Materials Analyst/Strategist, Janus Analysis

Gaius King

Materials Analyst/Strategist

Accelerating Tomorrow’s Independent Research

Boost Research

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Thematic (Sector/Industry)

<ul>
<li>Quantifying nuclear statistics with substantial discrepancies</li>
<li>LT contracts &amp; speculative hoarding driving recent 40% spot price increase</li>
<li>Primary/secondary Uranium supplies currently 112% of 2017 demand</li>
<li>Uranium supply deficits extremely unlikely before 2022</li>
<li>Global Uranium demand to fall 25-40% by 2050</li>
<li> Primary Uranium sector LT SELL</li>
</ul>
We have independently audited global nuclear construction statistics in order to determine future Uranium demand.  Although near-term statistics match those in the public domain, long-term demand determined via construction pipeline illustrates substantial discrepancies.  Compiling planned plant construction, operational extensions, nameplate upgrades, versus decommissioning announcements/events, and in many cases, public policy inertia; has led us to believe that despite historical primary supply shortages, global nuclear demand peaked in 2006.
Since plateauing and despite strong Chinese growth, nuclear power generation has fallen &lt;2% over the past two decades, a decline that is predicted to accelerate as a number of developed and developing nations pursue other energy options.
The macro-trend not replacing existing nuclear infrastructure means (dependent on assumptions), according to our calculations, global uranium demand will decrease between 20 to 40% by 2050.
As opposed to signifying a fundamental change in underlying demand, we believe that recent Uranium price increases are the result of producers closing primary operations, and substituting production with purchases on the spot market to meet long-term contract obligations.  In addition, hedge funds are buying physical uranium in order to realise profits on potential future commodity price increases.  Critically, we determine that primary and secondary supplies are more than sufficient to meet forecast demand over the next four to five years; before taking into account substantial existing global uranium stocks, some of which are able to re-enter the spot market at short notice.


Quantifying nuclear statistics with substantial discrepancies
LT contracts &amp; speculative hoarding driving recent 40% spot price increase
Primary/secondary Uranium supplies currently 112% of 2017 demand
Uranium supply deficits extremely unlikely before 2022
Global Uranium demand to fall 25-40% by 2050
 Primary Uranium sector LT SELL

We have independently audited global nuclear construction statistics in order to determine future Uranium demand.  Although near-term statistics match those in the public domain, long-term demand determined via construction pipeline illustrates substantial discrepancies.  Compiling planned plant construction, operational extensions, nameplate upgrades, versus decommissioning announcements/events, and in many cases, public policy inertia; has led us to believe that despite historical primary supply shortages, global nuclear demand peaked in 2006.
Since plateauing and despite strong Chinese growth, nuclear power generation has fallen &lt;2% over the past two decades, a decline that is predicted to accelerate as a number of developed and developing nations pursue other energy options.
The macro-trend not replacing existing nuclear infrastructure means (dependent on assumptions), according to our calculations, global uranium demand will decrease between 20 to 40% by 2050.
As opposed to signifying a fundamental change in underlying demand, we believe that recent Uranium price increases are the result of producers closing primary operations, and substituting production with purchases on the spot market to meet long-term contract obligations.  In addition, hedge funds are buying physical uranium in order to realise profits on potential future commodity price increases.  Critically, we determine that primary and secondary supplies are more than sufficient to meet forecast demand over the next four to five years; before taking into account substantial existing global uranium stocks, some of which are able to re-enter the spot market at short notice.

Uranium - About to Enter Its Own Nuclear Winter

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Morningstar and PitchBook hosted the 10th annual Management Behind the Moat Conference in Chicago on Nov. 7 and 8, offering our institutional clients an opportunity to engage with the management of 49 public companies we think have structural competitive advantages, or economic moats, as well as two private companies worth watching. This report distills the highlights from company presentations. A roster of all companies that participated in the conference, including those that held one-on-one meetings with investors, can be found on Page 2 of the attached document.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/069/790/original/img%201.JPG?1542165661" class="editor-image img-responsive" data-smartkarma-image-id="69790"></figure>

Morningstar and PitchBook hosted the 10th annual Management Behind the Moat Conference in Chicago on Nov. 7 and 8, offering our institutional clients an opportunity to engage with the management of 49 public companies we think have structural competitive advantages, or economic moats, as well as two private companies worth watching. This report distills the highlights from company presentations. A roster of all companies that participated in the conference, including those that held one-on-one meetings with investors, can be found on Page 2 of the attached document.

