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Australian market pushes through trade war, 'switching gears' to reward M&A

Australian resource stocks are expected to increase transactional activity yet more with the equity market "switching gears" to reward rather than punish them for acquisitions, given the massive rewards reflected in the latest Deloitte Western Australia Index issued on Oct. 10.

While the index revealed modest growth in September, with market capitalizations of Western Australian ASX-listed companies rising marginally to close out the month at A$193.2 billion, mining and services companies who made transactions enjoyed extraordinary growth.

Northern Star Resources Ltd.'s market capitalization rose A$1.04 billion (24.3%) in September having announced it would buy for US$260 million the Alaska Pogo underground goldmine, a potential third Tier 1 asset for the miner.

South32 Ltd.'s market capitalizaton that month rose A$2.2 billion (12.4%) to A$20.02 billion having rolled out a share buyback and raising its dividend total for the year to 13.8 U.S. cents on the back of a 16% profit increase for the year.

Financial services firm Morgans' senior analyst Adrian Prendergast, who covers South32, told S&P Global Market Intelligence that additional strength from the improving fundamentals supported the miner's aluminum division and coal assets, while more broadly the market was "switching gears" to reward transactional activity amid improving commodities sentiment.

Deloitte noted that zinc climbed to US$2,659/tonne, up 8% across the month, as Shanghai Futures Exchange inventory levels reached their lowest level since September 2017, plummeting to 29,204 tonnes.

The firm noted that while depleted zinc reserves over the past few years have resulted in several mine shutdowns, the price looks to have turned around following increased zinc mine investment, as demonstrated by New Century Resources Ltd.'s Century mine opening in Queensland.

Iron ore rose to US$69.70/tonne after Beijing decided not to renew the blanket steel production and coal use cuts during the upcoming heating season; while coking coal rose 14.8% in September to US$194/tonne amid a shortage of new mine projects and continuing demand.

Copper rose 5% in September up to US$6,264/tonne despite ongoing trade war tension between the U.S. and China, with increased global demand on the back of electric vehicle trade, particularly given the intentions of China, which currently accounts for half of global copper demand, to dominate the electric vehicle market.

"From the sell-off in base metals resulting from trade tensions, we've been expecting a relief rally to come through, and this (copper lift) might be the start of it, especially for beaten up metals like copper," Prendergast said.

The services sector was also active, with Ausdrill Ltd. soaring by A$357.1 million (61.1%) in September due to a significant movement in volumes of shares traded and the flow-on effect from the acquisition of underground miner Barminco Holdings Pty Ltd for A$271 million; while Barminco also secured a A$700 million, five-year contract extension at Sunrise Dam by AngloGold Ashanti Ltd..

Global Construction Services Ltd.' market capitalization also grew A$154.1 million (99.9%) stemming from the merger of equals with SRG Ltd., resulting in the creation of SRG Global.

Growth across commodities

Prendergast said Deloitte's report reflected his view that Australia's equity market, which barely two years ago rewarded companies making acquisitions by devaluing their share prices, had now "switched gears" to a "risk-on" mindset, leading larger companies to a "crossroads moment" where they can choose to grow either via "slow and steady with low-cost, high-risk exploration, or via acquisitions."

This trend stretches beyond mining, as Prendergast noted with South Australian-based oil and gas midtier Beach Energy Ltd, which completed its A$1.59 billion acquisition of Origin Energy Ltd.'s Lattice Energy Ltd. in January, which has enabled it to leverage up in scale despite and pay down the "tremendous amount" of debt it had previously taken on.

Poseidon Nickel Ltd.'s market capitalization rose by 125.5% following an entitlement issue which saw the raising of about A$69 million in fully underwritten capital; and entered into a memorandum of understanding with Estrella Resources Ltd. to enable a binding final agreement for ore toll treatment from the latter's Carr Boyd Rocks nickel project.

Prendergast said that while there was a greater push into acquisitions as opposed to a more gradual pick-up in exploration, the rewards for positive developments in exploration has been inconsistent despite access to capital for exploration having improved.

Deloitte's assurance and advisory partner Dave Andrews told S&P Global Market Intelligence said the share price rewards for M&A showed that the market is "becoming more positive of the sector coming together and bolstering itself for the next wave."