What Mattered Today; Nickel stocks crank up – banks lag

James Gerrish

A better day for stocks with the market higher throughout the session – not to the extent that we saw in the US overnight where the Dow Jones rallied by +669pts plus we’ve seen FUTURES up another +103pts during our session, but a reasonable bounce non-the-less. The banks were the disappointing sector again today trading a long way below their morning highs, simply seems there is a smell about them at the moment that is hard to shake. Not often the US market rallies ~3% with Financials one of the strongest sectors and we see both ANZ and NAB finish in the red – As one trader said to me on Bloomberg today - if only banks could grow a pair!

Most attention was focussed on other areas today with the Nickel stocks rallying hard on a combination of broker upgrades and positive commentary around future Nickel demand – Independence Group (IGO) added +5.42% and Western Areas (WSA) added an impressive 9.3% - more on these stocks below. Elsewhere, Fortescue came under some slight pressure (-0.65%) after downgrading their Iron Ore price expectations while Oz Minerals (OZL) announced they would buy Avanco (AVB), a Brazillian facing Gold and Copper company for around $400m – which is a ~120% premium to AVB’s average price leading into the bid – nice for them!

Overall, the market opened higher as you’d expect with continued support from US and Asian markets throughout the day – the ASX 200 adding +42pts or +0.72% to settle at 5832 - the close over 5830 is encouraging.

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Broker Upgrades; This got some stocks rocking & rolling today with two stocks we own in the sites of analysts - Macquarie upgraded ORE to outperform and $6.80 target while UBS upgraded IFL to a buy and $11.50 target – two stocks we own in the Platinum Portfolio. IFL was interesting given the day prior it was the biggest mover in terms of growth in short interest. Those shorts would have hurt this morning with the stock up ~5% however it seems more pressure was applied late in the day with the stock only closing +2.41% higher on 3 x times the usual volume. This is a polarising stock with Bells extremely negative on it, while others are more upbeat – clearly some volume wanting to push this one down. IOOF (IFL) Chart

We’re liking our positon in ORE just a few days after acquiring it, with the stock pushing up through $6.00 today, before closing at $5.99. We own from $5.79 after switching out of Kidman (KDR) last week.

Orocobre (ORE) Chart

JP Morgan put a note out on the Lithium Sector saying…. ORE, GXY & KDR preferred exposures: The ASX lithium stocks have largely recovered from recent oversupply concerns, with most stocks within 3% of their prior trading levels and KDR the outperformer at +14%. Given recent share price strength and weaker than expected DSO volumes, we downgrade MIN to Neutral (NPV 5% lower at A$19.50/sh). Our preferred stocks are ORE (0.77x P/NPV, strong realised pricing expected this half), KDR (0.83x P/NPV, recent resource upgrade, studies to come in 2018) and GXY (0.85x P/NPV, Mt. Cattlin recovery enhancements. (source; JP Morgan)

Independence Group (IGO) 4.86 / +5.42%; Morgan Stanley increased their PT today to $4.45 a share today while Macquarie upgrade WSA target to $4.00 however it was comments by IGO at the Goldman Sachs Battery Day Conference which put a rocket under both WSA + IGO today. In short, Nickel is in global deficit now while demand will accelerate substantially as electric vehicles make up c30% of global car sales by 2040 + the changing chemistry in electric vehicle batteries towards those with higher Nickel (& less Cobalt) content will amplify the demand for Nickel even further. Clearly this is a huge global change and this space will have structural tailwinds for many years ahead.

Independence Group (IGO) Chart

Fortescue Metals (FMG) $4.58 / -0.65%; Out today and has cut its full-year price guidance for Iron Ore as steel mills in China continue to pay a premium for higher-grade ores. They now say they will get 70 to 75% of the benchmark which compares with a 75 to 80% forecast given in July. This shouldn’t come as a total surprise with the company alluding to as much in recent briefings saying it was ‘trending that way’. Below a quick look at the current price discounts FMG is experiencing which are big. Owning FMG means we think these are cyclical challenges while if you believe Rio, they reckon these are more structural in nature (both are talking their own book!!).

Fortescue Metals (FMG) Chart

Oz Minerals (OZL) $9.10 / +1.11%; An interesting move from Oz to buy Avanco (AVB) for such a big premium however they have plenty of cash, it doesn’t stretch their balance sheet even with the development of Carapateena and you’ve got to back management given their recent (strong) track record. Stock looks good here…

Oz Minerals Chart

Have a great night

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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