Author: Alison Sammes

China And Steel Impact On Australia Mining Sector #87

by Alison Sammes

Key Points

  • China steel output makes new record levels of 1034bntpa
  • China economic data still robust
  • Iron ore prices to rise further
  • Coking coal prices heading higher
  • India to increase iron ore imports
  • MENA DRI operations requiring magnetite are soaring
  • ASX iron ore producers printing money`
  • BHP ,RIO and FMG heading much higher
  • @DawesPoints Global BoomTM on track

Call me to participate:
bdawes@mpsecurities.com.au
+61 2 9222 9111


The achievement of over 1,000mtpa in crude steel production in China in April 2019 is truly remarkable and may be even higher in Dec Half 2019. This is not a sign of a declining economy in China.

China is by far the world’s largest consumer of raw materials and steel is the most important non-energy commodity for China.  It consumes almost 50% of global steel.

Steel is so important across the economy so that whatever happens for steel consumption will just as surely be repeated in aluminium and copper as well as many other commodities where China consumes even more than 50%.

Steel itself is universal and gives a clear indication of activity in every sector within an economy.

The monthly World Steel Association crude steel production figures are one of the best near-real time indicators of economic activity.  These World Steel Association figures show the underlying strength of the economy in China and also show the economic strength of other parts of the world.

Obviously the current US-China Trade War will have some impact if it is not soon resolved but because China faces west and not east it is far more concerned with its own economy and those of Asia, Africa and Europe.

But with steel the figures are current and some of these numbers from other parts of the world might surprise you as will be shown a bit later.

The economy in China has continued to grow such that it is currently around US$14tn and 90tn Yuan RMB and despite all the perpetual bearish talk the economy has continued to expand.

The key point is that whilst the growth rate itself is slowing the China economy is adding around US$1tn each year.

Note this idiosyncratic table that shows GDP in US$ falling with a weaker Yuan.   

The US$ has been firm so the Yuan RMB has weakened against these other currencies over the past five years.

The key drivers in China are of course a liberalisation of the Communist State that has allowed rapid expansion of commerce of all kinds and also the urbanisation such that since 2000 over 350m people have been added to city life and now cities now make up 60% of the population.

China has a population of around 1420m growing at 5mpa with a demographic problem arising from the One Child policy that is likely to see a population decline from around 2032 as China’s aged cohort peaks.

Another key factor is the remarkable growth in Personal Disposable Incomthat continues to exceed GDP growth reflecting the entry of about 20m people each year into paid workforce rather than on subsistence farming in many parts of China. These people experience a sharp boost in their own incomes and so it affects the averages.  The self employed and the entrepreneurs are also adding to this growth rate.

This is particularly important factor as the Middle Classes in China as they move to housing, cars, appliances and better food. The appetite is voracious and inexorable at present.

The savings rate is still very high at >40% and vast hoards of cash are still reported to exist.

It is also noteworthy that wealthy Chinese (and most SE Asian) businesses have just two asset classes for investment – the business (including property) and cash.

Consequently the economic expansion drive remains strong.

Anecdotally, the driving forces of property (location, location, location) together with the dramatic urbanisation has produced very large rises in true property value and rental incomes that can readily support the high property debt load.

And I see no sign of any significant slowdown that could turn to a downturn although the momentum has clearly slowed. Nevertheless, overall investment in construction is still rising.

With this level of construction it is to be expected that demand for steel will be firm.

It is notable that demand for steel reinforcing bar is at robust new highs.

Source: China Steel Industry Network

The MPS steel rate of change indicator is providing another turning point.  The 12 month moving average is ~5% higher than a year ago and the six month rate of change is turning up again.

Crude steel output should be even higher in the Dec Half.

It has been clear that domestic iron ore production in China has seen a dramatic decline of around 50% from highs in 2014 as the iron ore price fell.  Almost all iron ore production in China is magnetite ore and requires crushing and grinding beneficiation to produce the saleable 65-70% magnetite concentrate so it is a high cost source of iron units and mines closed accordingly.  Ore grades had been declining over the past 5-8 years down to around 15% but with closure of some very low grade mines the average has begun to rise again.

Source: China Steel Industry Network

With rise in crude steel production and the decline in local iron ore production the level of imports rose strongly and Australia is the most important supplier.

Source: China Steel Industry Network

Port stockpiles in China had risen in 2017/18but began to turn down so with the loss of around 40mtpa of Brazillian output the market saw over 20mt cut from stockpiles in just two months.  Clearly this was more strong demand than declining Brazillian supply when viewed against the massive 1034mtpa monthly crude steel production in April.

No wonder the iron ore price has been rising.

But as indicated above, it is not just China.

India has become the second largest producer of crude steel with output now around 110mtpa with and has passed Japan.

Importantly, India has produced this steel from its own mines.  Also India uses magnetite concentrates for use in the production of Direct Reduced Iron (DRI) and Hot Briquetted Iron (HBI) for about 30% of its crude steel production in processes that are using gas as the reductant rather than the blast furnace route with coking coal. 

The demand however is outstripping existing mines and bureaucracy issues over mining titles is likely to limit near term expansion.  India is now an importer.

India would like to be producing 300mtpa of crude steel by 2030 so the jump from 110mt will be 190m crude steel requiring about 300mtpa of iron ore.  Probably 60% of this will need to be imported.

Where will it come from?

So with India needing more iron ore and Sth Korea still growing and Vietnam accelerating rapidly from a small start to a current 18mtpa the market for iron ore must remain tight.

And in addition to Vietnam we have other strong growth in MENA where again most production is as magnetite concentrate fed DRI products that use very low cost local gas and these are fed into electric arc furnaces (EAFs) that use low cost electricity from low cost gas for steel making.

Source: World Steel Association

So it becomes no small wonder that the iron ore price is strong.

It is clearly a demand issue not supply driven.

The iron ore price completed a text book A-B-C correction with that 5 wave C completing a Wave 2 into the 2016 low and this enabled Dawes Points to then call for new highs to come in iron ore prices.  That outlook is still on track. 

Iron ore prices are heading up and so are those for coking coal.

Source: China Steel Industry Network

So let’s now look at the Shanghai stock indices to see how the market views China.

Looks robust to me holding that 27 year uptrend and the recent 30% jump into 2019.

And I do like this relative performance chart vs the S&P500.

And while we are at it lets look at India’s Nifty 50 Index.

And also the Nifty against S&P 500:-

Capital is flowing to these `emerging markets’.

So the ASX Metals and Mining Index looks robust.

As do BHP

RIO,

 and FMG

The chart formations for these companies suggest VERY MUCH higher prices are coming for these stocks.

The Dawes Points Global Boom is firmly on track.

Don’t delay.

Call me to participate.

Barry Dawes BSc F AusIMM MSAFAA

Executive Chairman
Martin Place Securities

I own many of the stocks mentioned in this report.

+61 2 9222 9111
bdawes@mpsecurities.com.au

10 June 2019

Bulls, Bears & Brokers: Barry Dawes from Martin Place Securities joins the lineup

by Alison Sammes

https://www.proactiveinvestors.com.au/companies/stocktube/11743/bulls-bears--brokers-barry-dawes-from-martin-place-securities-joins-the-lineup-11743.html

Barry Dawes, geologist and founder & executive chairman of Martin Place Securities, joins Proactive's Danielle Doporto as the newest contributor on the Bulls, Bears & Brokers lineup. Dawes emphasises that he is a bull, outlining areas of opportunity he sees for 2019 with a particular focus on Australian gold. 

Watch our full video interview for all of Dawes Points.

