Triple C Consulting Pty Ltd (AFSL 346282) is a boutique, full service Stockbroking Firm with a strong and established presence in both the Resources and Technology sectors. Triple C provides clients with a niche service covering both Retail and Wholesale along with Corporate clients. We believe in ethical and honest investing with long term wealth creation the primary objective for our clients.
Red River Road Show Last week Red River (RVR) came through Perth on a two day road show to brokers and funds. The story was well received and zinc is most definitely the commodity investors are chasing for 2015. As indicated in the chart below, the LME stockpiles have been falling steadily from around October 2012. With inventory levels now below 680,000t and still dropping, the price is starting to react. The Zinc price has been one of the best performing commodities this year and it’s only set to continue next year. The major catalyst of MMG’s Century zinc mine shutting next year should see prices increase significantly. While a rising zinc price helps all zinc producers, the lack of available zinc-producing companies on the ASX makes it a hard choice for investors. Like any boom in a commodity there will be an influx of young hopefuls as the prices run and their projects become viable. When there is money available, then companies tend to pop up. Red River on the other hand managed to buy their zinc asset at great prices. For $5m and $1.5m deferred for an existing plan with exceptional infrastructure, they are already years ahead of other hopefuls. Given that the closure of Century is happening next year and the cycle will last 3-4 years, then only producers will really see the benefits. Here is a chart showing the LME Warehouse and the price reaction of Zinc during the last boom in the zinc price and the forecasts for 2015-20. Medibank IPO
Now looking at this ‘risk off’ mentality and the Medibank IPO, a few interesting points can be raised. Firstly, it is the common knowledge of most financial industry professionals that Medibank has great potential to provide a stag profit as the demand overflow translates into strong buying day one. Also, the way it has been priced means that many domestic institutions have not got an allocation and will also need to buy stock on market once it has listed. Looking at capital flows, the amount of money ($4 - $5bn) that is going into the Medibank IPO has also been ‘ missing ’ from the markets as investors set aside capital for the IPO. While this works out to be only 1 to 2 days of standard trading volume on the ASX, it is still a significant amount, and even more so psychologically. Should the Medibank IPO perform well, then a large portion of this money could potentially flow back into the markets and likely into more ‘riskier’ assets. Markets are driven by people and their psychology, when investors or traders make money, they tend to take a bit more risk on the next trade and should this ha ppen then it’s possible that small cap stocks will also see some buying come back post the Medibank IPO, potentially kick-starting a Christmas rally. Medibank will be listing on the 25 th of November. Free Trade Agreement – China With over $100bn worth of exports and $49bn of imports, China is Australia’s biggest trading partner. Australia is now looking at a free trade agreement (FTA) with China, which would directly stimulate our agriculture Sector. New Zealand saw over 400% growth in their agricultural exports when they signed their FTA with China, so it’s clear that investors are beginning to also get excited about an agreement being inked. While current listed agricultural stocks are limited in choice, it’s likely that a deal of this significance could see a lot more IPO’s in the agriculture space. As more money can be made from farming, it will attract more capital and investment. While farming will likely see gains, there will be many businesses that will enjoy the benefits of a FTA being signed. As mentioned last week, E Cargo is listing on the ASX and is a Chinese focused company that helps Western companies sell goods into China. This could become a theme for investors to follow as many companies are likely to experience increased sales and improvements to their bottom line as the tariffs are lifted. Bega is one company that has been looking to expand into Asia and could benefit from the FTA as it becomes cheaper and easier to export dairy into China. Chart: Bega Cheese Weekly
E-Cargo offers services required to develop a marketing strategy, create a website, online store, launch their products and manage their inventories as orders are processed and fulfilled. They can provide support and distribution end to end in a market that many western business do not understand. For example Myer (who is a client of E Cargo) wish to start selling more products in China. They engaged E Cargo to help them set up their online stores in China, market and then distribute their products. For this service, E Cargo charges a fee for set up and will also earn a percentage on the total volume of goods sold. In terms of Tier 1 clients like Myer, E Cargo can earn revenues in excess of $1m per month. Source: E Cargo (Partners of CS Logistics, Ticks are E Cargo Clients also). E Cargo has been formed by John Lau, who is very well known wit h some of the World’s leading retailers through his other business CS Logistics. Mr Lau is responsible for founding and building the largest privately owned integrated logistics services provider and freight forwarder in China and Hong Kong. CS Logistics have over 6000 staff and operates in over 150 countries. Mr Lau then saw an opportunity in the market as many Western companies wanted to enter China, but did not have the expertise or technical knowhow to enter this foreign market. With his contacts and experience from CS Logistics, he has already attracted some particularly credible and reputable names into E Cargo. Rupert Myer of the Myer Family is just one of these and has invested $5m into the business as well as becoming a non-executive director. E-Cargo are currently looking at raising between $30-$40m and will be listing on the ASX on the 27 th of November. These funds will be used to expand their existing business, mostly in China to capitalise on this growing opportunity in the E-Commerce sector. E Cargo have already signed tier 1 clients including brands such as Myer, Esprit and Jeans West to name a few. While these are some big name clients, it is only the tip of the iceberg. For example, Esprit achieves over $EUR500m in online sales in Europe but only $15m in Asia… giv en the organic growth alone of Chinese E-Commerce it might not be long until sales in China begin to surpass their other online markets. Through Mr Lau’s CS Logistics business which services over 100 tier one companies, there will be no shortage of existing business contacts who potentially will be signing onto E cargo’s platform. An interesting comparable is when Ebay first launched, there was some amazing opportunities that arose. One business which was bought by Ebay in 2011 for $2.4 billion was GSI Commerce (Now Ebay Enterprise www.ebayenterprise.com ) which had a similar business model to E Cargo, helping companies to set up and distribute their products online. At the time, shopping online was new to many companies and very difficult to execute. Many businesses knew they should be online but weren’t sure how
With investor participation at extremely low levels, the very public and high profile IPO of Medibank could be what lures retail investors back into the markets. With investors still extremely cautious and seeking ‘yield plays’ or stocks with dividends , they appear to still be averse to risk, but this could be about to change. With Australian property stalling and interest rates at record lows, there are not many places investors can turn other than the stock market. With Medibank bringing back the retail investors in droves, it might not be long before the volumes start to pick up and the markets move even higher. While we don’t know if a bell has been rung yet, there is a good chance that this landmark IPO could be the start of the next Bull Run for the markets as the GFC shy investors begin to dip their toes back into the financial markets! Remember, the long term trend for the markets is up and after the consolidation period, it is now back into a period of what appears sustainable growth albeit with a few bumps along the way.
