Gindalbie Under Pressure At Karara

China’s Ansteel has increased the funding offer for the joint venture with Gindalbie Metals (GBG) at Karara, Western Australia, but the announcement has opened a can of worms for brokers. The Karara project is running at reduced rates while work is being done to overcome bottlenecks in tailings management. The work should be finished in three months. These delays are stretching the joint venture’s balance sheet. Hence, Ansteel has come up with more money, having already injected $200m in extra funding since the start of FY14.

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Iron Ore Price Resilient

The market is fearful that iron ore prices will become hostage to increasing oversupply, and fall, mimicking the precipitous declines that took place late in 2012. This is predicated on forecasts for seaborne supply to increase along with reduced demand from China. It may not happen. Iron ore prices currently have surprised on the upside, as both supply and demand support the strong prices.

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Overwhelming Relief At McMillan Shakespeare

The federal election is over and leasing and salary packaging consultant, McMillan Shakespeare (MMS), is breathing a sigh of relief. The former Labor government had intended to take the razor to the fringe benefits scheme, which would have substantially affected individual salary packaging and novated leasing. These items form a large part of McMillan Shakespeare’s business. There was a rush to downgrade the stock among analysts. Then, as the Labor government increasingly looked a lost cause, the views started to improve. The incoming Coalition had stated those changes to the Fringe Benefits Tax would not be made.

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UGL Has A Lot Of Work To Do

There’s a lot of work ahead for the engineering and infrastructure conglomerate UGL (UGL). The company must not only negotiate the headwinds from a downturn in mining related activity but also justify its decision to separate DTZ (property division) from the Australian-based engineering operations, to be completed some time in FY15.

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Can Virgin Australia Turn Around?

Virgin Australia (VAH) has made a last minute downgrade to FY13 guidance, now expecting a net loss. Results are expected on August 30. Brokers are still hopeful that FY14 will turn around, and industry statistics suggest, at the very least, the domestic market is stabilising. Still, a downgrade is a downgrade and a sign that Virgin Australia is struggling in a competitive market.

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Brokers Breathe Easier Over ResMed

Sleep disorder equipment specialist, ResMed (RMD), provided a number of inducements to look favourably on the outlook after a strong fourth quarter finished off FY13. This was the first full quarter since the announcement in January of round two of the US Medicare competitive bidding pricing. Pricing was seen by brokers as the most contentious issue in the latest results, and for FY14.

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Material Matters: Oil To Japan, Steel And Iron Ore

Japan’s oil demand development is normally low profile as the market focuses squarely on China and India. JP Morgan has looked at what might change in Japan, given the country achieved relatively strong economic growth in the first quarter of 2013, at 4.1% quarter-on-quarter. The upshot of the analysis is that demand will not boom. Japan’s economy remains dominated by services, totalling 71% of GDP according to 2010 data. Thus, the commodity intensity of the economic growth is substantially lower than in more manufacturing oriented economies.

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Flight Centre Cruising At Altitude

Travel services operator Flight Centre (FLT) has established a position in the top 100 Australian stocks, yet it is one of the most shorted stocks in the market, Macquarie notes (Number five on ASX top shorted list; see FNArena’s Short Report). The company continues to demonstrate earnings resilience, despite fears that shop front travel agency business is dying. Flight Centre is still making inroads into offshore businesses and has a network of around 2,300 shops and 36 brands.

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CFX, CPA Proposal Sparks Speculation

Commonwealth Bank (CBA) has put forward a proposal that sets the stage for the internalisation of the management of CFS Retail ((CFX)) and Commonwealth Property Office ((CPA)) trusts. It is also proposed that CFX would acquire the wholesale funds and shopping centre management businesses of Colonial First State Global. Financial institutions have been under pressure to divest real estate, given the Basel III changes, so this move by CBA is not surprising. A transaction is some way off as the proposal is conditional and incomplete. Nevertheless, it has provoked speculation among brokers as to the benefits, or otherwise, of an internalisation of management on the said trusts (REITs).

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Shopping Centres Australasia Needs Dressing Up

Shopping Centres Australasia Property (SCP) has struggled to deliver since its inception late last year. Or rather, it has struggled to appear like it’s delivering. The portfolio of shopping centre assets from the spin-off of Woolworths’ ((WOW)) properties has definitely not set the world on fire. Nevertheless, if you take a rising broader equities market in the first half of the year the stock has outperformed and it is one of the better performing Australian real estate investment trusts (AREITs). Maybe grey is the new red.

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Second Half Turns Sour For Orica

Most brokers aren’t too happy with Orica (ORI). At least in the intermediate time frame. The mining chemicals and explosives business has issued a profit warning and expects net profit to be 10% lower in FY13. Driving the downgrade were higher integration costs for Minova, particularly weak European and North American markets, lower earnings from Indonesia and soft ammonium nitrate (AN) and sodium cyanide volumes.

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Iluka Shines On Zircon Recovery

Iluka Resources (ILU), the world’s largest producer of zircon, surprised many brokers with substantially increased zircon sales in the June quarter. Production for the quarter was 33% lower. Overall, mineral sand production was down 29% for the first half of 2013. So, what has happened? Iluka has made inroads into zircon inventory to increase sales, with a stock drawdown in the quarter of around 92,000 tonnes. Mineral sands revenue was down 42% on the prior corresponding half. That decline was largely because of lower realised prices and weak sales volumes for the high grade titanium dioxide business, the whitener feedstock used in paint and paper manufacture.

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Perseus’ Achilles Heel Revealed

Gold stocks that were strong performers have joined the lists of those struggling to find the right balance in production and development in a quickly changing landscape. Perseus Mining (PRU), with interests in West Africa, is a case in point. The company has delivered production guidance for FY14 that is significantly below expectations and the much vaunted Sissingue project is now on ice.