Gold is now poised to rise #76

by Alison Sammes

Key Points

  • Australian Gold Sector leading global reflation
  • ASX XGD Gold Index pushed through 5000 and breaks 2011 downtrend
  • A$ Gold Price at ~ A$1750 also breaking 2011 downtrend
  • Australian gold production reaching new record in 2018 >310tonnes
  • Australian gold resources rising
  • Exploration and development increasing
  • Gold sector earnings rising
  • A Corporate M&A rush likely to unfold
  • Global macro outlook outstanding for gold
  • Large cap golds well ahead of minnows – time for catch up
The past few years in gold have been fascinating for those who can take a longer term perspective beyond the weekly and daily gyrations in the markets and see that the time has come for gold to reassert itself in the market place and for the value in gold mining and exploration companies to become better recognised. The key longer term undercurrents come down to supply & demand and for gold, with that unique position of having all its historic output of around 180,000 tonnes still available, it is the what and the wheres of gold inventory transfers that are most important. The price itself of gold may be an important driver in stock valuations in this sector with movements due to US$, interest rates and wars etc but to me the most important matter is the transfer from the West of most of newly mined gold and freely tradeable gold bullion inventory to the East being India and China predominantly but with Turkey, Russia and the Middle East also as key gold purchasers A time will come, and soon I expect, when the rundown of the this freely tradeable physical gold in the West will actually be felt.  The tightness in gold will become unprecedented. Looking at the overall market place it is clear that the gold bull market thesis has not yet been embraced as indicated from the generally weak performances of gold equities around the world and in particular in North America. The important Philadelphia Gold Index (XAU) bottomed in early 2016, had a rapid 6 month 200% surge and has spent the last 18 months causing emotional stress to the bulls and nothing clear for the bears.  The TSXV has been a Blockchain and Cannabis sorry story where small resources have been all but ignored. That is also obvious from the broader ASX gold sector because many quality gold stocks are still quite friendless and the ASX XGD Gold Index has also been going sideways for over a year. But that is not quite the reality. The A$ gold price and a rejuvenating Australian gold industry have generated some outstanding returns from Australia’s geotechnical entrepreneurs. This graphic shows the strength of the Australian Gold Mining Industry over the past five years with my unweighted index of ten Australian gold producers (ex Newcrest) with operations in Australia. This index made its low in June 2013 and is almost 500% higher today. In contrast the ASX All Ordinaries Gold Index didn’t make its low until November 2014 and is up ~200% from that time but it is just 150% from June 2013. This graphic presents a wholly different view of gold sector in Australia. The Terrific Ten have been wonderful with earnings and dividends flowing and are a great credit to the Australian mining industry. These figures on growing cashflows and cost reductions from Evolution are typical of the results from NST, RRL and SBM so far. Evolution Mining Ltd operating results FY2013-18 But the ASX XGD only looks like this. Importantly however, the 2011 downtrend has now been broken and the 5000 level has been breached again in this latest surge. This should lead to a rapid move in the XGD and is likely to be leading the US$ gold price higher. These Australian gold producers have been leading the whole global economic recovery since their lows in June 2013. From these contrasting graphics, the ASX XGD has failed abysmally in providing a proper picture of the true state of the Australian Gold Mining industry. A gold index undiluted by pointless inclusion of foreign companies with no Australia assets would be a start. The underperformance of Newcrest over this period, particularly since early 2015 has held back the Index but it has been the woeful makeup of this index. The index has simply not reflected the remarkable gains made by the likes of NST, EVN, SBM, RRL, GOR and SAR. The numbers look like this
Low + from 2013 + from 2014 low
MPS Terrific Ten stocks(ex NCM) Jun 2013 498% +390%
Eight dom-based with OS assets Nov -49% -13%
ASX XGD Gold Index (25 stocks) Nov 2014 +149% +205%
The Australian gold industry has been severely handicapped by this Index. But looking at this performance it is the Australian mining industry at its best.  Entrepreneurial geotechnicians who have found new deposits, reopened old mines, revitalised existing operations and earned cashflows that have built excellent balance sheets and rewarded shareholders. And done it quickly and efficiently. WA has been the leader with the services and infrastructure well in place. The reinvigoration of Kalgoorlie, Leonora and now the Yandal-Wiluna Belt is providing excitement. Western Yilgarn from Boddington and Katanning and out East to Gold Road’s Yamarna Belt are also providing new resources and new output. Kalgoorlie has had the Big Pit, Kanowna Belle and the Zuleika Shear and NST and EVN are key players in this reinvigoration. NST has two milling hubs to treat ores from all around the Kalgoorlie region. Leonora has the most impressive Gwalia Mine. And now with the rejuvenation of Jundee, reopening of Wiluna, action at Bronzewing and new management for Darlot, this Northern Yilgarn Wiluna-Yandal region can only get more exciting. The net effect of this has been a remarkable recovery in WA gold production, producing around 70% of Australian output, such that a new quarterly record is likely to be set in 2018 and 2018 exceeding the previous high of 312t in 1997. It is ironic that WA did not really participate in that US$250 to US1032/oz rally in 2008 as its output plummeted 48% over that decade but the recovery is well underway.  The sharp increase in Australia’s gold output in Mar Qtr 2018 to 317tpa is a promise of more to come in 2018 and 2019. This Dept of Industry graphic provides a useful summary of the distribution of the Australian gold industry and outside of WA. The rising A$ gold price has also stimulated exploration and discoveries, brownfields and also some greenfields and we can expect more discoveries over the next few years.  We are seeing the opportunities and the results now on a daily basis. Despite these strongly upbeat numbers we have a true dichotomy of the likes of the Teriffic Ten and a few hundred smaller companies that are still doing it tough. This graphic contrasts the Terrific Ten with 15 smaller stocks closely followed by Dawes Points. Clients have strict orders (wisely) not to sell any NST EVN SBM RRL etc but the pressure of the difficulties some of the smaller stocks are facing purely because there is insufficient capital committed to the sector and trading liquidity is still low. The market has clearly not yet embraced the big gold bull market thesis here in Australia. The excitement over 2015-16 was strong for all types of gold stocks but since the highs in July 2016 the dichotomy has been strongly pronounced. The reluctance of fund managers, financial planners and investors in Australia to embrace the now very obvious Dawes Points Global Boom TM and invest in Australian Resources Stocks has meant that this has been a much delayed bull market but much delayed markets have a habit of catching up quickly and running for much longer. The picture for Dawes Points has been very clear for some years and it is all unfolding as suggested although the time table for the general resources market has been longer than anticipated.  This has been unfortunate for traders in the markets but those with an investment approach these past few years in the better quality gold stocks have been outstanding. Coming back to ASX XGD Gold Index while we can be critical that its 25 stocks is unrepresentative of the Australian gold industry it still is a published index and can be interpreted accordingly. The ratio of the Gold Index to A$gold is probably meaningless overall but it does seem to have some meaning to the marketplace because it has provided support and resistance over the past 16 years or so. < The market happily played 4, 5 and 6 times the A$ gold price previously. The numbers for the ASX XGD Gold Index become:
A$ Gold Price 3X 4X 5X 6X
A$1750 5,250 (now); 7,000 8,750 10,500
A$2000 6,000 8,000 10,000 12,000
Interesting thoughts. Keep in mind that over 2000-2008 the earnings of the Australian gold stocks would have been almost non existent.  Most of the action was in Africa and Sth America and with loads of overseas stocks listed on ASX for……(?) what reason? Gold itself in A$ is creeping up and has also breached the 2011 downtrend line and A$2000 is quite realistic target. Gold in a number of currencies is also above their respective 2011 downtrend lines so the the move in all currencies can’t be far away now. Gold Sector turnover as a share of total ASX All Ords turnover is still a respectable >3% and likely to move higher along with the better A$gold price. To better appreciate the overall mood of the current market place it can be seen that only a handful of gold stocks are up in 2018 with the Terrific Ten figuring prominently. The average is only 7.5% whilst the XGD did 4.3%. The past four quarters have been very tough for most of these stocks. Amongst 53 other stocks monitored by Dawes Points, less than 40% were higher in 2018 and the average was -14%. There was a lot of volatility in these stocks over the past four quarters but few were through true operational disappointments and most were trading liquidity issues. A lot of gold resources have been discovered or delineated by dozens of these companies. How many will become like the Terrific Ten?  With the Australian mining sector entrepreneurial spirit there will be many winners here and given the strong difference in market ratings of the big stocks and these it is certain that M&A activity can only increase.

