Brave investors look past rate-rising cycle in hope of better days ahead

Investors looked through this week’s bad news of rising interest rates and declining dividends in the belief that a threatened recession will be short-lived with a sustainable recovery possible next year.
28th July 2022
Tim Treadgold

They might be right, but a careful investor will also be taking care to not get caught between the U.S. central bank and its objective, which is to crush 40-year high inflation by ratcheting up rates until they really hurt.

Locally, the stock market rose marginally this week even as the Australian central bank prepared to follow the U.S. Federal Reserve’s latest 0.75% increase in its benchmark rate, though perhaps with a less demanding rise of 0.5%.

The best gains on the Australian market were in the mining and energy sectors, despite Rio Tinto reporting a 29% fall in first half profits and 50% cut in its interim dividend.

That Rio result, and the potential for similar cuts from other miners, should have sent a shiver through the market because the world’s second biggest mining company was sending a powerful signal that it’s time to conserve cash for what comes next.

Remarkably, the profit fall and dividend reduction was greeted with a price rise of $1.71 to $97.17, largely because of confidence that its iron ore engine room will benefit from China’s ongoing attempts to stimulate economic growth.

Fortescue Metals was another miner to enjoy a rising share price, up 5% to $18.48, thanks to strong June quarter exports and indications of a rising iron ore price which could counter rising costs.

RBC Capital market was not convinced warning that cost increases and capital expenditure demand would be a drag on FMG. The bank maintained a hold tip on FMG and set a price target of $17.

The next few weeks should throw more light on the direction of financial markets with optimists treating Rio Tinto’s big dividend cut as a one-off event while pessimists see it as the start of a downward slide in shareholder rewards as companies lock up their cash.

Chinese commodity demand is the key to markets between now and the end of the year with Citi, an investment bank, reporting that its Copper End-Use Tracker rose by 1.1% in June thanks to buying by car makers and other industrial consumers even as property demand fell.

In a separate forward looking research note, Citi said there were several Chinese Government policies which could change global commodity markets including an increase in oil exports, particularly diesel, increased coal production to help cut LNG imports, expanded support of the financially-stressed property sector, and an easing of restrictive Covid policies.

A Chinese rescue might not be necessary if another big U.S. investment bank, J.P. Morgan is reading the data correctly. It reckons that the stock market is already “pricing in” a modest recession with “peak Fed behind us”, meaning that the worst for markets and market volatility should also have passed.

Those encouraging comments come just days before Australia’s mining industry migrates to WA’s goldmining capital of Kalgoorlie for the return of a full-blown Diggers & Dealers forum, complete with record delegate registrations of 2620.

Apart from meaning there’s not a spare bed in town, and there might be a few dry pubs, a crowded event is fertile ground for deal flow with close attention being paid to the consolidation of the Leonora gold district and the potential for the same in the Pilbara.

Key players in the Leonora rush, Genesis and St Barbara, attracted attention thanks to merger speculation and a US$40 an ounce rise in the gold price which moved back up to US$1738/oz with Genesis rising by 4c to $1.30 as St Barbara added 11c to $1.03, 37% up on the stock’s recent low of 75c reached on June 30.

Other gold stocks performed well over the week, even as the World Gold Council reported an 8% drop in gold demand in the June quarter to 948 tonnes.

Significant moves by goldminers presenting at the Diggers & Dealers conference included:

  • Regis Resources recovering from a punishing sell-off with a rise this week of 10c to $1.70, up 40c on the $1.30 low point reached in late June. Bell Potter is leading a cheer squad of stockbrokers with a price tip for Regis of $2.64.
  • Red 5 continued its recovery from a 22c low reached earlier this month, adding 2c to reach 27c, perhaps on its way to the 42c target price set by Morgans.
  • Bellevue Gold, up 7c to 79c thanks to a project update which demonstrated how its namesake project had been substantially de-risked. Macquarie Bank maintained its enthusiasm with a buy tip and price target of $1.20, and
  • Evolution continued to shrug off the effects of a recent bout of heavy selling to add 15c to $2.52, perhaps on its way back to a $2.95 target price set by Morgans.

Encouraging gold exploration news this week included Red Dirt Metals reporting an assay of 15.3 grams a tonne over 7 metres from a depth of 125m at its Mt Ida prospect in WA. The stock added 2c to 37c, while White Rock rose by half-a-cent to 11c after reporting a 0.25m section metre assaying a spectacular 972g/t (31 ounces) at the Morning Star mine in Victoria.

Best drill result of the week came from Cobre Ltd (CBE) which reported a 59m intersection of visible copper (assays pending) from drilling at its highly prospective Ngami project in Botswana. The stock added 5c (138%) to 8.6c with trading paused another announcement.

Other copper news included:

  • Sandfire Resources adding 25c to $4.38 after reporting strong production in the June quarter which beat guidance. RBC Capital Markets maintained its enthusiasm for the stock with a buy tip and target price of $7.25.
  • OZ Minerals shook off bank analyst concerns about costs and project development costs to added 50c to $18.23 with Canaccord Genuity seeing the stock heading back up to $20.50, and
  • Eagle Mountain Mining added 2.5c to 23c after releasing an encouraging June quarter report with a focus on its Oracle Ridge project in the U.S. Shaw and Partners is tipping a future price of 47c.

Nickel stocks, always a sector of interest at Diggers & Dealers performed well this week as the price of the metal edged back up to $21,754 a tonne, taking local producers with it. Mincor added 5.5c to $1.87. Lunnon was up 8.5c to 92c and Centaurus put on 2c at 99c.

Other news events and market moves this week included:

  • Pilbara Minerals led a lithium sector revival with rise of 21.5c to $2.72 after reporting a 56% increase in spodumene production to 127,236 tonnes in the June quarter, including first concentrate from the Ngungaju plant’s fine circuit.
  • IGO joined the lithium recovery with a share price rise of 51c rise to $10.55 thanks to strong production news from its part-owned Greenbushes mine as well as the Nova nickel project. RBC has a price tip of $15.25.
  • Mineral Resources was another lithium exposed stock to post a strong share price this week, up $5.35 to $52.19 with Bell Potter telling clients that the stock’s lithium business was “stepping out of the shadows” in a report which seeing a price targets of $75.
  • Lucapa Diamond Company’s well-publicised discovery (with partners) of a 170-carat pink diamond in Angola helped the stock rise by a modest 0.9c to 5.7c.
  • Syrah Resources added 5.5c to $1.40 after announcing receipt of a US$102 million loan from the U.S. Department of Energy for if Vidalia graphite plant in Louisiana.
  • Dreadnought Resources reported high-grade rare-earth assays from its Yin project in WA, adding 1.5c on the market to 6.6c.
  • Metro Mining and Adavale led a return to the capital raising trough with Metro seeking $20 million to expand its bauxite mining business in Queensland and Adavale seeking $3 million to fund nickel exploration in Tanzania.
  • Accelerate Resources said it had identified the potential for direct shipping of Manganese ore from its Woodie Woodie North project in WA. The stock added 0.1c to 3.4c, and
  • Genex Power rose (69%) to 22c after receiving a takeover bid priced at 23c from software billionaire Scott Farquhar and his wife, Kim Jackson.

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