Base metals tipped to be next fertile field for investors as consumer demand kicks in

One door shuts and another opens. That’s the best way to see this week’s change-over in commodity market sentiment
26th June 2020
Tim Treadgold

One door shuts and another opens. That’s the best way to see this week’s change-over in commodity market sentiment as iron ore started its inevitable decline after a spectacular 12-months to be replaced by strong demand and higher prices for copper, nickel and gold.

The flip will not be immediate or universal but the trend is there for anyone to see, once you get past the latest outbreak of Covid-19 panic in the US and other parts of the world, including Australia’s own problem State, Victoria.

For investors who have enjoyed the iron ore boom and are about to enjoy a rich flow of dividends from stocks such as Fortescue Metals, it will be hard to say goodbye. But a series of reports this week explain the problem of Chinese steel demand peaking and Brazilian exports recovering, leading to a supply/demand squeeze on the price.

UBS, an investment bank, took a deep dive this week into the Chinese steel sector via an online conference with Shanghai Metals Market (SMM,) a specialist iron ore and steel consultancy, which sees 2020 in two distinct halves – an iron ore shortage in the first half and a surplus in the second.

SMM said a 41 million tonne iron ore shortfall over the past six months lies at the heart of the benchmark price sitting above $US100 a tonne, whereas a 59m/t surplus in the next six months is likely to push the price down to $US75/t by Christmas.

Tipping commodity prices, as everyone knows, is a bit of mug’s game, but a 95c fall in Fortescue’s share price over the past three weeks to $13.95 even as the iron ore price clung to $US102/t is a sign of investors re-allocating funds.

Rather than trying to get the price right it’s more important to see the trend (it’s your friend, as they say) and the clear leader over the next six-to-12 months is gold, but moving into clearer view is the base metal family led by copper and nickel.

Macquarie Bank, arguably the leader of gold’s cheer squad in Australia, said in a research note yesterday that gold was “breaking out to a new cycle high” as it moved towards $US1790 an ounce, in what’s a mirror image of the fall in a key US interest rate, that offered on Treasury Inflation-Protected Securities.

What is particularly important in the TIPS rate hitting a cyclical low of -0.7% (yes, minus 0.7%) is that fall was more due to rising inflation expectations.

Yield, the Holy Grail of every sensible investor, is what’s starting to drive gold because so few investment categories offer much in the way of a reasonable yield and when even Treasury returns turn negative, the appeal of gold rises significantly.

UBS yesterday upgraded its outlook for base metal miners, telling clients that they are “leveraged to global recovery”, when it takes hold.

Among the changes to its recommendations is an upgrade for Sandfire Resources from hold to buy, a result of the stock falling 20% this year, which means value has emerged, and a surprise downgrade in Western Areas, which has just made what appears to be a significant nickel discovery in South Australia.

UBS said its analysts were surprised by the speed of the recovery in financial markets over the past few months and while outbreaks of Covid-19 were the greatest risk to the revival it would be consumer demand which will drive base metals higher.

“We prefer base metals over precious metals and bulks, in particular iron ore,” UBS said. “Coal prices are also seen to be at the bottom of their trading range.”

Nickel news played into the theme of a stronger outlook for base metals with a report that BHP is planning a new underground development at its Leinster hub in WA and is believed to have brought the undeveloped Honeymoon Well project into its asset base.

BHP’s confidence in nickel as a growth commodity was reinforced by Mincor’s $60 million capital raising to fund reinvestment in its Kambalda operations and Western Areas’ discovery news from the largely unexplored western Gawler Craton where early drill core has the hallmarks of the nickel and copper of WA’s Fraser Range.

On the market, Mincor hit a 12-month share-price high of 84c before going into a trading halt ahead of the fund-raising announcement. The stock has effectively doubled since late March when Covid-19 fears drove it down to 41c.

Western Areas has also been a big winner from its nickel exposure, adding 45c (20%) this week to trade around $2.67, a price which is 60% higher than the stock’s March low of $1.66.

Other news events and significant moves were dominated by gold stocks, included:

  • De Grey Mining adding another 22c (37%) to 81c after reporting more encouraging assays from its Hemi gold project in the north of WA with a best intersection of 53 metres at 5.9 grams a tonne, with a core in that section assaying 10.2g/t over 28m from a depth of 117m. Earlier this year De Grey was trading at 5c.
  • Ramelius upgraded its financial year production estimate up to a record 230,000oz after a strong June quarter which is expected to yield 80,000oz when the books are ruled off next week. On the market, Ramelius added 26c to $2.06.
  • Other gold leaders followed Ramelius (and the gold price) with Evolution up 18c to $5.37. Saracen, up 45c to $5.28. Northern Star, up 55c to $13.64, and Newcrest, up $1.02c to $30.76 – but with Shaw and Partners upgrading its price tip for Newcrest to $41.
  • Calidus rose by 7c to 52c after winning environmental approval for its Warrawoona gold project in WA.
  • Havilah added 3c to 11.5c after releasing a suite for encouraging assays from its Kalkaroo project in South Australia, including 5m at 4.84g/t from 49m.
  • Red 5 lost 14c to 20c after reporting a difficult quarter at its Darlot operation in WA.
  • Bellevue Gold added 17c to $1.12 after reporting high rates of gold recovery from Metallurgical tests at its namesake project in WA, and
  • Metallicity doubled to 2.6c following the announcement of strong results from drilling at its Kookynie project in WA with a best assay of 4m at 16.3g/t from a depth of 42m.

While gold news dominated the week’s activity among mining stocks there were developments in a number of other commodities, including:

  • Talga rising by 12c to 55c after the latest upgrade to its Vittangi graphite project in Sweden with expressions of interest in the company’s battery anode material exceeding by 300% the planned annual capacity, and
  • Strandline Resources trading up to a 12-month high of 28c on Wednesday after reporting approval for a $150 million loan from the Northern Australian Infrastructure Fund for its Coburn mineral sands project. The stock later eased to 25c, which is more than three-times the 7c price of late March.

Image: Maximillian Stock

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