The Macro Scene for Gold

The Dawes Points official view is that demand from China and India et al is tightening up the gold market to an extent that physical gold will be relatively difficult to come by in the West. This drive for gold comes from rising living standards amongst 1400m people in China, 1300 m in India and another 600-800m in ASEAN and the like. The rising living standards are also driving economic activity and the attractive economies and equity markets are reducing the need for capital safe refuge in US TBonds. The conclusion is that long term gold prices will be much higher and probably driven by a tight squeeze on available gold. Gold in US$ is hopefully completing the very last stages of its basing and reversal from the decline from the US$1923 in September 2011 and the next move up that passes through US$1370-80 should produce a powerful surge. The long term shows the rapid and powerful from the 2000 lows around US$250 to US$1923 in September 2011.   Completion of the 6-7 year pullback and resumption of the bull market gives very high technical targets. Bond prices and yields need to normalise to properly reflect a true market and so higher bond yields are necessary to match risk and it is likely that bond prices will continue to fall for years yet with occasional bear market rallies. Total Global Public Sector debt is US$61trillion in this World Data graphic and growing. The issue is complicated and exacerbated by the whole debt matter of bond issuance by governments to fund current social spending. Current refuge capital parked in these bonds is likely to leave for better opportunities as the bonds mature. Who will buy the new issues?  Pension funds will still have a growing need for income to match obligations and central banks will buy the rest.  But even US$2-3tn leaving and going to property, equities, commodities and gold will send up prices here. This graphic is disturbing for Europe.  France has 30% of GDP as spending as public social spending. Its total budget is now 52% of GDP. As interest rates rise, so will government budget interest payments. Note this yield for the US 1 year Note:- The last maturity schedule for the US Treasury bond portfolio that I have seen was 2016 and the overwhelming majority of the portfolio was less than 7 years.  Very little had locked in the low 20 and 30 years rates when they were well under 3%. Most of the portfolio was taking advantage of the low short term funding rates. This is likely to have been a dangerous gamble as these yields rise and new bonds need to be issued at higher yields and coupon costs. Let’s say US$1tn of theUS$21tn was for 1 year bonds. In mid 2015 this 1 year rate was 0.4% so the interest bill was US$4bn. Today, that 1 Year money will cost US$22bn. At 5% it is US$50bn. Across US$21tn of mostly short maturities a 2% interest rate rise is US$400bn.  Good bye Budget. In Europe and Japan where yields have been lower than in the US and bond maturities generally shorter then the impact will be greater on budget interest expense outlays. So this issuance of bonds will need to accelerate and so bond prices will continue to fall – for many years yet – as supply increases. Some swamp draining will be required but it is probably already too late. The rise in rates at the longer end of the bond maturities will just continue and at a faster rate than at the short end. While this is all happening we are finally seeing an expansion in the velocity of circulation of money as the banks increase their lending of all their previously hoarded QE funds into a booming economy. The impact on the economy will be positive and the Trump tax cuts, capital repatriation and technological revolutions will be inflationary. The banking sector is now outperforming the S&P500 so there is not yet concern about failing banks here. And so when we see strong housing in the US as the MIllennials finally make that housing commitment and that 6 million dwelling shortage becomes really visible, the result is clearly inflationary demand for housing and housing raw materials and furnishings and appliances etc. At this stage individuals and funds everywhere will be looking to buy gold. Will they find it? May be in China or India.  Or perhaps not. This combination is likely to lead to much higher gold (and silver) prices than you had imagined. Do you have enough of the Terrific Ten or those ridiculously cheap minnows? Call me to discuss +61 2 9222 9111 Barry Dawes BSc FAusIMM (CP) MSAAF I own many stocks mentioned in this report. 7 May 2018 bdawes@mpsecutities.com.au +61 2 9222 9111 I own or manage in portfolios I control: NST EVN SBM NCM GOR DCN PNR CLY WGX

2018 Outlook – And it is only just starting #74

by Alison Sammes

Key Points

  • Brilliant year ahead for resources
  • Bond market peaking creates critical watershed
  • Global inflationary pressures building
  • Economic Boom broadening
  • Equity markets now playing catch up
  • Gold and silver now ready for major move
  • Resources commodities iron ore, copper and aluminium strong
  • Oil and gas (+LNG) rising as energy bull market resuming
  • Big caps wonderfully cheap
  • Mid caps proving production and earnings paths
  • Small and micro caps provide numerous opportunities
  • Small cap oil and gas stocks outstanding
  • Expect lots of M&A across the resources sector
  • Key stocks BHP.ASX RIO.ASX FMG.ASX WPL.ASX NST.ASX NCM.ASX SBM.ASX PSA.ASX LNG.ASX OSH.ASX
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111 The Dawes Points Global Boom™ is now in its fourth year and has been accompanied by robust GDP growth in Asia and US and now Europe and Japan are fully fledged members of this expanding club. Also, China has just announced an uptick in growth in Dec Qtr 2017 to 6.9% annualized. Equity markets around the world have been showing enthusiasm and, quite frankly, rational exuberance as earnings growth accelerates and as new projects are being unveiled daily everywhere.Global trade is expanding again with major drivers in transportation, housing, construction and technology.  The list is ever-widening. The 3000-4000 Dow points surge called in early Sept provided 3000pts by end Dec and 4000 on 12 January and 4500 by 23 January. So much more coming over the next decade. The top of the channel has been hit by the Dow 30 so it will probably need some consolidation before moving higher. Other individual stocks have only just broken through their top channels so more upside is still coming and the US Banking sector is not overbought and still well below previous highs. The Australian market has been playing catch up but the Resources Sector is giving it underlying strength and will propel it higher in 2018. Commodities are looking strong and resources equities are starting to take off with gold now likely to move sharply higher after breaking the 2011 downtrend and providing enough retests, good bye kisses and fake-outs to deserve to go higher now. Gold has gained US$100 since early December and now has US$1350-70 as the major resistance. Pullbacks and consolidation may be expected but it just may be more powerful. Oil is in its next channel and should achieve US$80 (WTIC) and US$86 (Brent) in 2018. Demand side drivers, especially China where consumption is expected to surge again, are reducing the inventory position and supply side issues like no growth in Non-OPEC output and flagging US tight oil output. Iron ore will surely provide the U$100/tonne target set by Dawes Points early last year. Resource sector stocks large and small are having a wonderful start to 2018 and can be expected to provide a magic year. Keep the buy and hold mentality close to your nose. Fortunes are made by being patient, not by furious trading. This graphic is showing the long term trends and is notable how well BHP did from 2000 to 2008 when the S&P500 went nowhere.  BHP out performed the S&P500 over 12 years, has had a correction and is now moving on to outperform for another decade. RIO is a few months ahead of BHP but BHP should get a benefit from the rising oil price and should catch up. Again, keep in mind the time frames involved here. At least a Decade. Not a few months. Long term Dawes Points readers might recall the early 2016 discussion anticipating the `bifurcation' in markets with the bond markets, the bureaucrats, the public sector, snout in the trough politicians and the media heading for trouble while the backers of industry, raw materials, Asia and gold were heading in another direction. This bifurcation has been clearly underway. And in three dimensions.We are moving upwards in a new direction. They are stumbling down an old and treacherous path. Dawes Points continues to focus on the Flow of Funds concept for markets. 

Follow the money.

The vast amount of capital tied up in bonds and also in cash has been tied up with the left bifurcation and, in anticipation of the demise of this defensive sector, is now flowing out. And flowing to the Resources Sector and tangible assets and infrastructure. (Did you note recent ECB comments that its policy settings were for continuing downturn. Now inappropriate. The boom is happening there as well. Some clearly worried EU bureaucrats.) China has indicated an acceleration in GDP growth with 6.9% recorded for the Dec Qtr. The equity market is going to respond positively to that in 2018. As with China, the other emerging economies are also performing and receiving strong capital inflow. Some repatriation of safe haven capital and some is new investment.

Emerging Markets surging after nine years of consolidation.

