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Beaufort Securities Breakfast Today including Antofagasta Plc and Ophir Energy

May 02 2013, 8:28am

The Markets

Market opening: Markets could open lower today. FTSE 100 futures were trading 14 points down at 7:00 am.

New York: Wall Street slipped as weaker-than-expected economic data outweighed the Fed’s decision to hold interest rates and maintain its stimulus program. In the US, manufacturing activity slowed in April, construction spending fell to a seven-month low and there were fewer job additions in the private sector. The S&P 500 fell 0.9%.

Asia: A decline in China’s manufacturing PMI drove commodity prices lower. Disappointing global economic data over the last few days raised worries about growth prospects for major economies. The Nikkei ended 0.8% lower, while the Hang Seng was trading 0.4% down at 7:00 am.

Continental Europe: UK FTSE 100 Index’s gains were capped on Wednesday after worse-than-expected US employment data. Investors remain hopeful that the ECB would ease monetary policy at its meeting today. Most European bourses, including Germany’s DAX and France’s CAC 40, were closed for May Day holiday.

UK small caps: The FTSE AIM All-Share index rose 0.4% yesterday. 

Today’s news

China’s HSBC manufacturing PMI declines in April

The final HSBC Purchasing Managers’ Index (PMI) fell to 50.4 in April from 51.6 in March, slightly below the flash reading of 50.5 last week. Growth in new orders eased to a five-month low, while new export orders fell to 48.4, the lowest level since last October 2012. The sub-index for employment dropped below 50 for the first time in five months.

ECB likely to cut interest rate as the economy weakens

The ECB is expected to lower the main interest rate by a quarter-basis point to 0.5% at its meet today following increasing weakness in the Eurozone in recent weeks. Inflation eased to 1.2% in April, the lowest level since February 2010 and well below the ECB’s target rate of 2%.

Company News

Antofagasta (LON:ANTO)

Yesterday, Antofagasta released its production results for Q1 2013. On y-o-y basis, copper production rose 12.8% to 183,800 tonnes, matching the company’s expectations, largely due to increased production at Esperanza owing to higher throughput levels. However, copper production was down 5.2% compared to Q4 2012 due to lower production at Los Pelambres as a result of scheduled plant maintenance. Gold production stood at 86,200 ounces (oz), marginally below the 86,400 oz seen in the previous quarter. Molybdenum production at Los Pelambres was 2,600 tonnes compared to 2,700 tonnes in Q4 2012. Group cash costs (net of by-product credits) rose 1.8% to 115.5 cents per pound as Los Pelambres was impacted by inflated energy and shipping costs that were only partly offset by lower cash costs at Esperanza. The Esperanza plant is still undergoing modifications to bring it up to its design capacity of 97,000 tonnes a day. The management reiterated that it was on course to deliver on its production forecasts for the full year. The Antucoya project, which was temporarily suspended, has resumed development. The provisional pricing and hedging adjustments with respect to copper sales resulted in a total negative provisional pricing adjustment of US$78.9m and an average realised price of 341.1 cents per pound. The provisional pricing adjustment for molybdenum sales was a negative US$4.8m and US$4.1m for gold sales.

Our view: Antofagasta reported positive production results for the first quarter with copper production advancing 12.8% y-o-y due to the ramp up at its Esperanza mine. The Esperanza plant reached an average throughput of 91,400 tonnes a day in the first quarter, up from 89,200 tonnes a day in the fourth quarter even though overall payable copper production fell from the previous quarter due to in-process inventory movements. Gold production was broadly unchanged from the previous quarter. The company reaffirmed that it remains on track to meet its 2013 production targets of around 700,000 tonnes of copper. The on-going optimisation of operations at Esperanza was progressing well and the company is optimistic of ramping up total output, with the potential for incremental plant expansion at Los Pelambres and stand-alone plants at the Esperanza Sur and Encuentro sulphides deposits. We remain positive on the longer-term fundamentals of the copper industry and expect an increase in demand growth from large markets China and the US. In the first quarter of 2013, Antofagasta witnessed a weak performance on the bourse, leading to unwinding of gains achieved in 2012. We believe the current valuation is very attractive, and maintain our Buy rating.

