The Scorecard from Friday / The Past Week Markets XJO 4,743.0 points, -10.7 points, Down 0.2% / -80.2 points, Down 1.7% DJIA 12,638.7 points, +54.6 points, Up 0.4% / +132.7 points, Up 1.1% SPX 1,340.2 points, +5.1 Points, Up 0.4% / +2.8 points, Up 0.2% NASDAQ 2,827.6, +12.8 points, Up 0.5% / -45.9 points, Down 1.6% FTSE 5,976.8 points, +56.8 points, Up 1.0% / -93.1 points, Down 1.5% DAX 7,492.3 points, +115.3 points, Up 1.6% / -22.2 points, Down 0.3% Hang Seng HSI 23,159.1 points -102.5 points, Down 0.4% / -561.7 points, Down 2.4% Nikkei 9,859.2 points -145.0 points, Down 1.5% / +9.5 points, Up 0.1% Shanghai 2,864.2 points -8.3 points, Down 0.3% / -46.9 points, Down 1.6%
AUD/USD 1.0700 +0.0079, Up 0.7% / -0.0269, Down 2.5%
Key Commodities Gold +$22.30 to $1,495.90, Up 1.5% / -$70.30, Down 4.5% Silver +$0.96 to $35.72, Up 2.8% / -$12.25, Down 25.5% Oil USD -$1.74 to $98.06, Down 1.7% / -$15.67, Down 13.8% Copper USD -$0.012/lb to $3.967, Down 0.3% / -$0.223, Down 5.3%
Market Direction XJO: If the weakness in commodity markets continues then it is likely that our market will have further to fall, with a target around 4,500 based on a measured move. Given the relatively weak economic data which came out of the US last week, this scenario appears more likely than not. Of major concern in the US were the low number of jobs created during the past month and the unexpected increase in the unemployment rate from 8.8% to 9.0%. The unemployment claims numbers have also been rising in recent weeks, which is another sign that the US recovery has failed to extend to the labour market. The US ISM Non-Manufacturing PMI index (measuring the services industry) came in at a much weaker level than expected indicating that the services industry is not creating additional jobs. A double dip recession is still on the cards in the US.
US Dollar The USD bounced on very high volume last week as commodity prices plummeted on concerns over global economic growth. The high volume was of significance and could mean that the current move has momentum behind it. I would not be surprised to see the USD heading higher in the short term however, as mentioned last week, if QE3 eventuates then I expect weakness to return as the total supply of US dollars in circulation increases significantly again. I believe that the US Federal Reserve will have little option but to buy more government bonds (implementing QE3) and therefore maintain my view that the US dollar is headed much lower over the medium to long term.
Market Direction DJIA: The DJIA re-entered the trading channel last week. Having reviewed my trend lines this week I can see an upward sloping wedge formation on the chart. If economic data continues to deteriorate then I would expect the index to break out of through the bottom of the wedge with significantly lower levels likely. In the immediate future I would expect a test of the lower trend line at around 12,450 points is possible with both the slow stochastic and the MACD indicators showing that further weakness in the days ahead is likely.
Economic Data: Global trade will be a focus this week with the US, China and Australia due to release trade figures. Economists will also be looking to the retail sales data and consumer confidence readings out of the US as a sign of whether the economic recovery is faltering. A close eye is also likely to be kept on the weekly unemployment claims number to be released on Thursday night due to the sharp increases experienced over recent weeks.
Company Reporting Season: Two DOW companies will report this week; Walt Disney Co and Cisco Systems. Earnings season is also in full swing for Japan this week with many global names reporting in Tokyo.
Monday: Incitec Pivot Ltd, Lonmin PLC, Sumitomo Corp, Toshiba Corp, Tower Group Inc Tuesday: CSR PLC, Mitsubishi Corp, NEC Corp, Seiko Holdings Corp, Suziki Motor Corp, Teac Corp, Walt Disney Co, Westfield Group Wednesday: Carlsberg AS, Cisco Systems Inc, Hitachi Ltd, J Sainsbury PLC, Macy's Inc, Nikon Corp, Nissan Motor Co Ltd, Olympus Corp, Singapore Telecommunications Ltd, Toyota Motor Corp, Yamaha Motor Company Ltd Thursday: Allianz SE, Daiwa Industries Ltd, Fujico Co Ltd, Nvidia Corp, Samsung Heavy Industries Co Ltd, Sanyo Industries Ltd, Seiko Corp, Singapore Airlines Ltd Friday: Bridgestone Corp, Janome Sewing Co Ltd
Stocks To Watch
In what was a testing week for small caps EGO, the only stock in my list, returned -7.7% for the week.