The outlook is powerfully positive. These long term trends are so useful and inspiring. Take the bond markets. This is for US Ten Year T Notes. Almost 80 years of history in a single market and asset. Long term trends. Generational and hence easily ignored by each generation. Here, from 1946 to Sept Qtr 1981. 35 years of rising bond yields. Then until Sept Qtr 2016, 35 years of declining bond yields. Another 30+years of rising bond yields is now in train. Bond yields and bond prices get a bit complicated when the coupon ( ie the income component of a bond) differs from the actual prevailing interest rate environment and bond yields. The price of a bond itself is also complicated but the overall price is declining and a big fall is imminent. This is the 30 Year Tbond and you have seen the 10 Year has already fallen sharply. The 10 Year Price Index will include 30 year bonds from 1997 when rates were 7% and 20 Year bonds from 2007 when rates were 5%. These would now be trading at a premium to their issue price but are now falling back to par value as maturity comes closer. Before we go on, note how equity markets are rising as bond yields head higher. Now look at the yield on 30 Year T Bond. A major compression feature ahead of a strong surge in yields to probably 3.25% and then targets to 3.75%. Nothing much in 0.5%-1.0% in interest rates rises but it will have a major impact on bond yields and a significant decline in bond prices at a time of low coupons. Note that yield on 10 Year T Bonds have already jumped. Likewise for 3 years and all along the yield curve. Note that weaker TBonds are not necessarily a call for a weak US$. The DXY US$ Index is very narrow with just six components and is terrible given it is 57% Euro, 13.6% Yen and 11.9% Sterling, 9.1% Canadian $, 4.2% Swedish Krona and 3.6% Swiss Franc. The CNY and A$ don't figure in this index. This US$ Index may be ready to weaken. Or may strengthen. But look at this broader US$ Index. Doesn't look so bad at all. Note that the US$ is very strong against currencies of many smaller nations.  The proverbial s**tholes are still weak currency states. Also note how gold is rising with higher interest rates. And with equities. No Fear Trade here. Can you imagine the current anguish of those believing that rising interest rates will make markets in stocks, commodities and property fall.  Imagine their short positions in all these markets over the past year. Ouch. I have called this global boom for almost four years now so have given it a trademark -  The Dawes Points Global Boom™. I hope you agree that this is a fair assessment of things. The Wave Pattern graphic below was first presented on 1 December 2008 at Mines and Money London that happened to coincide with the major 2008 lows in commodities, resources stocks and most things China. The major equity markets kept falling until early March 2009 but the earlier upturns here in resources with gold leading gave strong confidence for the future of world economy despite the extreme pessimism at that time. The previous 8-10 years had been a good bull market but as long term readers would know, there was little participation by institutional investors and very little public retail interest. It was an excellent Bull Market that few believed in and hence the Disbelief leg. The Subprime/Lehman Bros debacle in 2007/08 created that sharp Pessimism leg that was the GFC. The Hope rally was encouraging with gold running to US$1923 in September 2011 however the resources rally petered out earlier in 2011 leading into the Despair leg that gave us an 80% fall in most gold sector indices into the lows of late 2014 in Australia and late 2015 elsewhere.

MPS Dawes Points Wave Pattern

The key issues to focus on here are the time cover of these trends.  Ten years Disbelief. Five to seven years of Pessimism/Despair. Now we have at least 10 more years of Optimism. This pattern can be clearly seen in the resources sector indices and in commodities. The big driver is GDP growth. Underestimated and disbelieved by so many commentators. GDP growth (and Industrial Production growth) is good for commodities and growth in China is the best growth.And it is accelerating again. Commodities have been priced for recession and resources companies have cut back on exploration and new capacity development. Particularly in energy. The CRB Index has a heavy weighting in energy so this should be very strong over the next few years. The shorter term is providing evidence for a sharp move soon. Commodities were covered in more detail in Dawes Points #73 2017 Year in Review but the 2018 Outlook is still the same. Record consumption demand still flowing through, restocking of inventory required, limited major new capacity coming on stream and, well, just no inventory. Higher prices are inevitable and the outlook still suggests the supply/demand imbalance will be with us for several years. Higher prices are just inevitable. The producers of resources commodities are generating very robust cash flows on balance sheets that are now quite favorable. The big commodities iron ore, copper and oil are really helping the bigger stocks. All are moving higher. So is aluminum with its 63mtpa and rapidly growing consumption level. The big stocks still appear to be very cheap and here BHP is on its way to test the previous high A$50 (US ADRs US$75) and perhaps this year. Just repeating targets from 2016. RIO is looking strong too. Aluminium, iron ore and copper here will send RIO up to US$75 and up 150% to my target from 2016 (100% from early 2017). Here is a link to my 16 Jan 2018 CNBC Asia interview on RIO. https://www.cnbc.com/id/15840232/?video=3000686687&play=1 FMG is here too. Brilliant company with debt reduced and strong cash flow despite the discount for low Fe iron ore.

Energy Outlook

Energy is having its own resurgence thanks to robust demand and to supply side concerns. Inventories have fallen considerably. Source: HFI Research Oil consumption is likely to hit 100mmbopd in the Sept Qr of 2018. That is 36bnbbl pa. The largest oil field in the US was Prudhoe Bay at 16bnbbls recoverable. Australia's largest was Kingfish at just over 1bnbbl. Oil will remain tight for many years yet. Energy consumption is all about Non-OECD countries increasing their energy consumption while OECD has been flat due to stagnant economies and energy efficiencies. OECD is growing too now! BP does it differently with some more detail but the picture is growth in China and India and in lots of `other'. It is also useful to note the relative sizes of each source. Fossil fuels aren't going away anywhere soon! MPS Energy Consumption by Fuel Type Energy will be covered in more detail in the near future but the basic position is quite clear. Energy is the lifeblood of all economies. Demand is rising and LNG is already assuming an important role again in Asian energy imports. WPL looks quite exciting. And also Oilsearch. These larger companies need to be part of every portfolio. The Oil and Gas Sector on ASX is quite unloved and doesn't even get a sniff of an index.  This MPS index of 11 small explorers/producers shows a lag between oil prices and stock prices. These stocks are down 80% from an arbitrary 1 Jan 2007 basis and almost 90% against the oil price so should provide outstanding returns to astute investors. The market for many of these companies is the East Coast of Australia where decades of government and bureaucratic bungling and pandering to half baked ideals of special interest groups have put the entire well being of 80% of the nation at risk. Shortages can be overcome by increasing supply. So simple. Talk to me about them.

Gold Outlook

Gold continues to be looking positive and an appropriate switch is underway from T Bonds into gold as part of the great bifurcation. Which safe haven would you prefer? Gold itself is readying for another test of US$1350-1370 before launching a more powerful upmove. This may still take another three to six months to break through. Or maybe the coming week! Gold in A$ has travelled sideways for three years now but it has bounced off the long term uptrend and is still heading toward a A$2000 target within the next year or so. Gold stocks in North America have been trading constructively but have been net flat in 2017. The largest global gold stocks have had to unwind a lot of debt after some expensive new projects and mergers but improved cashflows and better balance sheets are making these stocks quite attractive again. In Australia the ASX XGD is leading the world resources industry, as it did from Dec 2014. The short term trend of gold stocks vs Gold is calling for a resolution soon. A similar wedging is apparent for these gold stocks against the S&P 500. Together these graphics suggest a VERY strong outperformance by gold stocks. And gold and gold stocks are important in the direction of the A$. Look at this long term correlation. Within all this the A$ looks very robust. The very long term is bringing about a change. To make A$ holders wealthier.

Summary

It is very clear that The Dawes Points Global Boom™ is well underway and the trends are coming into place that will last for quite some years. The broader resources sector has some excellent performances in 2017 and should continue into 2018 and beyond. This graphic of the ASX 300 Resources is at a critical juncture and a solid break above 4400 (now 4174) will unleash some massive buying that will take all these indices to new highs within two years. ASX S&P 300 Resources  2004- 2018 Equity markets around the world are acting as the barometers of improving economic prosperity in the years ahead as the vast savings in cash and bonds are redirected into equities, property and commodities. The markets have been indicating all this for these past four years and the markets have often been at odds with the commentators. Dawes Points has held true through all of this and we are looking at further outstanding returns to our portfolios. The year ahead will provide even better returns for resources sector investors starting with the major companies with strong revenues, balance sheets, earnings and dividends. The mid cap sectors will also perform well and should be at the forefront of M&A activity. The hundreds of small to micro caps offer outstanding value if you know how and where to look. These will also be the targets of the M&A and once mid caps are comfortable with their own cashflows they will be looking for growth opportunities. Talk to me if you want to participate. Barry DawesBSc F AusIMM (CP) MSAFAA +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #74 25 January 2018 I own BHP, WPL, FMG, NST, OSH, PSA, LNG

