China’s power crisis stokes inflation fears and energy shares alike

7th October 2021
Tim Treadgold

China’s power crisis boosted prices for all forms of energy this week, though Australia’s full hand of coal, oil, gas, uranium, and renewables helped suppress investor anxiety about the threat of stagflation, an unpleasant mix of value-destroying low growth and high inflation.

Adding to the sense of a sea-change in underlying economic fundamentals was a fresh burst of concern about rising interest rates and the withdrawal of easy central bank money which has propped up global asset values.

Lithium stocks led the way up in the new energy sector after a report from Benchmark Mineral Intelligence said a shortfall in supplies of the ultra-light metal tipped to occur in the next two years had arrived early.

“The financing for lithium projects is still too little, too late,” Cameron Perks from BMI told the Bloomberg news service. “The market deficit is already occurring.”

Those mid-week remarks triggered a sharp reversal in the share prices of lithium stocks.

Pilbara Minerals, which was down 21c at $1.80 on Tuesday, bounced back to $2.02, aided by a strong September quarter production report, a significant increase in reserves at its Pilgangoora project in WA, commissioning of its Ngungaju processing plant, and a fresh research report from Macquarie Bank which reckons Pilbara is heading to $2.80.

Other lithium stocks reacted positively to the BMI comments. Orocobre, which was down 40c on Tuesday, recovered all of the lost ground to close up 20c at $8.39. Liontown, down 10c, performed the same trick to close 12c higher at $1.45.

Oil and coal stocks, leaders of the old energy sector, also had a solid week as China’s scramble for fuel supplies created a knock-on crisis in Europe which has badly botched its energy policies

Good news as oil at $US80 a barrel (and rising) might be for stocks such as Woodside (up $1.30 to $24.95) and Santos (up 40c to $7.30) the reality of a higher oil price is that it piles pressure on consumers, increases operating costs for miners and manufacturers and adds to inflationary fears, leading to one mid-week suggestion that perhaps the world is on the road to a repeat of the stagnant 1970s.

Uranium stocks, after a stellar upward run, lost momentum as the price of the nuclear fuel slid to $US40.45 a pound, down from its recent peak of $US50/lb, but still close to a six-year high.

While uranium sector leaders such as Paladin fell by 7c to 70c and Deep Yellow shed 8.5c to 88c, Aura Energy swam against the tide with a rise of 3c (14%) to 24c after announcing an offtake financing agreement for its Tiris project in the west African country of Mauritania.

Coal stocks weakened after a 10% fall in the price of globally-traded thermal material to $US242 a tonne, a price which is still more than double the $115/t of late May.

Coronado Coal slipped 1c lower to $1.44 while Whitehaven, the local coal leader, lost 4c to $3.37, despite an upgraded by tip from Morgans which sees a price target of $3.85 thanks to Whitehaven’s valuation disconnect the longer coal prices stay at record levels.

Oil and gas stocks are having their best year since 2014, according to Macquarie Bank, which has Woodside and Karoon as its two best buys. “On our latest estimates, we expect Woodside, Santos and Oil Search to generate a combined $US7.8 billion in operating cashflow in calendar ’21, the highest since 2014 when $US8.1 billion was generated at an average oil price of $US95/bbl.

The energy situation has sparked a global stampede for natural gas and coal and even led to reports that China has swallowed a bit of its pride and started unloading stranded shipments of Australian coal which have been sitting at sea for more than a year.

At the end of next week, investors will get their first glimpse of September quarter production with Rio Tinto kicking off quarterly season on Friday, October 15, followed by BHP on the 19th and Fortescue on the 28th with what will be a keenly dissected document given the company’s operational problems and its deep dive into renewable energy and highly ambitious zero-carbon target.

The weakness which has dogged Fortescue since it embarked on its controversial adventures in renewable energy continued this week with the stock down another 78c to $13.98, roughly half its all-time high of $26.58 reached on July 29, less than three months ago.

Macquarie is maintaining the faith in iron ore with a mid-week research note listing all the iron ore producers it researches, with Fortescue tipped to reclaim a price of $21 and Mt Gibson, down this week to 43c, forecast to return to 80c.

UBS, a rival investment bank, is not as confident given the problems in China, including a property sector meltdown, part of a shift in spending from goods to services which might indicate that the commodity cycle has started a downturn after its post-Covid surge.

Gold stocks had a reasonable week after the price bounce in late September which lifted it back to around $US1759 an ounce with the star performer this week being Sunstone Metals, which reported a whopper drill result from its El Palmar gold and copper prospect in Ecuador

A best assay of 163.55 metres at 0.71 grams of gold and tonne plus 0.2% copper from just 52.35m saw Sunstone rise by 80% (1.4c) to 4c.

Other gold stocks in the news included:

  • Kin Mining, which added 1.7c to 12c after rejecting an unwanted merger approach from St Barbara Mines.
  • De Grey announcing plans for a big development at its Mallina project with a target of producing more than 400,000oz of gold a year, a plan which saw the stock add 21c to $1.19, and
  • West African Resources added 14c to $1.13 after announcing record September quarter production of 81,960oz of gold.

Potash stocks made waves during the week with Trigg Mining releasing a positive scoping study for its Lake Throssell project in WA while Salt Lake requested an extension of its share trading suspension pending the release of an update about problems at its Lake Way project.

Kalium Lakes said it had become Australia’s first sulphate of potash producer at its Beyondie project, news which lifted the stock by 2c to 23c, perhaps on its way to Macquarie’s price target of 42c.

Other news events and price moves (mainly modest) included:

  • AuKing added 3.5c to 25c after reporting highly encouraging copper intersections at its Koongie Park project in WA’s Pilbara region with a best hit of 124m at 1.03% copper, plus 1.08% zinc and 1.54% lead from a depth just 8m.
  • Coda Minerals said it had encountered very encouraging iron oxide copper gold (IOCG) intersections from the latest drilling at its Emmie Bluff project in South Australia. Assays are pending. Coda shares were steady this week while its minority partner in the project, Torrens Mining, added 1c to 17c.
  • Western Areas added 1c to $2.95 after reporting that its new Odysseus nickel mine had reached first ore.
  • Black Canyon slipped 1c lower to 25c after reporting a maiden resource of 15 million tonnes of ore grading 11.3% manganese from its part-owned Flanagan Bore project in WA.
  • Horizon Minerals reported encouraging drill results from work at its Kestrel gold project near Kalgoorlie in WA with best results of 4m at 24.27g/t from 92m and 5m at 13.22g/t from 101m. The stock added 1c on the market to 12c.
  • Auroch Minerals slipped 0.5c lower to 17c despite reporting the intersection of thick and highly prospective material in its Nepean Deeps project below the historic Nepean nickel mine in WA. Assays are pending but Auroch said it had encountered a 46m zone of potential mineralisation beneath a pegmatite which marked the end of previous mining, and
  • Dart Mining added 0.5c to 13c after reporting the planned start of drilling to test potential lithium-rich pegmatite structures in Victoria.

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