Battery stocks charge on but strong support building for good-old gold

12th January 2018
Tim Treadgold

Battery metals have continued in the first few weeks of 2018 where they left off in 2017, as the stars of the mining sector. But in the background, there are rumblings that old-faithful of the mining world, gold, could be getting ready to take centre stage.

While cobalt, lithium, graphite, and the other members of the battery family (including manganese and vanadium) have performed well, gold has quietly added $US80 an ounce over the past four weeks, with $US30/oz of that coming since Christmas.

The major factor driving gold has been a weaker US dollar, but if recent speculation about a US-versus-China trade war is correct and China stops buying US Treasury Bonds, which has been rumoured, then the spotlight will switch to gold as a high-quality reserve asset for China’s spare cash and the price could move up quite quickly.

At $US1318/oz, gold is at its highest since last September whereas in contrast, the Australian gold price has been struggling to make headway thanks to its US3 cent rise from US75c to US78c over the past month.

Watching gold and gold equities will be a priority for mining-sector investors in 2018, especially if the US and China do engage in tit-for-tat trade measures, though gold will not be the only game in town as investors warm to the idea of another year of strong commodity prices.

China’s supply restrictions caused by its new rules governing environmental pollution will underpin demand (and price) for steel-making raw materials, which is why iron ore, coking coal, manganese, nickel and vanadium continue to perform strongly.

Base metals, especially copper and zinc, have also picked up where they left off at the end of 2017 thanks to a combination of demand growth and supply restriction caused, in part, by limited investment in new mines.

Even thermal coal, the material banished from the headlines by political correctness, is excelling with the spot-market price sitting above $US100 a tonne, 30% higher than the most optimistic forecast of a few months ago. Coking coal for steel-making is doing even better at $US270/t.

At the top end of the mining sector, an interesting situation is developing which will have an effect on the small end of the market during 2018 thanks to the biggest miners, BHP and Rio Tinto, being forced to delay investment in new mines in order to satisfy shareholder demands for higher dividends.

UBS, a leading investment bank, summed up the situation in a pre-Christmas research report which had as its headline, “2018 Outlook: Cash focus to remain”.

The bank’s thesis is that debt reduction by the biggest miners is almost complete and while it might be tempting for management to dust off mine development plans as metal prices reach “project incentive levels”, that is unlikely to happen for at least another year.

With the big boys forced to return cash as dividends, the field is being opened for small and mid-tier miners to get on with mine development projects.

Copper, which is trading at a four-year high, will be a priority for explorers and developers, while producers are watching their share prices march in step with the copper price. Sandfire, for example, had drifted down to as low as $5.57 in mid-September but has since risen by 27.5% to $7.09. OZ Minerals is up by 22.7% to $8.90.

Copper stocks were not the only strong performers on the ASX over the past week with interest stretched across most commodities. Some of the more significant share-price moves included:

  • Lucapa Diamond Co adding 5.5c (27.5%) to 25.5c after reporting the discovery of a diamond-bearing structure at its Little Spring Creek prospect in the 80%-owned Brooking project in the West Kimberley region of WA. The discovery area is located 50km from the Ellendale diamond field, an area familiar to Lucapa’s management team.
  • Australian Vanadium reported excellent recoveries from samples taken from its Gabanintha vanadium project near Meekatharra in central WA, sparking fresh interest from investors who drove the stock to a 12-month high of 3c on Wednesday before it eased marginally to close yesterday at 2.9c, a gain of 0.8c, or 38%.
  • Zenith Minerals rose by 5c (33%) to 20c after reporting the recovery of high-grade, near-surface samples of cobalt and nickel from its 100%-owned Split Rock project located about 15km north-west of the Bounty goldmine in the south of WA.
  • Breaker Resources was the pick of the gold stocks with a rise of 8c to 71c after reporting fresh assays from its Bombora project in WA, with a best assay of 35.88 grams of gold a tonne over 9 metres from a depth of 131m.
  • Nzuri Copper got a fresh price lift after reporting the receipt of a second tranche of funds from its Chinese partner in the promising Kalongwe copper and cobalt project in the Democratic Republic of Congo (DRC). This week’s rise of 6c to 46c means Nzuri has risen by 28.5c (160%) over the past two months.
  • Kalium Lakes slipped 2c to 41c despite reporting fresh work which confirmed the prospectivity of the Carnegie potash project in WA.
  • Pegasus Metals rose by 1c to 3.5c after reporting that it was farming-in to the Dablo precious and base metals project in the West African country of Burkina Faso.
  • Force Commodities said field work had confirmed the presence of a 1km long lithium-bearing pegmatite at its Kitotolo project in DRC, news which lifted the stock by 2c to 11.5c.
  • Ausgold said drilling had resumed this week on its Katanning gold project in the south-west of WA with results from work completed late last year expected to be released soon. On the market, Ausgold added half-a-cent to 3.7c.
  • Dragon Mining also crept half-a-cent higher to 20c despite reporting an eye-catching 38% increase in the gold resource in its projects in Sweden and Finland, with group resources now standing at 1.44 million ounces grading 3.3g/t, and
  • Diatreme Resources effectively doubled from 1.6c to 3c after announcing a deal with a Chinese company to complete a definitive feasibility study into the Cyclone titanium minerals project in the Eyre Basin, close to the border between WA and South Australia.

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