Chinese virus: opportunity in adversity, but timing now the key question

The coronavirus roller-coaster which drove industrial metals down and gold up is showing signs of slowing...
31st January 2020
Tim Treadgold

The coronavirus roller-coaster which drove industrial metals down and gold up is showing signs of slowing, which could be a time for investors to consider a spot of bargain-basement shopping – but there’s no need to rush.

Risks remain high and the fear generated by a mutant killer virus is having a real effect on some sections of financial and commodity markets. But if the last virus outbreak, Severe Acute Respiratory Syndrome (SARS) in 2003 is a guide, then a strong recovery is likely.

Some earlybird speculators are already taking positions in high-quality stocks, and the best of luck to them, but more cautious investors will wait for a peak in the bad news before returning to the market.

A good example of how the market has moved can be seen in the metals and mining index (XMM) of the Australian stock market.

In two distinct trends, the XMM, which includes all major mining companies, gained 5% in the two weeks to January 22, when virus news hit the headlines, and then lost 4.5% over the past two weeks to be roughly where it started.

That roller-coaster effect can be expected to last for the rest of the March quarter with China, the source of the virus, also likely to be the source of more bad news before stability and recovery can kick in.

Credit Suisse, an investment bank, provided the best summary of what to expect in the months ahead with a dramatic slowdown in Chinese economic activity likely as the country “seems to be coming to an industrial stand-still to isolate all infections”.

Public transport in Tangshan, centre of the Chinese steel industry, has been halted and ports closed.

It’s the promise of major slowdown in steel production and construction activity which has rubbed the gloss of Australia’s iron ore star, Fortescue Metals, which has retreated after a spectacular upward run over January when it added 20% to an all-time high of $12.87, before catching a dose of Wuhan flu to shed 12% to $11.29.

Dividend hunters were the major players in Fortescue’s January rush and they should get what they want (a bonus payout) later this month. But they will also be looking at the iron price, which has been edging down even as Brazil struggles to fully restore shipments after its flood-induced outages.

Credit Suisse sees the virus-effect playing out like this:

  • “Four months were lost in the SARS outbreak as China struggled to understand what it was,” Credit Suisse said. “This time, China is rapidly isolating infection centres … so we expect new infections should cease by mid-February … and the epidemic to end by March.”

Reduced commodity prices, especially for industrial metals such as copper (which has lost 10% over the last two weeks) and nickel (down 11%), are a pointer to the trend.

Gold, naturally, has risen in the face of a global fright, but a gain of roughly $US10 an ounce over the past two weeks is not much to write home about, especially given the scare headlines associated with the virus.

Leading gold miners have not done as well as the gold price until a late bounce yesterday, another indication that investors are nervous with many preferring a sideline view of events.

Northern Star, which delivered a solid December quarter production report and a strong improvement at its Pogo mine in Alaska, initially slipped 40c to $12.29 in week which got off to a slow start after the Monday holiday, but yesterday afternoon it stormed back to close steady over the week at $12.66.

Newcrest was another leading gold stock to swim against the modestly rising gold tide, losing $1.50 to $30.52 thanks to operational problems at a number of assets, and despite encouraging assay result from the latest drilling at its promising Havieron prospect in WA.

Regis also weakened, down 5c at $4.47, but Saracen defied the weaker downward trend, adding 40c to $4.02.

It was a more encouraging picture among gold explorers and small producers, where a number of stocks had an excellent week, including:

  • Anglo Australian Resources traded up to a 12-month high of 12c with the 2c gain attributable to growing interest in its Mandilla project near Kalgoorlie and settlement of a management dispute.
  • Silver Lake, which operates in the same area as Anglo Australian, also touched a 12-month high of $1.64 (up 8c for the week) before easing to close at $1.60.
  • Perseus continues its stellar recovery after a slow start to hit a high of $1.18, up 6c in the week, and 50c over the last three months.
  • Kingsgate rose to a 12-month high of 58c, up 4c over the week and up 40c since this time last year.
  • Kingston Resources caught the eye of investors as it makes progress with its plan to redevelop the Misima goldmine in Papua New Guinea, adding 2c this week to 18c.
  • Alkane Resources added 6c to 74c after boosting its reputation as a gold stock (and less of a rare earth play), reporting a maiden inferred resource of 445,000 ounces of gold at the emerging Roswell prospect near its Tomingley mine in NSW, and
  • Oklo Resources added 9c (53%) to 26c after reporting what looks to be the best drilling result of the week, 55 metres at 7.65 grams a tonne from a depth of 54m at its Dandoko project in Mali.

Copper stocks were buffeted by the sharp fall in the price of their metal which is often referred to as a proxy for the health of the broader economy, hence its nickname of Dr Copper.

OZ Minerals lost a relatively modest 40c to $10.05 thanks largely to a well-received December quarter production report and a plan to increase spending on its new Carrapateena mine in South Australia.

Sandfire also reported healthy quarterly production and an acceleration in its growth ambitions, which included expanding its stake in Bosnia-focussed Adriatic Metals. On the market, Sandfire shed 60c to $5.43 but remains a preferred stock of Canaccord Genuity which reckons it will bounce back to $7.60.

Lithium stocks remained stuck in the sin bin, weighed down by a big surplus of the battery metal on world markets. Galaxy was down another 10c to $1.02 and Orocobre lost 50c to $3.15 with an additional negative factor in the lithium sector being reports that China’s leader in the material, Tianqi, is struggling to repay a $US3.5 billion loan which it used to buy a stake in Chile’s SQM.

Ending on a positive note, there was an upbeat assessment of the iron ore market published by Macquarie Bank which reckons that problems in Brazil caused by heavy rain potentially over-filling tailings dams could threaten plans to fully restore production.

Less Brazilian ore now will give the market a chance to stabilise in the face of China’s coronavirus slowdown, and if problems continue in Brazil the iron ore price could stay high for the rest of the year.

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