This is why making a plan (Fail to plan- Plan to Fail) is so important for markets, while the ‘daily’ charts look volatile , sit back and consider the weekly, it looks much more bullish than bearish. Remember the long term outlook for equities is very favourable, with low interest rates, a slowing property market, and an ageing population with a lot of wealth in cash and self- managed super funds. Red River Update This week Red River raised $3.6m from sophisticated investors at 18c per share. After a recent roadshow that was very well received by investors it was clear that there is an appetite for zinc. Given that the Century Zinc mine closes next year, the Zinc market has the potential to really develop some real excitement and with the ASX having few quality zinc stocks to pick from, Red River could become a market darling. When the Century mine does indeed close next year there is going to be a sizeable deficit in the zinc market and along with some other mine closures (due to running out of ore), prices are set to rise. Some big names such as Glencore and Wood Mackenzie have all been increasing their zinc price forecasts in anticipation of this deficit. Below
The weekly chart also indicating the support zone has now been tested. Setting buy zones is important to have clarity with your investment decisions and now the market is testing these zones the plan is to start re-deploying some capital into the market. While the charts do indicate the initial support zone, they haven’t ‘confirmed’ a turn higher. Waiting for a higher swing bottom would give more certainty of a trend change and something the more conservative investors might wait for. This being said, it’s important to also understand the fundamentals behind the market and why not to lose faith. People buy shares because they want to get a return higher than the cash rate or money they have in the bank. They take on risk to get a higher return and are essentially buying into the future of that company. It is similar with investing in property, where people look to get a return on their capital higher than the risk free rate. So why shares over property? Well the hit reality TV Show
As explained by the Ex-Kagara geologist on site, these VHMS deposits generally are in clusters within a belt formation. Therefore there is potential for more of these to be uncovered. Looking at the presentation there was one target that was particularly interesting, which was Waterloo. As indicated on this below cross section there is significant potential to the East of the deposit, but no exploration was undertaken here by Kagara. Being only 35km as the crow flies from the Thalanga mill this could significantly extend the mine life of the operation should the deposit continue down to the East, to what depth is the question? One of the many other interesting points is that no exploration has been conducted below 500m in depth which again is very exciting given that some of the largest zinc mines in the world have their highest grades below 500m. While this was being discussed it was hard not to think about Northern Star which when they started drilling deeper, pulled up huge gold hits with many over 1000g/t. While the exploration is exciting, it’s the production that’s going to bring in the dollars and West 45 is the obvious first target. Kagara managed to cut the decline down to the ore body and even mined a few thousand tonnes from the deposit before shutting down the operation. West 45 will need to be de-watered prior to the commencing production. This is another deposit that has not had exploration done at depth. After learning about the exploration potential of the site and some history of Kagara it was time to look around the plant. The plant as you can see from the picture below was impressive. While it’s been around a while , the refurbishments and the $34m Kagara spent on it were clearly evident. The below photo is taken from the ROM pad where the ore is piled before being
AUD/USD As you can see from the AUD chart above, it’s been a one way trend lower. For the XJO, 5100 is a strong support area where investors are likely to start buying back into the ASX 200 shares. One other concern when looking at the US market is that with QE coming to an end, there is potential for a meaningful correction. Times are changing and the FED-fuelled rally appears to be coming to an end. One thing that is certain is that volatility is going to increase, and it appears more likely to be to the downside.
What is happening now is that investors are seeing the potential for US rates to increase so borrowing costs increase. Now they can essentially get more return if they invest in the US bonds as they will pay higher interest. These foreign investors then sell their Australian investments and move the money back over to USD before the currency drops and they erode their capital gains…in effect actually making the currency fall itself as they sell AUD to buy USD. The thing about the carry trade is it generally involves huge sums of money and can take weeks or even months to unwind. Think about how long and sustained the rise in Australian yield stocks has been and the rise of the AUD. Many of these stocks have seen massive capital gains, as well as paying huge dividends which generally doesn’t add up. A c ompany paying out profits and forfeiting growth opportunities generally won’t see huge capital appreciation on the share price. With the currency now starting to fall, the US potentially lifting interest rates and the Asian/Australian economy looking sluggish, there is going to be a huge unwind of this carry trade. Investors holding cash at the moment will hopefully be able to take advantage of some bargains should the market fall back to around the 5000 point level. Australian domestic manufacturers, USD focused earners and exporters should see profits increase as they begin to get more bang for their dollar as the AUD keeps falling. Looking at the XJO it’s possible that this market drops back to around 5100 points which would be a great buying opportunity for investors. XJO Weekly