Australia emerging as big winner in global energy crisis

Energy transition away from fossil fuels is happening but it’s a lot slower than some people imagine, which is why coal, gas, oil and uranium are today’s hottest investments.
30th September 2021
Tim Treadgold

In what’s shaping as a classic case of the story getting ahead of reality, the world is being rocked by an energy crisis that is crimping Chinese growth, forcing Europe to burn more coal and delivering windfall profits for Australian gas and coal companies.

Thermal coal, which is supposed to be a fading star, this week morphed into a shooting star, hitting an all-time price high of $US195 a tonne while oil touched a three year high of $US80 a barrel and natural gas in the U.S. traded at $5.50 per million British thermal units, double the price at this time last year.

Whitehaven Coal, the target of repeated attacks by environmental activists, has emerged as one of the Australian stock market’s top performers despite predictions of its demise, up 28% over the past month, 210% over the past 12-months and 700% over the past five years.

Not even the stars of the new-energy world can match those returns. Orocobre, one of the lithium leaders, is down 8% over the past month, up 240% over the past 12 months and up 127% over the past five years.

Australia, which had been widely tipped to suffer an economic shock from its unofficial trade war with China, is shaping as the biggest winner from the energy crisis because it has a foot in both camps, old energy through coal, oil and gas and new energy through lithium, nickel and solar, and the commodity with a foot on both sides of the old/new divide, uranium.

The return of old-energy commodities is part of a wider trail of disruption destabilising all financial markets as the world’s leading central banks prepare for the winding back of Covid-19 economic stimulus which has driven interest rates to zero and beyond.

Early signs of higher official interest rates can be seen in bond markets such as the U.S. 10-year note, which has risen by 30% over the past month from a super-low 1.15% to 1.5% and while that latest rate is still close to an historic low, the upward trend is increasingly clear. At this time last year, the 10-year note was paying 0.67%.

Gold, which always suffers when rates rise, slipped lower to trade around $US1731 an ounce, though the Australian dollar gold price was aided by a currency shift, which saw the exchange rate dive below US72 cents. This helped the local gold price stay above $A2400/oz.

Activity in the Australian gold sector was muted this week, with the major event being a North American takeover which will see an ownership change at Victoria’s high-grade Fosterville mine with Kirkland Lake agreeing to a merger with Agnico Eagle.

Emerald Resources was one of the few local gold stocks to move sharply higher, with a rise of 14c to 98c after reporting that its Okvau mine in Cambodia had reached full production. De Grey reported fresh assays from its Greater Hemi project in WA but fell 6c to 96c while Northern Star was 49c weaker at $8.47 and Gold Road lost 9c to $1.15 after reporting more operational problems at its Gruyere mine in WA.

The start of the final quarter of the year generated a number of “crystal ball” reports from investment banks trying to predict trends out to Christmas.

RBC Capital Markets is optimistic, upgrading most commodity price forecasts, except iron ore, which could dip to $US75 a tonne over the next three months.

Aluminium, according to RBC, will continue to rise as a country-wide shortage of energy in China forces more smelter cutbacks. Lithium, in its spodumene form, will rise to $US1000/t. Copper could pick up by 10% but a looming surplus could see the price fall back to $US3.75/lb last year from its current $US4.20/lb.

RBC’s top investment picks for the December quarter are South32 and BHP among the larger diversified miners, and two gold stocks, Silver Lake, thanks to increasing production and profits, and Northern Star on the strong profit outlook.

Morgan Stanley has lithium and uranium as its top commodity picks for the next six months thanks to “speculative stocking and lagging mine supply”. Iron ore and gold face headwinds.

But the overarching comment from Morgan Stanley is one for all investors to consider: “disruptions abound”, a two-word warning that the shift from an era of easy money to one of tightening will bring challenges across the investment spectrum with the sudden arrival of an energy crisis a sample of what lies ahead.

For fleet-footed traders, the next few months will be loaded with opportunities and an equal number of risks as a sea-change rolls through financial market and destabilises governments, which are still battling the effects of Covid 19.

“Risks to commodity supply and demand have escalated rapidly late in the third (September) quarter amid the debt troubles of China’s property industry, China’s power crisis and soaring global energy prices,” Morgan Stanley said.

“The sharp correction in iron ore, driven by China’s steel production curbs and weakening demand, has had a negative impact on sentiment across other commodity markets. Steel has the highest and most immediate exposure to China’s property market, but slower construction starts could be felt by other metals.”

A “heat table” compiled by Morgan Stanley of the commodities outlook has lithium as the hottest thanks to surging electric vehicle demand, followed by uranium as investor stockpiling is likely to extend this year’s price rally. Not surprisingly, iron ore and coking coal are the commodities facing the most bearish outlook.

Rarely mentioned Red Dirt Metals (the renamed TNT Mines) was the pick of the lithium sector this week after reporting the discovery of what it called “a new lithium province” north-west of the historic WA goldmining centre of Menzies. The stock more than doubled from 30c to 61c, but did trade up to 89c on Wednesday after reporting drill hits of up to 24 metres of 1.85% lithium oxide from a depth of 160m.

Other lithium stocks failed to match Red Dirt. Core Lithium lost 2.5c to 40c despite announcing a formal development commitment to its Finniss project in the Northern Territory. Vulcan slipped 27c to $13.12 while Pilbara was down 16c to $2.02.

Uranium stocks weakened despite the optimism of several banks, with Canaccord Genuity echoing Morgan Stanley while taking a step further by predicting a uranium price of $US80 a pound by December, a tip which failed to lift local leaders such as Paladin, which fell 11c to 76c and Deep Yellow, which lost 14c to 97c. DevEx was a rare winner in the uranium space, adding 1c to 34c after reporting accelerated exploration at its Nabarlek project in the NT.

Other market news and share price moves of interest included:

  • Gascoyne Resources rose by 5.7c to 37c after receiving a takeover bid from Westgold Resources pitched as a one-for-four share swap. Westgold was steady at $1.63.
  • Anglo Australian Resources slipped 0.3c lower to 8c despite reporting high grade gold assays from geotechnical drilling at its Mandilla project near Kalgoorlie in WA. Best hit in a hole designed to determine rock properties was 44 grams of gold per tonne over 0.7m.
  • Great Boulder Resources said it had expanded the footprint of the Mulga Bill project in WA by 1.4 kilometres to 5.1km with air core drilling returning assays up to 3.63g/t over 8m from a depth of 72m and 4m at 3.34g/t from 105m. On the market, Great Boulder added 1.5c to 17c.
  • Metal Hawk lost 6c to 59c after reporting a 1m intersection assaying 5.89% nickel from a depth of 144m at its closely-watched Berehaven project in WA.
  • Lunnon Metals also lost 6c when it fell to 43c despite reporting a 2m intersection assaying 5.07% nickel from the East Trough prospect at its Kambalda project in WA, and
  • Chalice slipped $1 to $6.24 after confirming the spin-out of its gold-focused subsidiary Falcon Metals which offset the results of the latest drilling at its Gonneville palladium discovery near Perth with the latest high-grade results up to 26m at 4.8g/t palladium and 0.5% nickel from a depth of 286m.

 

 

 

 

 

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