African Energy Resources Ltd: AFR The company's initial inferred JORC coal resource at the Sese Project is now overdue and should be released any time. There seemed to be a greater level of interest in AFR during the latter part of last week so I expect the announcement to come soon. There is still some uncertainty due to the government's decision in March to review the development strategy for the countries coal assets however it is important to note that all of the company's granted prospecting licences remain unaffected, including that on which Sese is located. News Due: The initial inferred JORC resource at the company's Sese Coal Project in Botswana. Price Target: The Bollinger Bands continue to tighten and signal agreement on the value of the company however this rarely lasts for extended periods of time. Given the previously announced positive drilling results and that the initial Sese JORC resource is due I lean towards a breakout to the upside. The first target is at 87 cents. Beyond this there is resistance at $0.96 and $1.00 then blue sky. Disclosure: No Stock Held
Altura Mining Limited: AJM/AJMOA The gap between the underlying value of AJM shares and the arket price continues to widen. As mentioned in previous weekly updates, the company has an impressive suite of projects including 30% of the Mt Webber Iron Ore project (currently being drilled) which I have valued at $200m on a DCF basis. Altura's JV partner, Atlas Iron Limited, has been managing a drilling program since early March with the objective of upgrading the JORC category of the current DSO resources with a large proportion expected to be converted to indicated and measured status. Diamond drilling is also being undertaken for metallurgical studies, bulk density measurements and geotechnical data. Results are now overdue. The value of the Mt Webber project is calculated by me at $0.44 per AJM share (fully diluted) based on DCF modeling using a discount rate of 10%.
The MD has recently been up in Indonesia recently most likely trying to get final permitting approvals for the development of the company's Tabalong Coal Project in Indonesia (DCF valuation of $37m or $0.08 per share). It is also known that AJM is trying to secure new coal projects in Indonesia.
Cash reserves were at $10.9m at the end of March 2011 quarter which was lower than I expected. The AJMOA options have the potential to bring in another $19.5m by September. Clearly the company is well funded to undertake aggressive exploration programs at its projects. The funds from the exercise of the options could potentially be used to fund a portion of the company's share of development costs for the Mt Webber project assuming Atlas don't attempt to buy out the entire project by offering an up front payment to Altura. News Due: Receipt of final permits giving the company the go ahead to develop the Tabalong Coal Project in Indonesia. News on the acquisition of new coal projects in Indonesia and the Philippines. Drilling results from the Mt Webber DSO project. Further RC drilling results from the Pilgangoora Lithium Project including those from adjacent area which form part of the extended ground acquired from Shaw River Resources and Atlas Iron Limited. Updated development schedule for the Mt Webber DSO project which currently has a start up target of 2012. Price Target: There ar many levels of resistance between 15.0 and 18.5 cents. A break of 18.5 cents would probably see 20 cents tested again. Disclosure: Holding AJM
Empire Oil & Gas NL: EGO EGO remains on my list this week however there is nothing fundamentally different to what I wrote last week except a cheaper entry price. The update provided by the company the week before last included the identification of a new target called the Wannamal Prospect. It has the potential for 64BCF plus condensate in two separate zones. The target is adjacent to the Gingin West and Red Gully discovery wells. Significantly the target structure is a tilted fault, a structure which has never been mapped before in the Gingin area and this explains the presence of oil and gas in the previously drilled Gingin 1, Gingin 2, Bootine 1 and Eclipse 1 wells. The company noted that this type of structure is the style of most oil and gas discoveries in the North Perth Basin. Analysis of the 3D seismic data appears to have upgraded the prospectiyity of the EP 389 for further significant discoveries. News Due: Further details of development plans for the Perth Basin field including the GinginWest-1 and Red Gully-1 wells and the construction of a new gas plant (including funding). Detailed plans to drill a new well to evaluate the Wannamal Prospect, with a potential target of 64BCF of gas plus condensate. Price Target: If the price breaks 3 cents on volume I would expect 3.5 cents to be achieved in the short term. If further selling pressure comes then there is the possibility that the price could test the next support level at 1.8 cents. At that price the market capitalisation would be around $80m. Given the quality of the asset in its Perth Basin EP389 joint venture I think there would be little downside at that price. Disclosure: Holding EGO
Southern Cross Goldfields Ltd: SXG Southern Cross Goldfields already has significant gold resources of 436,000 ounces defined at its portfolio of projects located in the Southern Cross / Marvel Loch Area of WA. The EV of about $20 per ounce is low compared to its peers so there should be plenty of upside in the future especially if the current drilling program continues to grow the resource and the current feasibility study shows a profitable mining operation can be developed. The last program of infill drilling at Dolly Pot and Dugite resulted in some great intersections including 25m @ 3.3g/t Au from 23m and 11m @ 4.6g/t Au from 4m (an updated resource estimate is still awaited). With grades like these and being so close to the surface, the company expects production costs to be in the range of $750-$800 per ounce. A feasibility study is in progress (to be completed during the September Quarter of 2011) to evaluate the development of a 400,000 tonnes per annum processing facility at Marda which would produce around 30,000 ounces per year from 2012 for an initial period of three years plus potential for another two years from existing inferred resources. The initial production would be supported from reserves which are located on granted mining leases which the company owns. News Due: Updated mineral resource estimates for the Dolly Pot and Dugite deposits. Drilling results from the Golden Orb deposit which currently contains 71,000oz of gold. Price Target: There are multiple resistance levels between the current price of 6.9 cents and 8.5 cents however the stock has a spiked to prices above 10 cents three times since early February so much higher prices are possible on announcements with good news. Disclosure: Holding SXG
