Big banks deeply divided on whether to catch the falling knife

One decent discovery was not enough to totally wash away the negative sentiment that pervaded most sections of the Australian stock market this week, though Galileo Mining’s palladium strike near Norseman in WA went some way to improving the overall mood.
12th May 2022
Tim Treadgold

The highly encouraging 33 metre drill hit assaying 2 grams per tonne of three metals (palladium, platinum and gold), plus useful grades of copper and nickel from a depth of 144m triggered a spectacular surge in Galileo’s share price, which rose by 41c (192%) to 62c.

News of the find reverberated around the world, fast becoming a talking point at the Mining Indaba conference in Cape Town and sparking interest among stockbrokers in London, from where this week’s edition of Prospector’s Diary is being filed.

More drilling is needed at Galileo’s Callisto discovery, located in the richly mineralised Fraser Range region, but it’s easy to draw a number of conclusions including parallels with similar geology of the Platreef geology of South Africa and the fact that Callisto is the second significant WA palladium discovery in the last two years.

Chalice Mining’s Julimar project near Perth was the first major discovery of platinum group metals (PGMs), easily eclipsing smaller Australian finds such as Fifield in NSW and Panton in the north of WA.

If Callisto lives up to its early promise it could be another step in Australia developing a PGM industry at precisely the right time with high prices as Russian material is squeezed out of the market by sanctions on exports following its invasion of Ukraine.

Encouraging as Galileo’s Callisto find might look, the reality of the market this week was that investors remained on high alert for more bad news from three directions:

  • China, where the economy is struggling.
  • The U.S., where interest rates and a strong dollar are creating global headwinds, and
  • Ukraine, where Russia appears to be preparing for a long war which could destabilise the rest of Europe.

The overall result for Australian investors, who are also being forced to consider the high probability of a change of government later this month, was a 3% fall in the market as measured by the all-ordinaries index, with most of the damage done early, followed by hints of a recovery as a “buy the dip” mentality kicked in.

Banks, like everyone else, were confused by the mix of economic signals, as demonstrated by conflicting advice about currency values from Westpac and ANZ.

The Westpac view is that the rise of the U.S. dollar following that country’s interest rate increase will prove to be temporary “assuming global risks subside”, whereas ANZ reckons “synchronised global monetary tightening and strength in the U.S. dollar are key drags” on the global economy.

One potential winner from increasing risk is gold which ANZ sees moving up to trade in a band of $US1850 to $US1930 an ounce, potentially an improvement on last gold sales at $1857/oz.

The optimistic view of ANZ didn’t help local gold stocks with most trending down over the week, even with signs of a bounce from mid-week.

Gold price moves included De Grey, down 14c to $1.02, after touching a low of $1. Gold Road, down 13c to $1.33, up from a low of $1.29, and Bellevue down 12c to 83c after reaching a low of 81c.

Copper, widely seen as a bellwether of broader economic activity, sagged alarmingly close to the $US4 per pound mark before a recovery to $US4.21/lb but the dip to an eight-month low was a measure of concern about demand for base metals in China where the economy is struggling under the weight of strict Covid lockdown rules.

Leading local copper stocks bowed under the pressure of the price. OZ Minerals shed $1.86 to $22.20 but was down to $21.71 at one stage. Sandfire lost 47c to $5.04 but did touch a low of $4.92.

Gold and copper are the two metals being watched most closely by bankers and analysts in London because they are a measure of both financial and commercial sentiment as well as underlying economic demand which has weakened markedly over the past few weeks.

Citi, an investment bank, warned during the week that the purchasing manager indices (PMIs) for the world’s three major economies, China, Europe and the U.S. were displaying readings similar to those during the original Covid lockdowns of March 2020.

“Our global manufacturing soft data tracker registered near March 2020 levels of weakness in April this year, driven by a collapse in China data and further slowing in Europe and the U.S.,” Citi said.

“China policy makers are behind the curve and that should weigh on (commodity) prices in the near term, until stimulus is large enough to offset the weakness.”

Perhaps more ominously, Citi said that: “China needs to rebound sharply for metal prices to tread water”.

Battery and technology metals, which have largely escaped unscathed from the weaker tone in the market, were hit this week by sellers who rubbed $1.11 off the price of leading lithium producer Allkem which fell to $11.25, though the stock did get down to $10.65 before a rebound.

Other lithium moves included Pilbara, down 12c to $2.53, a price which represents a solid recovery from the mid-week low of $2.39.

Morgan Stanley, another investment bank, picked up the “flat China” them of Citi in a report which noted that lithium prices were falling in China even as they rose elsewhere.

Macquarie Bank lived up to its reputation as the biggest bull in the market with a fresh set of optimistic price targets for lithium and rare earth stocks even as big falls were being recorded.

Lynas Rare Earths, according to Macquarie, will rebound from this week’s 50c fall to $8.70, potentially reaching a target price of $12.80, up 47%. Pilbara is heading back to $4, the bank said and Liontown, after its 18c fall to $1.21 should move up to a target price of $2.50.

At the top end of the market big moves were made by leaders such as BHP which was initially down $3.50 to $44.29 before clawing back lost ground to trade at $45.71, still down $2.10 over the week while arch-rival Rio Tinto lost $5.74 to $105.64 but was down to $100.50 on Tuesday.

Other news and moves (mainly down) included:

  • Kingsgate Consolidated moving a step closer to re-starting the mothballed Chatree goldmine in Thailand thanks to the offer of a funding package from Taurus Mining Finance, news which failed to prevent a 3.5c slip in the Kingsgate share price to $1.36.
  • Santana Minerals lost 5.5c to 82c despite reporting encouraging drill results at its Rise & Shine gold project in New Zealand including evidence of multiple intervals of course gold between 361m and 384m with assays pending. At one stage on Monday the stock was trading up 10c at 97c.
  • GBM Resources reported encouraging assays from drilling at its half-owned Malmsbury gold project near the prolific Fosterville mine in Victoria with a best intersection of 14m at 6.1g/t from a depth of 120m. on the market, GBM eased back by 1.2c to 9.3c.
  • Calidus shed 7c to 89c despite reporting the first gold poured at its Warrawoona mine in WA followed by more high-grade lithium assays at the Spear Hill project in the Pilbara region. Canaccord Genuity reckons the stock will rebound to $1.20.
  • Resource Mining Corporation added 0.5c to 5.5c after reporting that it had acquired effective control of a portfolio of nickel exploration assets in Tanzania, and

Carnaby Resources reported encouraging copper assays from drilling at its Greater Duchess project in Queensland, including 68m at 2.4% copper and 0.4g/t of gold from a depth of 40m, only to slip 0.5c lower to $1.14 after a surge on Monday to $1.32

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