Morningstar Management Behind the Moat 2018: Conference Highlights

LNG, Oil & Gas, M&A Market Intelligence Specialist

Massimo Bellino

A new wave of consolidation is unfolding in the upstream oil and gas industry. Three company takeovers involving US shale E&amp;Ps were announced in just four days. The renewed M&amp;A activity has not been limited to the US. In Canada, <a href="https://www.smartkarma.com/entities/22923" target="_blank" data-smartkarma-citation="entities:22923:1">Husky Energy (HSE CN)</a> launched a $5bn hostile bid for <a href="https://www.smartkarma.com/entities/25700" target="_blank" data-smartkarma-citation="entities:25700:1">MEG Energy Corp (MEG CN)</a> while in Europe the terms of the merger between Wintershall and DEA, with an estimated value of $10bn, have finally been agreed. The total upstream oil and gas M&amp;A announced in the last four months reached $66bn, a quarterly aggregated deal value last seen in March 2017.
Meanwhile, the price of the crude Brent fell by more than 10% from its $85 per barrel peak reached in October as rising inventory levels, trade disputes, and worries about economic growth impacting the oil demand, shifted the market sentiment. As a result, the average valuation of the independent E&amp;Ps decreased back to the levels seen when the oil price traded at around $50 per barrel (Exhibit 1).
The strategic need to grow scale to remain competitive in the more efficient industry emerging from the downturn is one of the main drivers of consolidation. Oil and gas companies are taking advantage of the disconnect between the oil price and valuations to pursue M&amp;A and share buybacks while generating plenty of cash to implement these strategies. Will investors take notice?
<h2>Exhibit 1: M&amp;A Deal Volume vs E&amp;P Index and the Oil Price</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/660/original/Picture1.png?1541306124" class="editor-image img-responsive" data-smartkarma-image-id="68660"></figure>
<div class="content-caption">Source: Energy Market Square, Capital IQ. Market value-weighted index including independent E&amp;P companies with a market value greater than $300m as of 19 April 2018. Data as of 2 November 2018. M&amp;A volume includes $5bn Husky Energy hostile takeover for MEG Energy and the estimated $10bn value for the merger of Wintershall and DEA.</div>
<h2>Exhibit 2: Brent Oil Price and Consensus Forecasts Since 2016</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/703/original/update2latest.png?1541324157" class="editor-image img-responsive" data-smartkarma-image-id="68703"></figure>
<div class="content-caption">Source: Energy Market Square analysis based on Capital IQ data. Prices as of 2 November 2018.</div>

A new wave of consolidation is unfolding in the upstream oil and gas industry. Three company takeovers involving US shale E&amp;Ps were announced in just four days. The renewed M&amp;A activity has not been limited to the US. In Canada, Husky Energy (HSE CN) launched a $5bn hostile bid for MEG Energy Corp (MEG CN) while in Europe the terms of the merger between Wintershall and DEA, with an estimated value of $10bn, have finally been agreed. The total upstream oil and gas M&amp;A announced in the last four months reached $66bn, a quarterly aggregated deal value last seen in March 2017.
Meanwhile, the price of the crude Brent fell by more than 10% from its $85 per barrel peak reached in October as rising inventory levels, trade disputes, and worries about economic growth impacting the oil demand, shifted the market sentiment. As a result, the average valuation of the independent E&amp;Ps decreased back to the levels seen when the oil price traded at around $50 per barrel (Exhibit 1).
The strategic need to grow scale to remain competitive in the more efficient industry emerging from the downturn is one of the main drivers of consolidation. Oil and gas companies are taking advantage of the disconnect between the oil price and valuations to pursue M&amp;A and share buybacks while generating plenty of cash to implement these strategies. Will investors take notice?
Exhibit 1: M&amp;A Deal Volume vs E&amp;P Index and the Oil Price