Gold now ready for stronger 2018 #72

by Alison Sammes

Key Points

  • Six year correction in gold almost over
  • Move through US$1300 and higher anticipated in early 2018
  • Weakness in US bonds suggests further sharp falls ahead
  • Technical internal market strength in gold highlighted
  • ASX Gold Index close to 4900 and heading for 8500
  • A$ gold price holding near $1700
  • Australian gold industry really performing
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
The 2000-2011 first leg of the unfolding Dawes Points ~40 year bull market in gold brought a maximum US$1643 (575% and 19.7%pa) gain to gold and was followed by a four year correction of US900/oz (46%) in the 2011-2015 decline. The longer 2011-2017 downtrend was broken in August 2017 with the move to US$1354 and subsequent retesting and backing and filling has provided the technical support for gold to now move strongly higher.  This has been a furiously fought battle in the futures markets that has taken around 56 months so far to be resolved. Price surges and sharp selloffs have characterised this period. This graphic shows the tightness within this US$200/oz trading band.   Tight markets like these tend to be eventually resolved violently and the demand/supply equation is shouting tightness and higher prices to come. The drivers in gold from Dawes Points perspective are unchanged. It is simply Demand and Supply. China and India providing most of the demand with the notable addition of recent strong figures from Turkey and Germany. Rising equity markets are reflecting strong economies in the Dawes Points Global Boom and growing wealth that just needs to have more gold bars and jewellery. The flow of gold from West to East is just One Way Traffic.  Nothing is coming back the other way. Import figures of a combined almost 4000 tonnes to India and China is being met by 2800 tonnes (3200 tonnes globally less China's own ~400 tonnes mine production) mine supply and about 1500 tonnes recycled global scrap. Inventory of Gold in the West is declining. A shortage is coming. Shortages in commodities bring about short squeezes. Big shortages with short positions thrown in bring about big prices. The battleground has been set so let's review the evidence. First of all we have the global bond markets turning down because current yields simply do not compensate for the risk on sovereign debt.  All interest rates need to rise. The yield on a US 10 Year T Bond is moving higher again.  The 2007-2016 Downtrend has been broken and yields have retreated to test and retest with good bye kisses and are now moving higher. The picture is better shown through the price index of 10 year T Bonds.  These bonds peaked in price in 2012 and have just broken sharply lower as expected. The picture on bonds is horrific.  A vast concentration of global capital (~US$100trillion) in a safe haven sector but now at a time of global economic boom and at yields that are unattractive against equities (especially dividend paying resource stocks and in particular ASX Gold producers) and very unattractive against the quality of the issuers ( read politicians). A very overcrowded trade that is now being unwound. The 10 year bond peaked in 2012 but the 30 year T Bond peaked in 2016 and now has so much further to fall. There are inflationary pressures building globally as well.

Gold in the short term

Action on gold here looks text book.  Downtrend broken, first Good bye Kiss, surge, retesting, short term uptrend tested, consolidation.  Then it should soon move higher. The three year view shows the breaking of the 2011 downtrend and consolidation. The medium term shows the importance on the 2011 downtrend and the break in trend and also the important resistance around US$1360. The Long Term is looking just brilliant. Some things here are absolutely noteworthy for comment:- Every investor has a memory of the 2008 financial crisis with the initial surge in oil, gold and other commodities and the subsequent downdraft in all such prices.  The rally out of the lows brought strong moves by gold (and silver and copper, tin and iron ore) into 2011 but most other commodities including oil only managed half hearted moves before it all came down into the Dec 2015 lows. The 2007/08 highs were the end of the first leg in the commodities boom.  But Dawes Points again notes the important internal and relative strength of gold (and silver and copper and tin and ironore) to make new highs. This interpretation clarifies many previous unresolved questions.  The true peak of commodities was in 2008 but the remarkable rise of gold into 2011 showed outstanding internal strength.  The correction in the Wave 2 low of 1064 in Dec 2015 held above the US$1032 high in 2008. This internal strength gives us a powerful bull market in gold.

Gold stocks

North American Gold stocks give the global market picture with the short term XAU looking constructive after 18 months of extreme volatility. Gold stocks globally are now in far better positions with most debt repaid, earnings normalised and dividends resumed.  But are still underowned with the relative strength against stocks still poor and also against gold itself. Nth American Gold stocks against US$ gold still shows underperfomance but this relationship is compressing and `wedging' so that resolution to the upside should be very soon. Market sentiment is very poor and indicating strong potential buying power. For Australia, the ASX All Ords Gold Index (28 stocks) is building constructively and 4900 has been challenged.   A breach will see a rapid move to 5500 on its way to test the 2011 highs of 8499.  Soon. For Dawes Points that is by Sept Qtr 2018. The Australian gold stocks have been leading the world resources sector.  Leading economic recovery, leading reflation and leading inflation. Australian listed domestic producers have really outperformed the index itself. Coming into the Christmas Season and the end of the year selling should subside and the market will start to anticipate restructuring of portfolios and indices for early 2018. Dawes Points considers 2018 should be very strong throughout the resources sector with the gold stocks being amongst the leaders again. The Pilbara Gold Conglomerates provided some intriguing new perspectives on gold in Australia with considerable sums being committed to the first substantial exploration in the vast region. Results to date have been encouraging but so far inadequate to confirm the hypothesis. I had the honour of visiting the Novo Resources/Artemis JV at Purdy's Reward last month and was very impressed with the potential but sampling methodology for these conglomerates remains a hurdle to yet overcome. The bigger picture is truly fascinating and will discuss this further in the New Year. I wish all readers a wonderful Christmas Season and for a prosperous 2018. Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #72 22 December 2017

Yet more news on Small Resources Companies #71

by Alison Sammes

Key Points

  • Most global equity markets making new highs
  • Bond market about to have a sharp fall this quarter
  • Commodity prices looking very robust
  • Resources stocks returning to rightful prominence on ASX
  • MPS Portfolios well positioned for this coming uplift
The acceleration of the US equity market has brought renewed enthusiasm to almost all equity markets and the local All Ords finally broke through 5800 after a long consolidation. This has all been flagged for the past few months but the important initial upthrust has now taken place. The next few weeks should see some serious short covering and a strong move in all these equity markets that will take the resources sector to new highs in a surprisingly short time. The resources sector has seen the battery raw materials sector (lithium, graphite, cobalt and nickel) provide good gains amongst the leaders but the mood is spreading to companies with assets in industrial metals, mineral sands, rare earths, iron ore and petroleum. Note that uranium is stirring again. Much more to come here. Gold is moving upwards with some zigging and zagging but all seems well with much better times coming again in 2018. I still expect to see new highs in the XGD (ie doubling) by third qtr 2018. The limited funds in the market at this stage are seeing some switching out of gold into some of these other sectors but this should be only temporary. The Pilbara gold conglomerates story can only get better as results come through later this quarter. The concept is exploding across the Pilbara and the `me too' players are out in force so we need to be careful but also watchful because the area in the Fortsecue Basin is very large.  If the concept proves correct this is potentially the world's second largest concentration of gold after the 160,000t Witwatersrand in Sth Africa. No closed minds allowed here. Of course this will boost activity in the gold sector but there might not be many players in the actual ASX XGD Gold Index in the near term.  However, should Novo Resources be listed here and Kirkland Lake most certainly will then it will impact the XGD in 2018. It is certainly pleasing to see the Dow Jones Industrial Average perform so well as this shorter term graphic was suggesting. I cannot recall seeing this feature of a market pushing against an upper channel line like this but it certainly was telling something. The move should accelerate. The Super Bears didn't notice this action so it looks like October will pass without a crash and the 30th anniversary of the 1987 Crash was just a celebration. But accelerating into the next channel is worth noticing because these channel changes have a habit of alternating and displaying quite the opposite character to that of the previous channel. Over eight years trading within a congested 4000 pt range could just give way to a very sharp and free upmove. The DJIA has already added 1550pts since early Sept and accelerating into the next channel should give us another 2500pts by year end. Will it do this? I think so. Australia has finally woken from its torpor and should pass through 6000 this week on its way to above 7500. The character of these markets and these clear trends shown in the indices are reflecting the underlying economies and they all indicate another extended period of prosperity for at least another ten years. Leading economies around the world are just having a great time yet appear to not be over extended and changes to taxation rates in the US just cannot hurt. USA, Europe, China, India, Japan. All in synchronised economic expansion. Of course these equity market moves are not occurring in isolation. The key principle of investing is the flow of capital. This time it is flows of capital from cash and bonds into equities and commodities. Cash has been highlighted previously and there is certainly a lot on the sidelines. Capital into equities, and particularly into new equity (IPOs, rights issues and other capital raisings), funds capex and new jobs. The Fear Thesis has kept hundreds of billions of capital in cash and near cash. No wonder the Australian economy has been so sluggish. A surging stock market should now have a major impact on the local economy and keep in mind that a strong resources sector helps bring in foreign portfolio investment. Investment that buys shares from locals and increases local money circulation. The so-called Mining Boom of 2010-14 was really restricted to the major stocks owned by the large pension funds so individuals saw very little of those benefits. It will be very different now. The flow of capital should be from the US$100tn that was tied up in the bond markets. That is now coming out as bonds are sold or just not rolled over by those just seeking safe refuge for capital rather than long term income. The bonds are weakening and seem to finally be ready for the next leg down. Note that this is happening just as equity markets are surging! So much for `rising interest rates send stocks lower'! And also note that higher interest rates are pushing up US banking stocks which are outperforming the S&P500 after 14 years of underperformance.  Again, so much for `rising interest rates sending banking stocks lower'! Here in Australia the banking sector is having some heartburn with this although can't be sure as to what it really means!  Is it following the bonds?  Don't hold any local banks here.  Do you? Commodities continue to do well for the resources sector and copper is an excellent proxy for the story with most metals.  The Channel Analysis works well with copper and the bullish calls from Dawes Points over the past couple of years have come to pass as prices move nicely with the channels.  The US$3.70/lb looks easy now but US$6/lb is coming. The strength in gold, copper, iron ore, coking coal, aluminium, lithium, graphite, cobalt, zinc, lead and silver have helped the ASX 300 Resources Index (54 stocks) to regain its 2015 highs on the way down from the 2011 highs but the current 3650 level is firmly indicating that an upward move through this will give a very rapid retracement to 4000 (+10%) then to 4400(total +20%). Market share is now back over 25% of All Ordinaries weekly turnover. Small Resources (recall this index has 38 stocks with a combined market cap of A$42bn with 15 stocks capped at over A$1bn (including 5 >A$2bn!)) is showing much higher leverage and is coming with a probable 50% gain for the next year. Market share of turnover is growing and is over 5% again. Both of these indices seem to suggest that a sharp upmove is imminent. The reason behind it might be just the global equity markets and the cash on the sidelines but gold is likely to have an important input here. Whilst the immediate short term for gold is not quite so clear, the long term indicators are very robust and suggest a major move could come at any time now. There are simply hundreds of small quality resources companies out there and to find them is one thing but to play them is another. The best advice is to have a core portfolio to ride out the cycle and to add to it as further opportunities arise.  Which they will do in spades. The best returns come from choosing well early and just sitting it through. Have a look at these portfolios from the last boom from 2003-2011:- October 2004 Portfolio  +432% in 36 months and +430% over 44 months. Structured model portfolio with no trading. Structure provided liquidity and dividends as well as allowing 68x gain in SMM in the riskiest end of the sector. The July 2005 Portfolio provided 103% in 12 months and 261% in 22 months. Clearly not every stock provided positive returns but the portfolios did what they were supposed to do – give high aggregate returns with income and liquidity. Let's look at some portfolios for now:- Portfolio A A$100,000 in a conservative diversified portfolio for income and capital growth. Stock selection will be revealed in a month or so! Portfolio B A$100,000 in 24 equally weighted small cap stocks across a wide variety of sectors. Stock selection to be revealed in a month or so as well. The overriding comment is to `heed the markets, not the commentators' and the market character is that extreme value exists against the 3,300m people in Asia who just want better lives. And our resources! Are you onboard? Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #71 24 October 2017

