BHP, Rio increase exposure to energy revolution ... using bumper profits from iron ore

Any doubts about battery metals dominating the resources sector for the next decade, and beyond, were washed away this week when BHP and Rio Tinto made overdue expansion moves into nickel and lithium.
29th July 2021
Tim Treadgold

Both mining giants have been tinkering around the edges of batteries and energy transition, but they showed their hands when BHP lobbed a bid for control of a Canadian nickel discovery and Rio Tinto giving the go ahead to the Jadar lithium project in Serbia.

Fat profits from mining iron ore, and selling coal and oil assets, are funding the shift into energy metals with more to come in the next few weeks with BHP expected to take a bolder step into “green” commodities with a commitment to finish building its Jansen potash project also in Canada.

For investors there could not be a clearer pointer to where resources are headed as old commodities are reduced to the status of cash cows, providing the capital to pay for growth projects in new industries, especially energy metals.

In its simplest terms, and the reason to be excited about energy transition, commodities such as lithium, nickel, copper, graphite, manganese, vanadium (and few others) are filling a gap being created by shift away from fossil fuels.

In slogan terms, it’s a toss up as to whether copper, nickel or lithium can claim to be the “new oil”, though from an investment perspective the slogan is irrelevant as the entire family of energy transition metals are on the cusp of a boom.

It’s not a coincidence that Rio Tinto announced a record dividend courtesy of iron ore profits on the same day it gave the go-ahead on the $US2.4 billion Jadar lithium and borates project.

The big miners’ full-scale entry into lithium with what could become one of the world’s top 10 sources of the battery metal triggered a response across the sector with most players in the game enjoying share price re-ratings.

Pilbara Minerals saw its shares hit an all-time high of $1.79 on Wednesday before easing to $1.77 for a 15c gain over the week. Independence performed the same trick, hitting a record high of $9.17 followed by a slip to $8.90 for a gain of 36c, while Liontown traded up to a high of 85c before easing to 83c for a gain of 4.5c.

BHP’s nickel play is a more modest move and far from certain because of the potential for its offer to buy Noront, an emerging Canadian nickel stock, triggering a bidding war with arch-rival Andrew Forrest, who is a 23% shareholder in Noront.

But the point about BHP offering C$325 million for Noront and its nickel assets in Ontario’s Ring of Fire is that it clearly signals growing interest in nickel to complement BHP’s WA assets, which were once for sale but are now a focus of growth.

Just as Rio Tinto’s lithium move lifted the sector so did BHP’s Canadian nickel bid stir interest in the broader nickel sector, led by Mincor, which added 6.5c over the week to $1.23, aided by a steady flow of discovery news and mine development progress.

Western Areas bounced back from last week’s sell-off to rise by 11c this week to $2.51. Poseidon Nickel added 3c to 14c following the release of encouraging assays from drilling at its Golden Swan project. Auroch gained 2c to 20c on similar news and solid drill results from its Nepean project, and Lunnon Metals, the new boy on the nickel block, was 5c stronger at 52c thanks to a start on drilling at its Kambalda nickel project.

Copper, another of the battery brigade, had a solid week, reclaiming the high ground of a price above $US4.50 a pound (almost $US10,000 a tonne) with the potential for a surge above $US5/lb as the threat of industrial unrest grew in Chile’s all-important copper sector.

In local copper news, OZ Minerals reported a 22% increase in June quarter production, along with an increase in gold output to be rewarded with a $2 share price increase to $23.48.

Sandfire added 43c to $6.95 after a strong June quarter and Venturex started expansion work on its Sulphur Springs project with a $10 million drilling program, a keenly awaited development which lifted the stock by 10c to a 10-year high of 83c, while Coda slipped 18c lower to $1.24 despite reporting first assays from its Emmie Bluff discovery.

Gold, often a useful guide to the broader economic picture, had a mixed week as the U.S. central bank toyed with the idea of tapering stimulus cash creation but avoided talking about an increase in interest rates, though talk of tapering was enough to trigger a gold response late yesterday with the metal adding a quick $US23 an ounce to $US1818/oz.

Most price moves among gold miners was modest up or down with Capricorn the pick of the week with a rise of 28c to $2.11 after reporting the acquisition of the Mt Gibson project. Evolution added 5c to $4.22. Gascoyne lost half-a-cent to 32c despite reporting good grades from drilling at its Sly Fox project, while De Grey was steady at $1.19

Both Westpac and ANZ circulated research notes warning that while there was no urgency in the U.S. move towards normalising interest rate settings, the trend towards higher rates was clear and will be a big factor in markets next year, and perhaps later this year.

Iron ore stocks were led higher by Fortescue as investors rushed to climb aboard its dividend express after Rio Tinto’s monster first half payout. Despite repeated warnings of an overdue iron ore price correction, Fortescue traded up to an all-time high of $26.58 before easing back to $26.18 for a week’s gain of $1.18.

RBC was unimpressed with Fortescue’s outlook because of rising costs and the loss of Baosteel as a partner in its Iron Bridge magnetite project. The bank has Fortescue as a sell and a price target of $20.

Other news events and market moves during the week included:

  • Burgundy Diamond Mines, the renamed HER Resources, added 7c to 35c after reporting that it had successfully raised $50 million for the redevelopment of the mothballed Ellendale diamond project in WA, along with a number of other diamond assets. The well-connected Burgundy has Michael O’Keeffe on its board, a man who has made fortunes from coal (Riversdale) and more recently in iron ore (Champion Iron).
  • Lynas led a strong rare earths sector to higher ground with a 70c rise to $7.05 after reporting a 70% increase in revenue in the June quarter. Hastings Technology Metals joined in with a 1.5c rise to 19c after reporting a reserve increase at its Yangibana project, and RareX was up 1.3c to 9.9c as it gets ready for a fresh round of drilling at its Cummins Range project.
  • Trek Metals added 1.5c to 7.7c after reporting that a maiden drilling program has confirmed the potential for a large-scale copper and zinc structure in the Valley of the Gossans near Port Hedland in WA.
  • Deep Yellow led an improving uranium pack with a rise of 6c to 71c after delivering a resource upgrade at its Tumas 3 project in Namibia.
  • EcoGraf said it had secured a non-binding funding letter of support from the Australian Government’s export finance arm to help pay for the expansion of its Battery Anode Material project in WA. On the market the stock added 4c to 76c, and
  • Anglo Australian Resources rose by 0.2c to 9.2c after reporting high-grade drill intersections from the latest round of work at its Mandilla project with a best hot of 64.57 metres assaying 3.49 grams of gold per tonne from 190m.

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