Source: Energy Market Square, Capital IQ. Market value-weighted index including independent E&amp;P companies with a market value greater than $300m as of 19 April 2018. Data as of 2 November 2018. M&amp;A volume includes $5bn Husky Energy hostile takeover for MEG Energy and the estimated $10bn value for the merger of Wintershall and DEA.
Exhibit 2: Brent Oil Price and Consensus Forecasts Since 2016

Source: Energy Market Square analysis based on Capital IQ data. Prices as of 2 November 2018.

Flash Update: US Shale M&A Frenzy Drives Further Consolidation in Upstream Oil & Gas

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
A Correction and Not and End-Cycle Sell-off. In our note dated 20 October – “It’s Not Over Yet, But Lift the Bar on Defence” - we argued that the global equity market sell-off was likely a correction and not the beginning of an end-cycle sell-off.  We retain this view, but think better news on trade tariffs is needed if the market is to bounce back.  The US equity market PE derating is more a fundamental adjustment to slower earnings growth rather and better news on costs would be well-received.  The Fed will probably remain unfazed by the October risk-off period, so tightening financial conditions remain a headwind for equities unless the Fed pauses. </li>
<li>
Risk-off Underpinned by Fundamentals: US reporting season has shown that underlying late-cycle cost pressure has been managed relatively well.  However, the large lift in tariffs by the Trump Administration has added to these pressures and the prospect of more tariffs is weighing on the outlook.  The BXB quarterly result showed how these forces are coming together.  Global equity markets fell by 7.3% in the month, with Japan, the US and Asian markets particularly hard hit.  The Australian market began its decline in September (-1.4%), but saw a smaller decline in October than most other developed markets (-6.1%).  Emerging markets in Latin America, apart from Brazil, were also hit hard. </li>
<li>
Cost Pressures Seem to be Modest. During AGM season management has generally guided earnings estimates for FY19 a little lower on the back of higher costs.  Industrial stocks with US operations are under cost pressure (eg. BXB), but higher oil prices are reaching into areas such as airline ticket pricing (FLT).  The Miners are in a sweet spot – production has generally been solid against the backdrop of high bulk commodity prices and a weaker Australian dollar.  The Banks are reimbursing customers for overcharging in an attempt to front-run the recommendations of the Royal Commission.</li>
<li>
The Earnings outlook Still Looks Solid. The Upgrades: downgrades ratio for the market is above average and FY19 earnings growth is tracking similar to FY18 and around 8%.  In our latest model portfolio update, we increased the number of stocks in the portfolio and bought in a defensive earnings tilt.  The Tech sector (-11.5%) was swept up in the global sell-off in the sector and our exposure to WTC has been a drag on the portfolio, but the outlook for the stock seems positive, with management upgrading FY19 guidance.</li>
<li>
The Sell-off Ramped up Short Positioning. Short positioning generally increased during the sell-off.  The most shorted stocks in the ASX 200 are JBH, ORE and GXY.  ING, CSR and IFL saw the largest increase in short positioning, while CYB, AHY and VOC saw the largest falls in short positioning.</li>
<li>
Solid Economic Data Shows the Economy is on a Solid Path. Strong employment data indicates the domestic economy is still growing above trend.  Weak building Approvals and housing finance data highlighted the softness in housing, while weak inflation data for Q3 reinforced the RBA’s rates-on-hold policy agenda.  The Miners and weak currency helped deliver a strong trade surplus in September leaving Australia’s call on global savings relatively small.</li>
</ul>



A Correction and Not and End-Cycle Sell-off. In our note dated 20 October – “It’s Not Over Yet, But Lift the Bar on Defence” - we argued that the global equity market sell-off was likely a correction and not the beginning of an end-cycle sell-off.  We retain this view, but think better news on trade tariffs is needed if the market is to bounce back.  The US equity market PE derating is more a fundamental adjustment to slower earnings growth rather and better news on costs would be well-received.  The Fed will probably remain unfazed by the October risk-off period, so tightening financial conditions remain a headwind for equities unless the Fed pauses. 