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James Hardie Primed For Improved US Housing

James Hardie ((JHX)) has received a boost to its outlook. Goldman Sachs has decided to give the stock a Buy rating, upgrading the recommendation because the cycle is expected to turn more favourable in the US for the building materials supplier. There has been a substantial improvement in US housing starts over the last two years but James Hardie’s US business has not impressed. Fibre cement operations have been flat, both in terms of volume growth and margin performance. The reason the company did not get a better share of this growth has been the tendency for much of the initial rebound in construction to be skewed towards lower value and less fibre cement-intensive multi-resident segments. This may be about to change.

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Alumina Gains As Costs Fall

Improved margins reported by leading US aluminium/alumina producer Alcoa in the second quarter have given brokers a reason to expect a better performance from Alumina Ltd ((AWC)) this year. Alcoa reported a surprise quarterly increase in the alumina division’s earnings margin to US$47/t from US$44/t. Costs have fallen faster than realised prices. The better cash flow means Alumina’s 40% stake in the AWAC joint venture with Alcoa should deliver more than the guaranteed US$100 million in dividends in 2013. AWAC, the world’s largest aluminium producer, achieved US$32m in absolute cost savings in the second quarter from weaker key currencies and productivity gains.

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Challenges Line Up For Retail Property

Retail property is under more pressure than on first appearance. The online threat to individual bricks and mortar retailer sales has been widely flagged but there is pressure on shopping centre incomes and yields. This may come as a surprise because retail property has been highly sought after by investors and interest has been strong in 2013. Money is being spent on upgrading shopping centres and development is continuing apace after stalling post the GFC.

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QBE Transformation Going To Plan

QBE Insurance ((QBE)) has added detail to the transformation strategy currently underway. Brokers are upbeat on the company’s progress and encouraged by the strengthening balance sheet as well as optimistic about further upside to savings. Catastrophes have been relatively benign so far this year and reserves appear roomy.

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Residential Property: A Very Mixed Outlook

Residential property markets will be mixed in the next three years. Some which have strengthened are likely to tail off, others will be flat and there will be an upturn – in some. BIS Shrapnel’s Residential Property Prospects for 2013 to 2016 shows NSW should improve and Queensland start to gain traction. The star regions of recent times – Western Australia and Northern Territory – will lose some gloss as they continue to be influenced by resources activity. Elsewhere, underlying economies and excess supply will tell the story.

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The US Dollar And Commodity Prices

The US Federal Reserve chairman’s remarks has always been scrutinised for the minute changes to policy that may be implied. It may be embryonic but the market senses Ben Bernanke is getting ready to adjust the levers. The implications are significant. The US economy is showing signs of improvement after a long period in the doldrums. This suggests ultra low US interest rates cannot persist and once yields start rising in the US they only need to narrow the gap enough to attract global money, as funds readily move into the haven of historical choice, the US. Such movement of funds will whittle away the down-trend for the US dollar. That’s the simple part.

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Transpacific Carries Off Earnings Downgrade

Even cleaners are finding the going tough at present. Industrial maintenance and waste remover, Transpacific Industries ((TPI)), has downgraded earnings expectations for FY13 after the second half failed to deliver on several fronts. The company is guiding for FY13 earnings of $405-415 million, which implies the second half will be down 12-16% on the prior corresponding half, on an underlying basis.

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InvoCare Valued On Longer Term View

Funeral director, InvoCare ((IVC)), has had a strong run recently as investors seek out quality stocks with good growth potential. It surprised brokers at the AGM by offering a year-to-date assessment of earnings growth. At the operating earnings level it was 7.7% for the four months to April, somewhat softer than many had anticipated. The reasons cited were additional costs, digital business initiatives and lower-than-expected case volumes. Case volumes were up 4% in the four months, including acquisitions, while comparative volumes were up just 1%, as the number of deaths was relatively stable. Average funeral case prices were up 3-4%. The broker reaction to more muted earnings growth was far from severe as, while the stock is viewed as expensive, most take a long-term view.

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A Challenging Season For Myer

Department store retailers hold a mirror to householder sentiment in terms of the goods they sell – homewares, apparel and cosmetics. Sentiment picked up at the start of 2013 but appears to have softened at the end of the March quarter and consumers do not appear well disposed towards shopping. Is it the looming election? Is it the warmer-than-usual autumn? On both counts, by the time Myer ((MYR)) has delivered the FY13 earnings report in September, it will be better understood.

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Copper: Short Term Pain, Longer Term Gain

Copper markets are moving to surplus. Producers have been ramping up and, as China draws down inventories from Shanghai warehouses, supply will outstrip demand. All this is straight forward. Price forecasts are being downgraded as a consequence – for the short term. Commonwealth Bank analysts are actually upgrading longer-term price forecasts for copper. Moreover, the long-run sustainable price is also being raised. Why? Severe energy shortages in Chile, the world’s foremost copper producer.

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Boart Longyear Downgrades, As Expected

Another week, another downgrade in the mining services sector. At its AGM, drilling services and products supplier Boart Longyear ((BLY)) notified the market that FY13 earnings are likely to be at the lower end of consensus range of US$199-271 million. This compares with the guidance the company gave back in February of US$260m. Management expects a recovery at some stage, but the bets are off regarding just when that will happen.

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AWE: Timely Upgrade At Ande Ande Lumut

Australian-based oil producer and explorer, AWE (AWE), has welcomed a reserve upgrade at the Ande Ande Lumut (AAL) oil field, offshore Indonesia. This field is wholly owned by AWE and the company has previously announced a sale process whereby up to 50% of the asset may be sold down. The outcome is expected at the end of the September quarter. The upgrade to reserves is timely, as brokers believe it will enhance the attractiveness of the asset in the sale process.

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