the coming months.

Outside of commodities, Australian technology is threatening to propel a couple of companies to commercial success in the fields of construction and distributed ledger technology — blockchain-powered cryptocurrencies for the uninitiated.

Ausmon Resources (ASX: AOA)

Ausmon Resources stepped up its game this week by bagging no less than three cobalt projects scattered across Queensland and NSW. The timing is of the essence in the current chase for high-grade battery metals such as cobalt, currently trading around US$91,000 per tonne.

This time last year, cobalt was trading at around US$55,000 per tonne (that’s close to a 65% premium) which underscores the appetite for cobalt from junior explorers such as Ausmon.

According to Ausmon, the tenements total 628 square kilometres and include the Broken Hill project in NSW, in addition to the Greenvale and Mount Tewoo projects in Queensland.

The newly-acquired projects are close to Australian Mines’ (ASX: AUZ) advanced Sconi project and Aus Tin Mining’s (ASX: ANW) Mt Cobalt deposit where high-grade cobalt has been intersected. As with all resource plays, nearology can play a significant role.

Cobalt marketability is clearly heating up in the region with Australia Mines’ Sconi project recently securing  an offtake contract for its anticipated cobalt production from one of South Korea’s largest manufacturers: SK Innovation.

Having announced it triple-project acquisition, Ausmon closed the week around 60% higher at A$0.016 per share.

Sayona Mining (ASX: SYA)

This week was all about results for Sayona Mining.

The explorer published updated estimates of its potential resource endowment at its Authier lithium project, around 45km from Val d’OR, and confirmed that its exploration team has returned thicker high-grade lithium with mineralisation “open in all directions”.

The phase three program comprised 19-holes for 2,170m, with results helping Sayona to update its resource and reserve estimates which will be incorporated into its ongoing definitive feasibility study (DFS).

The current reserve is 11.6 million tonnes grading 1.02% lithium for 102,725t of contained lithium — but widely expected to be revised upwards in the coming months.

The rate of exploration progress could deliver a JORC-compliant DFS by the end of the current quarter, with Sayona aiming to bring Authier online by late 2019 or early 2020 via a straightforward, low cost open pit mining operation.

In addition, Sayona’s pilot metallurgy program also kicked into gear this week. During batch and locked cycle testing, Sayona reported concentrate grades of 6% at metallurgical recoveries of 80%.

The triple-whammy of good news helped Sayona shares to close the week around 20% higher.

MRG Metals (ASX: MRQ)

MRG Metals made a strong move toward mineral sands commercialisation by acquiring three promising heavy mineral sands (HMS) projects in southern Mozambique, widely known as a well-endowed HMS province.

If MRG elects to continue with the acquisition, it will have secured a pipeline of fully permitted projects — MRG chairman Andrew Van Der Zwan says that its Mozambique acquisitions were the ultimate result of root and branch review of at least 70 other projects in the pursuit of a “company-making project”.

Work programs, including geophysics and infill drilling will be started as soon as approvals are received, with MRG aiming to “expediently establish a JORC resource”.

Supplementary to its mineral sands assets, MRG is on the hunt for further “strategic opportunities” in Africa and other jurisdictions across the world.

The combination of news helped MRG shares close the week almost 30% higher.

Clancy Exploration (ASX: CLY)

The dynamics for cobalt miners look good with mounting demand and tight supply driven by the lithium-ion battery sector — and renowned investor David Lenigas is leading the charge with Clancy Exploration.

Clancy has become another entrant to the cobalt arena after acquiring key cobalt licences in Morocco, adjacent to Managem Group’s world-renowned Bou Azzer cobalt mine in Morocco, which has operated since the 1930s.

During its many years in operation, more than 50 deposits have been mined across Bou Azzer which is also prospective for nickel, silver and gold.

Since it began operations, more than 100,000t of cobalt has been produced there, as well as thousands of tonnes of silver and a good amount of gold.

Atlas Iron (ASX: AGO)

A takeover was on the menu for Atlas Iron as Mineral Resources (ASX: MIN) made a play for the iron-ore junior on Monday this week.

As a primarily iron ore play, Atlas has been exposed to the ongoing volatility in the iron ore market, with continuing low prices pushing Atlas into the red to the tune of A$21 million at the end of last year.

Mineral Resources’ takeover is expected to give the combined company multiple revenue streams enabling it to fare better during various commodity price cycles.

Mineral Resources managing director Chris Ellison said securing Atlas’ assets was part of the company’s strategy to consolidate its iron ore business and ensure its 50mtpa Pilbara infrastructure was fully utilised to drive efficiencies and cut operating costs.