Risk-off Underpinned by Fundamentals: US reporting season has shown that underlying late-cycle cost pressure has been managed relatively well.  However, the large lift in tariffs by the Trump Administration has added to these pressures and the prospect of more tariffs is weighing on the outlook.  The BXB quarterly result showed how these forces are coming together.  Global equity markets fell by 7.3% in the month, with Japan, the US and Asian markets particularly hard hit.  The Australian market began its decline in September (-1.4%), but saw a smaller decline in October than most other developed markets (-6.1%).  Emerging markets in Latin America, apart from Brazil, were also hit hard. 

Cost Pressures Seem to be Modest. During AGM season management has generally guided earnings estimates for FY19 a little lower on the back of higher costs.  Industrial stocks with US operations are under cost pressure (eg. BXB), but higher oil prices are reaching into areas such as airline ticket pricing (FLT).  The Miners are in a sweet spot – production has generally been solid against the backdrop of high bulk commodity prices and a weaker Australian dollar.  The Banks are reimbursing customers for overcharging in an attempt to front-run the recommendations of the Royal Commission.

The Earnings outlook Still Looks Solid. The Upgrades: downgrades ratio for the market is above average and FY19 earnings growth is tracking similar to FY18 and around 8%.  In our latest model portfolio update, we increased the number of stocks in the portfolio and bought in a defensive earnings tilt.  The Tech sector (-11.5%) was swept up in the global sell-off in the sector and our exposure to WTC has been a drag on the portfolio, but the outlook for the stock seems positive, with management upgrading FY19 guidance.

The Sell-off Ramped up Short Positioning. Short positioning generally increased during the sell-off.  The most shorted stocks in the ASX 200 are JBH, ORE and GXY.  ING, CSR and IFL saw the largest increase in short positioning, while CYB, AHY and VOC saw the largest falls in short positioning.

Solid Economic Data Shows the Economy is on a Solid Path. Strong employment data indicates the domestic economy is still growing above trend.  Weak building Approvals and housing finance data highlighted the softness in housing, while weak inflation data for Q3 reinforced the RBA’s rates-on-hold policy agenda.  The Miners and weak currency helped deliver a strong trade surplus in September leaving Australia’s call on global savings relatively small.


Aussie Equities Month in Review (Oct 2018)

<ul>
<li>
Good outperformance by staying long growth. Our model portfolio has a tilt towards Growth over Value and this has underpinned its solid outperformance since last December.  However, this outperformance is now at a threshold that in the past has given way to underperformance and there are signs this is now occurring.  CSL, COH and ALL have all disappointed in the past month, but we think these stocks will again outperform in the months ahead.  The portfolio (12.6%) outperformed the benchmark ASX 200 (7.3%) since our last update on 2 July and this gives us confidence we on the right path.  Stay long Growth, for now.</li>
<li>
Moving Back to Neutral in Resources. In Resources, we are moving from slightly overweight to benchmark by removing MIN.  We retain overweight positions in RIO, WHC, BHP,  OSH, STO and WOR.  MIN has underperformed since the last portfolio update and even though we like the stock we think there are better opportunities elsewhere.</li>
<li>
Stay underweight Banks. We retain our slight underweight position in Banks.  This position is mainly built upon our large underweight in CBA.  The findings of the Royal Commission are yet to be handed down and this uncertainty remains a headwind for the sector along with weak credit growth.  Funding pressures still exist, but they are being well managed.  However, the sector has valuation support and this limits the extent of our underweight.</li>
<li>
Start to Add Defensive Growth. Our main change in strategy is to begin de-risking the portfolio by adding stocks with defensive earnings characteristics.  In consumer discretionary, we add TAH, NVT and TME, while in Healthcare we add RMD.  TAH,NVT and RMD have a good defensive earnings quality and we think they will be rewarded as the global bull market matures.  TME and WTC provide more Growth.</li>
</ul><ol><li>
We remove JHX and NHF. Reporting season showed the US operations of Australian businesses are under cost pressure and we think these pressures will continue.  JHX is also at risk from the Fed’s tightening campaign and there are early signs it’s beginning to slow housing.  JHX has already seen cost pressures in its fibre cement business and was lucky to escape with a well-received earnings report.  Similarly, lower claims saw a relatively good result from NHF, but private health insurance remains under structural pressure.  We take the opportunity to remove these stocks from the portfolio.</li></ol>



