In this briefing:
- Memory Chips and the Elasticity Myth
- Nutrien’s Move On Ruralco Makes Agronomic Sense
- Pressure on the RBA Mounts
- New J. Hutton Exploration Report (Week Ending 22/02/19)
1. Memory Chips and the Elasticity Myth
During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase. This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.
2. Nutrien’s Move On Ruralco Makes Agronomic Sense
Ruralco Holdings (RHL AU) has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.
A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.
The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.
Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.
Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“
This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.
A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.
3. Pressure on the RBA Mounts
The pressure is building on the RBA to cut rates as the construction data proves much weaker than expected in the second half of 2018; pointing to sub-trend GDP growth over the year ahead. The RBA may cling to their outlook for stable rates, for the time being, citing recent strength in the labour market, and hopes of a rebound in infrastructure spending. But they will feel the heat as market commentators bay for their blood if the economy continues to struggle through the year. The relatively weak AUD appears to be reflecting the heightened concern over the weak housing market, but it remains difficult to short, considering the potential for a US-China trade deal, Chinese policy stimulus, rising confidence that the UK will avoid a cliff-edge hard Brexit, dovish noises from the Fed, and stronger commodity prices and global risk appetite.
4. New J. Hutton Exploration Report (Week Ending 22/02/19)
- Azumah Resources (AZM AU) rated a Speculative BUY
- 99.5m at 2.2g/t Au complements ‘discovery hole’ (75m above) – 93.1m at 2.3g/t Au
- DDHs from current programme targeting down-dip from existing intercepts
- Key drill results expected over next few weeks
- 1Moz Reserve, 2.5Moz Resource
- US$1,77M NPV5%, 1.6yr payback.
- US$886/oz AISC (all-in sustaining cost)
- Azumah Resources (AZM AU) , Emmerson Resources (ERM AU), Xanadu Mines (XAM AU), Kingston Resources (KSN AU), Oklo Resources (OKU AU), Blackham Resources (BLK AU), Dacian Gold Ltd (DCN AU), De Grey Mining (DEG AU), Austar Gold (AUL AU), Strategic Minerals PLC (SML LN), Asiamet Resources Ltd (ARS LN), Landore Resources Ltd (LND LN)
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