Fastbrick Robotics (ASX: FBR)

Fastbrick Robotics wants to merge automation, construction and 3D printing as a means of transforming the construction industry beyond all recognition.

Fastbrick claims its technology is the first stage of a revolution in human/machine collaborative digital construction, taking the benefits of fully automated machines onto the construction site.

However, as with all technological leaps, there is always the question of health and safety (as well as technical capability) to be resolved. To make its commercial dream a reality, Fastbrick is undergoing a series of test phases to put its Hadrian X robot through its proverbial paces.

The company says its Hadrian X construction robot is on track to be fully assembled by the end of June 2018, and then field-tested in an outdoor environment in building its first full-size house — a three-bedroom, two-bathroom structure, known as Build1 (a standard bungalow common to Australian property owners).

DigitalX (ASX: DCC)

The blockchain-powered cryptocurrency future is well and truly on its way, and DigitalX is seeking to book an early spot in all things “crypto”.

After sealing several deals over the past few months related to advisory services and ICOs, DigitalX is venturing into crypto asset management by launching the world’s first crypto-fund.

To supplement the brave new world of crypto-powered investments, DigitalX is also joint-venturing on launching two new websites designed to inform and educate a still perplexed general public with regards to distributed ledger technology and blockchain investments.

Watching all of it with a keen regulatory eye is ASIC, seemingly fighting the tide of entrepreneurial financiers and eager-beaver investors seeking above-average returns just when stock market returns begin to flatten.

LiveTiles (ASX: LVT)

Simplifying modern business all the way to the bank is LiveTiles.

One of Australia’s biggest tech success stories in recent years and nominated for several awards for its simplified method of helping businesses function effectively, LiveTiles reported record-breaking financial metrics for yet another quarter.

LiveTiles reported that it had achieved a total figure of A$11.2 million in revenue spread across all its products and services, offered to both small and large businesses globally.

Its most illustrious commercial achievement last quarter was its deal with N3, a sales and marketing consultancy based in the US that had signed a deal with LiveTiles to the tune of US$225,000 per month.

The company more than tripled its annualised subscription revenue, and possibly even more pertinently, hinted that some of its most novel artificial intelligence-based products had not yet been fully monetised or included in its audit estimates.

Prescient Therapeutics (ASX: PTX)

Prescient Therapeutics’ got investor’ attention this week by announcing its drug candidate, PTX-200, doubled the overall patient response rate to 50% and eradicated cancer in two patients with advanced disease, during the company’s phase 1b study.

Prescient’s early stage therapeutic PTX-200 is its leading drug candidate. It works by inhibiting the Akt tumour survival pathway, which plays a role in breast and ovarian cancer and leukaemia.

The news was significant because the doubled response rate compares very favourably to the current industry average of 25%, for patients being treated with paclitaxel alone.

The news was also significant enough for chief executive officer Steven Yatomi-Clarke to call Prescient’s achievement as its “most significant clinical milestone to date”.

Upcoming IPO

From the crop of new IPOs, investors are expecting to see cobalt-nickel explorer Galileo Mining grace the ASX next month.

Galileo Mining

Having lodged its A$15 million IPO prospectus, Galileo Mining wants to join the troop of base metals explorers vying for a commercial slice of the lithium-ion battery market.

The venture is being spearheaded by Mark Creasy, a British-born mining engineer who famously sold the Bronzewing and Jundee gold deposits in Western Australia in 1994 for A$130 million. The engineer turned venture capitalist is expected to become the company’s largest shareholder with a 31% stake in the company post-listing.

The offer is expected to open on 16 April and close on 27 April with proceeds primarily used for the further exploration of the two projects.

Post-listing, Galileo is expected to accelerate its exploration campaign across its handful of Norseman and Fraser Range projects, confirmed to host cobalt mineralisation, although it remains uncertain to what degree and how economically viable its project areas are.

Week ahead

It is a fairly quiet week ahead on the data front with the release of the Reserve Bank April board meeting on Tuesday the main event.

While interest rates remain firmly on hold, the statement will be analysed for any commentary on wages growth, inflation, share market volatility, trade protection and household consumption.

Another big focus will be on whether the Australian labour market can continue its record-breaking run of 17 monthly job gains.

The Thursday announcement will be closely watched to see if the participation rate continues to rise, taking the unemployment rate up with it as the strengthening job market attracts more people back into the workforce.

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.