Good outperformance by staying long growth. Our model portfolio has a tilt towards Growth over Value and this has underpinned its solid outperformance since last December.  However, this outperformance is now at a threshold that in the past has given way to underperformance and there are signs this is now occurring.  CSL, COH and ALL have all disappointed in the past month, but we think these stocks will again outperform in the months ahead.  The portfolio (12.6%) outperformed the benchmark ASX 200 (7.3%) since our last update on 2 July and this gives us confidence we on the right path.  Stay long Growth, for now.

Moving Back to Neutral in Resources. In Resources, we are moving from slightly overweight to benchmark by removing MIN.  We retain overweight positions in RIO, WHC, BHP,  OSH, STO and WOR.  MIN has underperformed since the last portfolio update and even though we like the stock we think there are better opportunities elsewhere.

Stay underweight Banks. We retain our slight underweight position in Banks.  This position is mainly built upon our large underweight in CBA.  The findings of the Royal Commission are yet to be handed down and this uncertainty remains a headwind for the sector along with weak credit growth.  Funding pressures still exist, but they are being well managed.  However, the sector has valuation support and this limits the extent of our underweight.

Start to Add Defensive Growth. Our main change in strategy is to begin de-risking the portfolio by adding stocks with defensive earnings characteristics.  In consumer discretionary, we add TAH, NVT and TME, while in Healthcare we add RMD.  TAH,NVT and RMD have a good defensive earnings quality and we think they will be rewarded as the global bull market matures.  TME and WTC provide more Growth.

We remove JHX and NHF. Reporting season showed the US operations of Australian businesses are under cost pressure and we think these pressures will continue.  JHX is also at risk from the Fed’s tightening campaign and there are early signs it’s beginning to slow housing.  JHX has already seen cost pressures in its fibre cement business and was lucky to escape with a well-received earnings report.  Similarly, lower claims saw a relatively good result from NHF, but private health insurance remains under structural pressure.  We take the opportunity to remove these stocks from the portfolio.

Australia

BHP Group Limited operates as a mining company.  The Companyengages in the exploration, development, production and processing of iron ore, metallurgical coal, and copper. BHP Group serves customers worldwide.

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BHP Group Ltd (BHP LN)

Uranium - About to Enter Its Own Nuclear Winter

Quantifying nuclear statistics with substantial discrepancies LT contracts & speculative hoarding driving recent 40% spot...

Boost Research

Morningstar Management Behind the Moat 2018: Conference Highlights

Morningstar and PitchBook hosted the 10th annual Management Behind the Moat Conference in Chicago on Nov. 7 and 8, offering our institutional...

Morningstar, Inc.

Flash Update: US Shale M&A Frenzy Drives Further Consolidation in Upstream Oil & Gas

A new wave of consolidation is unfolding in the upstream oil and gas industry. Three company takeovers involving US shale E&Ps were announced...

Massimo Bellino

Aussie Equities Month in Review (Oct 2018)

A Correction and Not and End-Cycle Sell-off. In our note dated 20 October – “It’s Not Over Yet, But Lift the Bar on Defence” - we argued that the...

Shane Lee

Aussie Equities Model Portfolio Update

Good outperformance by staying long growth. Our model portfolio has a tilt towards Growth over Value and this has underpinned its solid...

Shane Lee

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52-week Range

Market Cap (USDm)

P/E

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