Analysts see a lithium recovery around the corner, albeit approaching slowly

First signs of lithium hitting the bottom after a torrid year of falling prices could be seen in market commentary this week with leading investment banks hinting that a lithium rebound could be on the way.
18th October 2019
Tim Treadgold

First signs of lithium hitting the bottom after a torrid year of falling prices could be seen in market commentary this week with leading investment banks hinting that a lithium rebound could be on the way.

J.P. Morgan was first to suggest that it might be time to take a fresh look at lithium stocks, followed by Morgan Stanley, which said a tour of Chile’s lithium industry revealed some ongoing uncertainty but that “downside risk is becoming more limited”.

One reason for the flash of confidence is that the price of lithium carbonate in China is already close to $US7000 a tonne, less than half its price of 18-months ago, and seems unlikely to fall further.

Another factor is that lithium was one of the first commodities to take a dive in the recent downturn and, in theory, should be one of the first to recover.

Over the next 12-months, Morgan Stanley expects the price of lithium carbonate to move back towards $US10,000/t even though it is not yet possible to see a clear turning point for the flip from decline to modest recovery.

J.P. Morgan, in a December quarter commodity preview, reckons iron ore and gold are its preferred commodities and while the lithium sector is having some growing pains and could still face a difficult six-to-12 months, a number of stocks will “come out the other side”.

The turn the banks see developing in lithium is not yet being reflected in the share prices of local lithium producers but there was an encouraging response from investors to fund-raising operations undertaken by Altura Mining and Pilbara Minerals, which have adjoining mines in WA’s Pilbara region.

Altura announced a $21.5 million issue of new shares priced at 6c with the funds earmarked for work expanding the company’s Pilgangoora mine. Pilbara Minerals said its share purchase plan seeking $20 million had attracted subscriptions totalling $27.3 million.

Among the other lithium stocks, Orocobre, which has fallen by 40% since the start of the year, lost another 7c this week to $2.35, but was trending up during trade on Tuesday and Wednesday. Galaxy, an even heavier loser with a 60% fall since January, was 2c weaker this week at 92c but was trading higher mid-week. Pilbara shed 1c this week to 30c, but did reach 33c on Wednesday.

Gold stocks were sold down quite sharply as the price of the metal settled below $US1500 an ounce thanks to a combination of improved confidence in the US economy and a belief that the Brexit saga is drawing to an end – with no guarantee that either view is correct.

Among the leading gold miners, Evolution lost 46c to $4.18. Newcrest was down $2.12 to $33.11, Saracen shed 45c to $3.27 and Northern Star fell by $1.63 to $10.25.

A sideline issue affecting the gold sector is growing interest in the extent of producer hedging, or forward selling gold at a discount the current price.

Citi, in its latest analysis of the hedging books of leading Australian goldminers, found that there was 3.81 million ounces hedged at a weighted average hedge price of $A1819 an ounce, a big gap on the latest local gold price of $A2194/oz.

More provocatively, Citi reckons the gold price will continue to rise next year, reaching $US1675/or, or $A2392/oz, widening the hedge gap and encouraging a fresh debate about whether hedging is smart at the time of a rising gold price.

Nickel was in the news during the week thanks to a flow of update reports filed to coincide with a conference in Perth. But the publicity did little for share prices. which were weighed down by a weaker metal price on the London and Shanghai markets.

Two nickel stocks which swam against the tide were Mincor, which added 2c to 62c and Panoramic, which added the same amount, to trade at 32c. Independence, which was probably weighed down by the lower gold price, lost 22c to $6.10.

As well as the capital raising by Altura and Pilbara, a number of other companies went back to investors this week for fresh capital, including:

  • Stavely Minerals pulling in $19.6 million from professional investors keen to jump aboard the company’s promising copper-and-gold discovery in Victoria.
  • Syrah Resources finalising a $55.8 million issue of convertible notes to help with the poor performance of the company’s Balama graphite project and a sharp fall in the graphite price.
  • Havilah Resources unveiling a $5.46 million rights issue to fund work on the company’s copper and gold projects.
  • Artemis Resources raising $5.9 million to clear debt and pay for work on its base metal and gold projects, and
  • Navarre Minerals raising $4.75 million to fund a drilling program at its Victoria copper and gold exploration projects.

Quarterly reports dominated news flow during the week, along with updates from the mining majors, BHP, Rio Tinto and South32.

Most other news reports and share price movements this week were uninspiring with a large number of stocks opening and closing at the same price or shuffling a cent-or-two up or down. Examples included:

  • Anglo Australian Resources reporting fresh results from its promising Mandilla gold project near Kalgoorlie in WA with a best hit of 163 metres at 1.75 grams a tonne. On the market the stock slipped 0.3 of a cent lower to 9.6c.
  • Ora Banda Mining hung on to a price of 18c after reporting shallow, high-grade, assay from drilling at its Waihi project near the Davyhurst processing plant in WA with results that included 5m at 19.2g/t and 8m at 4.2g/t.
  • Sagon Resources added half-a-cent to 6.1c after reporting a significant maiden resource of 13 million tonne of material grading 1.13% rare earth oxides from its Cummins Range project in WA.
  • Black Cat Syndicate reported a bonanza assay of 335.96g/t of gold over 1.7m from a depth of 52.2m at its Myhree project near Bulong to the east of Kalgoorlie. On the market the stock added 3c to 45c.
  • Cyprium Metals slipped 2c lower to 20c despite reporting high grade copper assays from drilling at its Cue copper project. Best intersection was 10.4m at 14.9% copper from a depth of 84.5m, and
  • Comet Resources rose by 0.1c to 2.5c after reporting high grade graphite assays from drilling at its Springdale project in the south of WA which included a 57m section at 22.38% total graphitic carbon from a depth of 35.5m.

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