Raisemetrex: A New Capital Raising Platform – Supported by MPS

by Alison Sammes

Key Points

  • New fintech platform allows universal access to capital raisings
  • Novel extended prospectus allows immediate access to new shares
  • Platform may allow streamlined access to future MPS capital raisings
  • Platform useful for Corporate Issuers as well as investors
  • The first opportunity is with Catalyst Metals Limited (ASX:CYL) raising at A$0.50
LINK TO RAISEMETREX REGISTRATION AND ALSO CATALYST PLACEMENT
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
Martin Place Securities is pleased to introduce you to a new fintech web based capital raising platform that can streamline some investment processes for you. The platform will host IPOs and placement opportunities in companies seeking new funding capital and Martin Place Securities will be the first broker to participate in this innovative system. The Raisemetrex platform is a very simple system. It will register you as a user and then allow you to apply for shares in capital raisings, retain all your registration details, provide a BPAY message to carry out the funds transfer and complete the process to the share registry. This will allow you to choose your investment size, complete registration details and send your payment from your desk or your smart phone within minutes. The registration will allow each user to have the details of multiple entities ranging from your own name to your super fund or investment company. The platform will securely provide all the details online to the share registry, allow you to add your HIN or SRN to the specific application form, and deliver the funds to the company's bank account via the BPAY system. The platform will also provide share application form records and a history of all your participation in capital raisings carried out through it so that maintenance of your tax records will be easier. This is a new platform that uses a current company prospectus for capital raisings (IPOs, placements and rights issue shortfalls) and MPS intends to eventually utilise it for most future capital raisings once certain Section 708D issues are incorporated in the platform. MPS encourages you to register with Raisemetrex now and you will see that the first opportunity is with a prospectus issue for Catalyst Metals Ltd (ASX:CYL) at A$0.50. CYL is one of the preferred gold exploration opportunities in the MPS gold sector and I would encourage you to invest if it fits your investment profile. CYL has a large tenement area immediately to the north of the world-famous Bendigo gold mine, which produced 22m oz @ 15g/t, and during the period 1850-1890 was the world’s largest goldfield. The Company has several projects along the important Whitelaw Fault and is in Joint Venture with Gina Reinhart’s Hancock Prospecting Pty Ltd, which is funding CYL to earn 50% in the Four Eagles project. The geology is very similar to Bendigo but is totally covered by younger sediments in open farm land. Drill results released on 11 July 2017 included 27m @ 22.3g/t, 22m @ 31.1g/t, and 7m @ 26.1g/t. Numerous other higher drilling intersections have been recorded and the tenements are likely to provide an open cuttable resource in the near future.  Such a resource could provide open cut ore which can be delivered to near-by existing processing plants. St Barbara Limited (ASX:SBM) recently took a 5% investment in CYL at A$0.50. These links gives access to two announcements from 11 July 2017 – A corporate presentation on company activities and the assay results from recent drilling. A prospectus for the CYL issue is available online once you have registered with Raisemetrex. To participate and register with Raisemetrex, please click on the button below. LINK TO RAISEMETREX REGISTRATION AND ALSO TO CATALYST PLACEMENT For any query on Raisemetrex or Catalyst please contact me or Daniela Vecchio on +61 2 9222 9111 or bdawes@mpsecurities.com.au or dvecchio@mpsecurities.com.au. Barry Dawes Executive Chairman Martin Place Securities