Ophir Energy (LON:OPHR)

Yesterday, Ophir Energy announced the successful completion of its Drill Stem Test (DST) on the Mzia -2 appraisal well in Block 1, Tanzania. The Mzia DST was designed to be the first test of Cretaceous age reservoirs in the Tanzanian deepwater play. On test, the Mzia-2 DST flow-rate was at the upper limit of 10-20 million standard cubic feet per day (mmscf/d) range. The well flowed at an equipment-constrained 57 mmscf/d with a low drawdown. The DST results suggest that the reservoir parameters that were previously used to calculate recoverable volumes in the Cretaceous reservoirs were conservative. Although further appraisal drilling would be necessary to define the total recoverable resource, Ophir management now estimates that mean recoverable resources from the Mzia Field have increased 22% to an estimated 4.5 trillion cubic feet (tcf). Also, the Deep Sea Metro 1 drillship is now spudding the Ngisi-1 exploration well in Block 4. Ophir estimates Ngisi-1 could increase the mean in-place resource of the Chewa-Pweza-Ngisi hub to 5.8 tcf (4.1 tcf mean recoverable) and would also provide critical scale for gas aggregation and development from Block 4. Ophir holds a 40% stake in Blocks 1, 3 and 4 in Tanzania while the operator BG Group holds the balance 60% interest.

Our view: The Mzia-2 DST result has increased the estimated recoverable resources from the Mzia field to 4.5 tcf. This Mzia flow test is a milestone result for Ophir Energy as it is the first time that the older, Cretaceous reservoir has been successfully flow tested in Tanzania. This test result will boost expected production rates and improve development economics for this asset. The management said that with this better than expected reservoir performance in the Cretaceous reservoir, the Ophir-BG joint venture will reassess the potential of both the earlier Papa-1 discovery and the remaining prospects of similar Cretaceous age. Furthermore, the recent Jodari flow test demonstrated the excellent reservoir deliverability potential of the younger Tertiary reservoirs in Tanzania. This is another vital step in Tanzania’s first LNG development project and underpins the potential for considerable upside in the company’s acreage in Tanzania. Last year, Ophir drilled six exploration and two appraisal wells with a 100% success rate. Ten seismic programmes were also acquired and the company entered into two new countries, Kenya and Ghana. The additional seismic programmes acquired are expected to start paying off with the identification of significant new plays and prospects which could materialise once drilling commences later this year. Considering Ophir’s high quality acreage and strong drilling success rates, we maintain our Buy rating on the stock.

Economic News

UK Nationwide house prices

House prices in the UK dipped 0.1% m-o-m in April after remaining unchanged in the previous month, data released by the Nationwide Building Society showed yesterday. Economists had forecasted a 0.3% increase in April. A typical home in the UK was now worth £165,586. On a y-o-y basis, house prices rose 0.9%, following a 0.8% increase in March. Economists had forecasted house prices to rise 1.3% on a y-o-y basis.

US MBA mortgage applications

Applications for US home mortgages rose 1.8% in the week ended 26th April, the Mortgage Bankers Association said yesterday. Applications for home mortgages had edged up 0.2% in the preceding week. The seasonally adjusted index of refinancing applications rose 2.8%, whereas the index of loan requests for home purchases, a key gauge for home sales, dipped 1.4%. The refinance share of total mortgage activity was unchanged at 75% of total applications.

US ADP employment change

Jobs in the private sector increased 119,000 in April, after a downwardly revised rise of 131,000 in March, missing the consensus estimate of 150,000, ADP reported yesterday. The services sector added 113,000 jobs in April, while the goods sector added just 6,000. Financial activities payrolls rose 7,000.

US ISM manufacturing

Manufacturing PMI in the US fell to 50.7 in April, the slowest rate of the year, from 51.3 in March, the Institute of Supply Management (ISM) reported yesterday. Economists had forecast a reading of 50.6. The index for new orders rose to 52.3 from 51.4 the previous month, whereas the production index grew to 53.5 from 52.2. The employment index declined to 50.2, the lowest in five months, from 54.2 in March, whereas the prices index dropped to 50.0 from 54.5.

US FOMC rate decision

The US Federal Open Market Committee (FOMC) announced yesterday that it would continue to hold interest rates at its historic low level (0-0.25%) and purchase US$85bn in debt securities every month until the unemployment rate falls below 6.5%. The rate-setting panel announced it would continue purchasing additional agency mortgage-funded and long-term Treasury securities at a rate of US$40bn and US$45bn, respectively, per month. The committee also said it was prepared to increase or lower the purchase rate to maintain a suitable policy accommodation as the outlook for the labour market or inflation changes.


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