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Weekly market update

Written and accurate as at: Jun 18, 2018 Current Stats & Facts

The S&P/ASX 300 gained +0.8% last week, in line with a generally solid week for equities around the globe. AREITs (+0.9%) and Financials (+0.5%) performed best, while slightly weaker commodity prices saw Metals & Mining off -0.6%. The fall in commodities was driven in part to a stronger US dollar, which was in turn the outcome of a 25bp increase in the Fed benchmark interest rate and indications that two further increases are expected this year as underlying economic conditions remain sound. Last week also saw some jawboning from the European Central Bank, who indicated that their debt purchase programme would come to an end, without giving a specific timeframe.

The mining sector saw some material news flow with BHP (BHP, -1.5%) announcing that it has gained board approval to spend almost $4bn on its South Flank iron ore project in the Pilbarra, putting replacement volumes in place to offset depletion form other mines. Fortescue Metals (FMG, 0.0%) has also recently announced the intention to develop a new mine, while Rio Tinto (RIO, -0.3%) is expected to follow suit soon. This provides further momentum in the mining services sector following a challenging number of years, where we see opportunity in Monadelphous (MND, +5.0%) and also in Seven Group (SVW, +1.3%). The three-way battle for control over iron ore junior Atlas Iron (AGO, -10.0%) between FMG, Mineral Resources (MIN, -8.2%) and Hancock Prospecting continues and was further complicated by a statement from the Western Australian government that AGO did not necessarily have the priority right to develop further berth capacity at Port Hedland – the prize at the heart of the ownership tussle given throughput constraints at the port. More positively, MIN announced on Friday that it is looking to monetise its ownership of the Wodgina mine site – potentially the world’s largest hard-rock lithium mine – via the sale of a 49% stake to a development partner. Potential bidders have five weeks to conduct due diligence before lodging bids towards the end of July. 

The market continues to see a steady pipeline of corporate activity, with Hong Kong’s Chueng Kong Infrastructure group bidding for pipeline owner APA (APA, +17.5%). Cheung Kong generates a lot of cash from its legacy businesses in property and infrastructure in HK, so a low cost of capital supports the 30% premium that it bid for APA. However the full bid is not reflected in the stock price, reflecting the risk of rejection by the Foreign Investment Review Board (FIRB).


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