Petsec Energy Ltd – Remarkable oil production opportunity

by Alison Sammes

Key Points

  • Australian E&P company has acquired two key oil permits in Yemen
  • Oil production expected from each Block in 2017
  • Substantial current reserves to allow min 7,000bopd n 2018
  • Higher throughput of >12,000bopd expected in 2019
  • US operations to achieve higher revenues from Dec Qtr 2017
  • MPS appraised value A$1.46 as 12 month price target
  • Exploration potential in Yemen is very high
  • Numerous Yemen oil fields have reservoirs in `fractured basement rocks’
  • Potential for major rerating of share price from current A$0.16
Call Martin Place Securities to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
ASX.PSA began a new corporate strategy in 2014 away from its traditional US Gulf of Mexico base with the introduction of a new MENA technical team ex Oil Search and the acquisition of portion of the Al Barqa Block 7 exploration tenement in Yemen from ASX:AWE.  Petsec subsequently purchased of 100% of the Block from ASX:OSH, Mitsui and Kuwait’s national oil company Kufpec. Petsec followed this with the acquisition of the Damis Block S-1 production tenement with its 20,000bopd production facility on the An Nagyah field which had around 23million barrels of recoverable oil remaining and nearby undeveloped oil fields totalling 35 million barrels and 600BCF gas. The MENA technical and management team has had as much as 20 years operating experience in Yemen and were responsible for designing and drilling almost 50 wells on behalf of Oil Search. Petsec is now planning oil production in Yemen before end 2017 and should also experience the start of a growing cashflow again from its US operations. The results should be very beneficial for Petsec and could even be spectacular. Damis Block – S1 and surrounding fields and infrastructure Source:PSA These two tenements are well known to Petsec and the potentially >110million barrel Al Meashar discovery was drilled by Petsec’s now-current MENA team. With these two blocks Petsec now has potential oil production from each in the next six to nine months. Each block has the potential to produce substantial cashflows for Petsec that would match the company’s current market capitalisation in 2018 and far exceed it in 2019. Yemen’s geology reflects the abundant and unquestionably high quality source rock that has provided the carbonaceous source to oil formation throughout the Persian Gulf region but it also reflects massive regional tectonic activity that has literally shattered much of the brittle crystalline rocks such as granites and high grade metamorphics.   Oil from the source rocks has entered the intensive fracturing joints which have in many cases become very large reservoirs for oil entrapment.   The Masila oilfield region has several fractured reservoir fields totalling over 2 billion barrels and many of the post- 2000 oil discoveries in Yemen have been in such reservoirs. The abundance of high quality source rock indicates a much higher probability of any potential trap being charged with oil. Consequently these fractured basement reservoirs offer the potential of oil fields with hundreds of millions of barrels of oil.   ` Fractured Granites at Surface in Yemen Source: Oil Search The Al Meashar discoveries in Block 7 had an 800m oil column down to total well depth(no oil-water contact was encountered so this is still `open’ at depth) with much of this in fractured basement. Al Meashar Wells 1 and 2 with Reservoir Estimate Targets Source: PSA This field is only 14km from Austrian oil company OMV’s Habban oil field that has a 945m oil column in fractured basement and reserves of 170 million barrels in a very similar geological environment. The An Nagya field is a `conventional’ oil field but it also has potential for fractured basement reservoirs beneath it. An Nagyah Oilfield with vertical and horizontal wells Source:PSA `PSA is following Oil Search, now a major LNG producer out of PNG that in 2000 had also set up a Yemen portfolio and drilling ~50(including 12 exploration) wells. PSA, unlike Oil Search, has acquired 100% of existing or producing fields and infrastructure (as well as the experienced management and technical teams) on very modest outlays and so eliminated most capital expenditure risk. The parameters set by Oil Search for a Yemen portfolio are otherwise the same:
  • World class petroleum system –success rates >30%
  • Acceptable fiscal regime within conventional PSA terms
  • Access to producing infrastructure in key areas
  • Relatively under-explored petroleum basins
  • Recent discoveries and new developments
  • Low capex and opex (typically <US$<5/bbl and <US$10/bbl)
  • Active and established E & P industry’
I have prepared a thorough research report on Petsec Energy that represents due diligence carried out prior and after the underwriting of the A$11m rights issue by Petsec in December 2016. The Appraised Value 12 month share price target is A$1.46. The link is here:- http://www.mpsecurities.com.au/petsec-energy-research-report-13-june-2017-final/ The author and Martin Place Securities hold shares in Petsec Energy at the time of this report. The political position in Yemen has been uncertain since early 2014 when a rebellion led to curtailment of a wide range of business activities and the cessation of oil tanker liftings from Yemen’s four oil export terminals. Yemen oil production was essentially shut down. In recent times the rebellious regions have contracted to the north west on the border with Saudi Arabia and a small area on the Red Sea and well away from Petsec’s Block S-1 and Block 7 tenements. Petsec Energy’s Tenements and Yemen Pipeline and Port Infrastructure Improving prospects for a peaceful resolution in the hostilities allowed the Yemen Government’s national oil company Petro Masila in August 2016 to recommence oil production in the Masila oil fields in the eastern half of Yemen, well away from the disputed regions of the Shiite Houthi rebels near the northwest border with Sunni Saudi Arabia. Oil production is now around a reported 75,000 barrels per day and is pumped via the 138km Ash Shihr pipeline and allowing resumption of oil exports.  Shipping has resumed and an estimated six million barrels have now been lifted since August 2016 without incident. Petsec’s An Nagyah field has 15 shut in oil wells and 20,000bopd processing capacity that are linked to the major Marib pipeline that runs 438km to the Red Sea but this pipeline is closed and is not considered likely to be reopened before 2019. However, Petsec considers that it will receive official confirmation of its work plan during the Sept Qtr 2017 that will allow installation of a truck filling gantry (July) and a commencement of trucking convoys to Petro Masila oil fields and gaining access to the Ash Shihr pipeline for export. The Yemen Government has historically relied on oil revenues for around 60% of its Budget income and in the current environment has encouraged foreign companies to resume oil production. An Nagyah in Damis Block S-1 has 20,000bopd capacity today and should be able to re open wells to commence at 5,000bopd and steadily build up to 20,000bopd from existing wells and additional infill and appraisal wells.  The additional undeveloped resources should ensure the capacity of processing facility is filled. Damis Block S-1 Reserves The two Al Meashar wells should provide at least 1,000bopd while production testing.  The exploration potential in Block 7 is very high as these unrisked targets show. Petsec should receive about 63% of the fields oil revenues under the Production Sharing Agreement to cover authorised capital and operating costs and its ~29% of the oil field profit.  All sales receipts are received offshore to Petsec’s account.  These cashflows should allow the drilling of infill wells and subsequently some exploration wells on structures that have >100m million barrel targets. I have done considerable due diligence on this company’s operations and consider it an absolutely outstanding opportunity. There is a large amount of information to absorb to fully understand the opportunity here but I can say that the numbers are very high and the risks are surprisingly low. The key issues are that:- 1) Yemen is an early stage exploration target with underexplored basins and huge volumes of source rock 2) The MENA staff at Petsec spent over 10 years drilling wells here with Oil Search so they know the people, the local situation and the geological potential. The stock is A$0.15 and my target of A$1.46 is only notional and only uses the Low Case of 5,000bopd in Yemen. A perfectly rational high case could be >A$10/share. The PER for 2018 calendar Year is <1x and operating costs are <US$15/bbl and these would fall to about US$10/bbl once output is linked to a pipeline, probably in 2019. Looking at it dispassionately , it is clear that once production begins at An Nagyah, Petsec will be generating a lot of cash from low cost operations and should become something of a super stock.  Next to no capex is required and the two Blocks have accessible reserves ready for production and have very substantial upside. The oilfields and basins in Yemen are only in the early stages of exploration when large structures are being tested and, given the undoubted high quality of the Arabian Peninsula source rocks, it will certainly mean large oilfields are to be found.   The Hunt Jannah Block (to the west) and the Masila fields (to the east) are each over 2bn bbls. The existing fields are significant and in the experience of most operators in this basin it seems that they simply become much larger than initially thought. The Petsec MENA team led by Maki Petkovski have actually been the operators here in Yemen for many years through Oil Search so they know the geology, drilled many of the wells and most importantly, know the bureaucrats, local businessmen and politicians who make things happen in Yemen. The Yemen assets are almost beyond comparison with petroleum exploration prospects in Australia or in the very mature shallow Gulf of Mexico basins so the opportunities brought into Petsec are practically without peer for any ASX-listed company. Risk is in the eye of the beholder and whilst the entire Middle East is unstable and hostilities continue in the north west of Yemen the operations of Petsec should be able to work within a supportive community and government umbrella to resume output and apply risk capital, probably through farmins, to drill some of the indisputably attractive exploration/development targets. Petsec has acquired these magnificent assets and should production resume at An Nagyah as planned and Al Meashar deliver even modest reserves the upside is very high. Oil prices are currently softer on oversupply concerns but underlying demand has been rising faster than most forecasts so the medium term outlook incorporating increasing imports to China and India should not be negative for oil prices. MPS Research Report Low Case Earnings Forecasts for PSA at A$0.15. The link to the Research Report is here:- http://www.mpsecurities.com.au/petsec-energy-research-report-13-june-2017-final/ The author and Martin Place Securities hold shares in Petsec Energy at the time of this report. Barry Dawes  BSc FAusIMM (CP) MFASAA 19 June 2017

