Evening Wrap: ASX 200 falls + A big step forward for Australia's largest nickel-cobalt project

The Index stages its first meaningful red session since the June 26 low, Australia's industrial sectors spiral further into contraction territory, Ardea Resources completes a key study for its world class nickel-cobalt asset, Morgan Stanley retains its view of two more hikes and Macquarie's take on the agriculture sector.

Let's dive in.

ASX 200 Session Chart

ASX 200 falls and finished near worst levels (Source: Market Index)

Markets

The ASX 200 finished lower and near worst levels in a relatively uneventful session that had no US lead. Defensives including Telcos, Utilities and Staples outperformed while the rest of the market was weaker. The Index was on an almost six day win streak, up 2.9% off the June 26 low. Just like the previous rally, we talked about the importance of an orderly pullback. Will we see a friendly pullback to 7,200 or will there be an event that triggers a jump in volatility, panic and a revisit of recent lows?

Economy

The Ai Group Australian Industry Index fell in June, down 1.1 point to -11.9.

• This is a monthly index that measures changes in activity in Australia’s industrial sectors. The distance from 0 indicates the strength of expansion or decline

• The Index has been in contraction for the last fourteen months

• “Employment, industrial activity and new orders indicators all continue to point towards contraction.”

• “Price indicators all rose mildly in June, suggesting inflationary pressures are not yet over. Average wages surged by 11.6 points in the tight labour market.”

• “The new orders indicator slipped again after a modest recovery in May. It fell by 7.4 points into deeper contraction at -15.8 points. The new orders trend has been negative since July 2022.”

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Market Insights

A 'World-Significant' Nickel Asset

Last month, I had a look at which ASX nickel stock offers the best value based on two factors: Mineral Resource and Market cap. You can read the full article here.

Ardea Resources (ASX: ARL) was the stock that presented the best value via its 100% owned Kalgoorlie Project, which is the largest nickel-cobalt resource in Australia. It's got 5.9 million tonnes of contained nickel and 384,000 tonnes of cobalt - enough to produce more than 147 million EVs.

The stock has more than doubled in past four trading sessions, up to almost 70 cents or a market cap of $77 million.

Today it presented the outcomes of the Pre-Feasibility Study for Kalgoorlie. It was pretty spicy.

• Mining optimisation studies projected production of approximately 30,000 tonnes of nickel and 2,000 tonnes of cobalt per annum for more than 40 years

• Post-tax NPV of $4.98 billion

• Average annual EBITDA of $800 million

• Project pay back within 3.1 years

• Total capital cost of $3.12 billion

The capex might be a little cause for concern but the company also announced a non-binding MOU with a Japanese Consortium comprised of Sumitomo Metal Mining, Mitsubishi and Mitsui & Co. While its non-binding, they are some rather quality and seasoned partners.

Revisiting Lithium

Just a quick one on lithium. In the past few weeks, we've seen a rotation into emerging names like Delta Lithium (ASX: DLI), Leo Lithium (ASX: LLL) and Latin Resources (ASX: LRS).

The broader sector is beginning to pick up too, evidenced by Pilbara Minerals (ASX: PLS), which is arguably the local bellwether for local lithium stocks, breaking above a longstanding trendline.

The breakout has also attracted rather choppy conditions, with the stock finishing 2.2% higher on Tuesday, down from a session high of 7.3%. Interesting.

Pilbara Minerals chart (Source: TradingView)

Interesting news and movers

Trading higher

• +13.0% McPherson’s (MCP) – Appoints CEO

• +12.4% Medical Developments (MVP)

• +11.2% Lindsay (LAU)

• +9.4% Betmakers (BET) – Continuation rally, up 14.3% in last three

• +8.0% Cann Group (CAN) – Preliminary revenue

• +4.8% Elders (ELD)

• +4.1% Bellevue Gold (BGL) – Agreement with GMD

• +1.4% Silver Lake Resources (SLR) – Upgraded by RBC

• +1.2% Telstra (TLS) – Upgraded by UBS

Trading lower

• -28.9% Atomo Diagnostics (AT1) – Pullback after +277.3% in last three

• -6.1% AMP (AMP) – Class action update

• -5.0% 29Metals (29M) – Balance sheet and Capricorn update

• -4.9% Red5 (RED) – Reports Q4 production

• -3.8% Berkeley Energia (BKY) – Pullback after +27.3% in last three

• -3.7% Centaurus Metals (CTM) – Pullback after +12.3% in last three

• -1.9% Alkane Resources (ALK) – Reports FY23 gold production 

• -0.9% Lark Distilling (LRK) – Pullback after +25.5% in last three

• -0.9% Westgold (WGX) – Reports Q4 production

Broker notes

Morgan Stanley’s take on the RBA pause:

• “Back to a pause, but still flagging further tightening: tightening: The RBA left the cash rate on hold at 4.1% at its July meeting, in line with market pricing but against our expectation for a hike.”

• “Still expect two hikes needed, 4.6% terminal rate: Given this pause looks to be more around slowing the pace of tightening than a shift in the view of what is ultimately required, we retain our view of two more hikes and a 4.6% terminal rate.”

• “Given the larger than expected increase in the minimum wage and unit labour costs since the last update, we see some upside risk to forecasts and continue to see a hike at that [August] meeting.”

Macquarie’s take on Agriculture: 

• “Wheat: International wheat prices rallied sharply in response to supply concerns (dry weather in the US and floods in China) and on suspected short covering before falling rapidly in the last week of June as supply concerns eased. 2H23TD average wheat basis is A$31/mt vs -A$70/mt in the pcp (-A$8/mt in 1H23). GNC benefits from a more negative wheat basis.”

• “Sector M&A: Bunge and Viterra agreed to merge to create a combined entity valued at over US$30b at an FY22 EV/EBITDA multiple of 4.3x vs GNC's 3.3x.”

• “AU livestock: prices continued to decline in June with the EYCI -3% and key trade lamb indicator NTLI -7%, taking 12-month performance to -49% and -32% respectively.”

• “Soft commodity prices have fallen back, but remain above L/T averages. Price declines across agricultural products (fert/agchem/ livestock) are a headwind for ELD, IPL and NUF.”

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