Dawes Points Year in Review and 2017 Outlook #60

by Alison Sammes

Key Points

  • Global economic activity is robust
  • Equity markets making new highs
  • Commodity prices remaining firm
  • Global bond markets have broken down
  • US Banking Sector recovering well after 14 years underperformance
  • Oil price ready for further gains in 2017
  • Outlook for 2017 is more of the same only better
  • Best stocks are BHP RIO FMG S32 WPL NST WSA PSA CYL MLX ASP SWJ MGT CTP LNG
  • Contact me to invest in these and much more bdawes@mpsecurities.com.au  +612 9222 91112016 was a remarkable and very positive year for the world as seen from here.Economic activity was reasonably robust, equity markets held gains and many indices made new all time highs. Commodities from aluminium to zinc in industrial metals had good years with consumption yet again at record levels, and supply constraints and low inventories allowing for useful price recoveries.  Iron ore hit my S$80/t, while oil and US natural gas closed the year at two-year highs. Gold had an excellent June Half and spent the Dec Half disappointing us in a dragged out but piddly 15% correction that gave up about 80% of the Dec 2015-July 2016 US$315 gain. The recoveries in copper, lead, zinc and the other metals along with iron ore provided some excellent gains for the recommended BHP, RIO, S32, WSA and FMG. The global bond market had much of its bubble bluster and arrogance rightfully squeezed out with those dopey and hysterical 'negative yields' of July 2016 marking the end of the 35 year bullmarket in these financial instruments called bonds.  The ten year US Treasuries Index lost 8% in capital value from the July highs while the longer and more volatile 30 Year Index gave up 16%.  Ouch.  With US$100tn tied up in bonds and an average maturity of say 5 years a guesstimate of about US$5tn of market value has been lost. The 40% rise in the US Banking Sector Index flagged here from the beginning of June Qtr 2016, and its strong 33% respective outperformance against the S&P 500 after around 14 years of underperformance, gave robust indications of an improving US economy.  Against rises in the Fed Funds Rate. And also allaying fears of the Pessimists of a US banking collapse etc. The extraordinary progress in technology has provided immense productivity gains in Artificial Intelligence, robotics, computers, telecommunications, office automation, fintech, agritech, meditech, railways, aircraft, automobiles, domestic appliances and so much more.  Great progress in 2016 and lots more for the next decade. All the above went well to plan although the A$ was weaker than expected and the Wave 2 Pessimism that crept into the Gold Sector in the Dec Qtr 2016 left many gold stocks quite friendless and brought some share prices back to the levels of the beginning of the year.  Bargains abound. The Dawes Points Fixed Portfolios did reasonably well to 30 Dec 2016 as follows:-
    Dec 2014 Gold Portfolio +167% ASX.XGD +143%
    Jan 2016 Gold Portfolio +67% ASX.XGD  +55%
    July 2016 Resources Portfolio +38% ASX.XMM +27%
    Dec 2016 Gold Portfolio -0.2% ASX.XGD +3%
    The stage is set for another strong year in 2017 but it should be just another good year in a Decade of Prosperity to come. The Trump Presidency is offering some adventure ahead as so much of the US entrenched bureaucracy, policies and administration are turned on their respective heads. Uncertainty and unpredictability are key themes at present but the markets are positive. Note well that the year's economic and market performances reflected the underlying economic conditions driven by a relentlessly growing Asia and the recovery in the US. Long before Trump was even accepted as a candidate. Consequently the forces driving the economic expansion are wider and deeper than the impact of any US President, even someone as seemingly proactive as Trump, but Trump should accelerate this. The emphasis on infrastructure, corporate tax cuts and the long needed overhaul of bureaucratic red and green tape should be very positive for our resources sector.  The increase in US consumer confidence appears to be large and so with rising equity markets, improving commodities and mountains of defensive cash to drive it all it might just be all good and even better than previously forecast.

    The 2017 Outlook:-  More of the same only better!

    A quick trip around important equity markets which are making new all time highs should start as an appetiser. Note that stock markets are essentially barometers looking ahead at changing market conditions and not thermometers giving current readings of market health.

    Starting with the US

    S&P 500 Big Caps  - New Highs NASDAQ  - New Highs Russell 2000 Small Caps  - New Highs Wilshire 5000 Broad US Market Index – New Highs

    And elsewhere:-

    Germany   - DAX Leading and heading to new highs UK  FTSE  - Very powerful now! Japan Nikkei -  Rally heading to new highs again Shanghai SSEC – Quiet but powerful underlying strength  India Nifty 50 Index -  Leading the world and heading to new highs Australia All Ordinaries – Finally starting to catch up Equities are showing us where the world economy is going - and it is not going down!! I expect corporate earnings will be rising everwhere with the US adopting lower tax rates and with improving economic confidence.  The equity indices should rise, despite rising interest rates. And the Bears still don't own Shares! On the other hand the financial market cabal of bond markets, bureaucrats, central bankers, welfare lobbies, politicians and media canvassed here early in 2016 is steadily being roasted and hopefully somewhat dismantled by Mr Trump. Wouldn't it be wonderful if the US, providing 25% of UN funding, decided to drain that swamp as well. The expenditures using 'near- free money' from low coupon bonds are now over.  Bond yields have to rise much further. You are probably tired of seeing this but it is a critical component of the outlook. This 30 Year Treasury Bond Index has fallen 16% from the highs in July and, whilst oversold, might just fall another 5-8% before a bounce comes.  16-20% capital losses on 'risk-free assets'. 30 Year T Bond yields are likely to rise to ~3.7% in 2017 and much higher further out. Currencies and Sovereign Bonds have always held a fascination for me and I consider a sovereign bond is just currency with an interest coupon.  Where one goes so goes the other. The US$ and its 30 Year T Bond are the largest in the markets so need to be respected but at the end of the day they are they are just instruments that are bought and sold. But if the supply of each (Quantative Easing and Bond-financed Budget Deficits) is rising for the US then it becomes a matter of relativity against other currencies. The long term channels on the US$ Index have been heading down since 1985 but the rally over the past 2-3 years has been strong and has moved into a new top channel.  It could be very tempting to suggest that the US$ might head to 120 on this index as interest rates and bond yields head higher. Perhaps the strong positive sentiment for the US$ today represents an important high and may be providing a 'good-bye kiss' on this counter trend resistance line. Note that this current strength against a weak Euro (57% of the Index basket) and the Pound (11.9%) is not confirmed against the Japanese Yen (13.6 %), nor against the Canadian $ (9.1%). Consideration should be given to a strengthening US$18tn US economy leading to increasing imports and raising commodity prices and thereby assisting most other countries. The performance of most of the equity indices of the important other economies have certainly been heading higher and will be atractive investment opportunities for capital leaving the US bond markets. Also, China and Saudi Arabia have been reducing holdings of US T Bonds so those funds will be redeployed to other markets.  Probably to gold, commodities and equities. These countries, together with Russia, are using yuan, roubles and gold as trading settlement currencies and so the trading base of the US$ is steadily being reduced everywhere. It just may be that the surprise of 2017 is not a strong US$ but possibly quite a weak currency. Prices of Industrial Metals have been rising over 12 months and this index of LME monthly closes has had a decisive trend break into a new bull market that should last many years. Iron ore prices have exceeded my US$80 target (did anyone else make this call in the June Half of 2016?) and could quite possibly reach US$95 by mid 2017 before we see a significant pull back. The price history of oil carries great similarities to that of iron ore and an assessment of the supply/demand factors indicates the market is already in balance, stocks are now falling and the recent OPEC cuts will be helping as well. These commodities are only part of the story as the CRB Index is suggesting a sharp move higher soon for most commodities and probably led by oil. The other aspect of this is that gold is just becoming even more interesting. Gold has broken upwards against T Bonds.China and Saudi Arabia have been sellers of T Bonds and have probably been swapping from the oversupply of bonds into the ever tightening market for gold. Gold bought for the East from the West at artificially depressed Western prices using funds from sales of very risky sovereign debt paper. So the Outlook in 2017 is much more of  the same only better. These are the stocks that are considered to offer the best total returns in 2017:-
    BHP Iron ore, coking coal, copper and oil
    RIO Iron ore, copper, aluminium and
    FMG Iron ore
    S32 Lead-Zinc-Silver, manganese, coal and alumina/aluminium
    WPL Oil and LNG
    WSA Nickel
    NST Growing gold production base in WA
    MLX Tin, copper and nickel
    BLK Growing gold production profile at Wiluna in WA
    LNG Export LNG plants in US
    CTP Gas supplier into Australian East Coast gas
    PSA Oil production growth
    CYL Exploring for another Bendigo in Victoria
    SWJ 9moz gold project in Sth Africa
    MGT Sth Australian Major Magnetite Project
    ASP Web-based publisher of resource sector news flow and data
    Best wishes for an outstanding 2017. Barry Dawes BSc F AusIMM MSAA I own or control in portfolios all the stocks mentioned here. Contact me on bdawes@mpsecurities.com.au  or +612 9222 9111