Fear of recession and earnings downgrades leaves exploration success as investors’ great white hope

Recession speculation flowing from a potentially rapid rise in interest rates dominated the top end of ASX resource stocks this week while at the bottom end, with the aid of a magnifying glass, a handful of winners could be found.
24th June 2022
Tim Treadgold

Biggest losers from the downbeat talk were the three major iron ore producers, BHP, Rio Tinto and Fortescue Metals, which were sold off as the iron ore price headed south.

BHP dropped $2.19 (5.2%) to $40.36. Rio Tinto fell by $5.31 (5%) to $102.38, while FMG was hit hardest, losing $1.50 (8%) to $17.26.

China’s slowing economy, caused in part by Covid lockdowns, was the primary reason for the steel-making material crashing back to US$112 a tonne, its lowest this year and half the price of 12-months ago.

Macquarie Bank said “all eyes were on the next phase of government stimulus spending in China” which could boost the iron ore sector. The bank has retained a buy tip on BHP and set a price target of $51. Rio Tinto is also a buy with a price target is $124, and FMG could rise to $18, but has a neutral rating.

The major drag on market sentiment was central bank interest rate activity as a concerted attack started against inflation, prompting economists surveyed by Citi, an investment bank, to rate the probability of a global recession at 50%.

The corrosive effect of inflation, and a timely warning to investors to be on full alert for unpleasant inflation surprises, can be seen in Dacian Gold, which started falling latest last week after horror cost blowouts at its Mt Morgan mine and kept falling this week.

Cost increases of between 75%-and-85% for contractors, 42% for diesel fuel and 40% for natural gas, torpedoed the Mt Morgans business case, prompting mine closure and a reduction of operations to treating stockpiled material, a change which drove Dacian’s share price down to 8.3c, a fall of 30% in the past week and 70% since the start of the year.

Macquarie Bank added to the pessimistic mood with a report which warned investors that “recession is the price to pay for lower inflation”, adding that its economists expect most of the developed world to be in recession next year.

The bank’s strategy team said it assumed aggressive interest rate increases in the second half of 2022 which will: “take monetary policy into restrictive territory with large July hikes from both the U.S. and Australian central banks (0.75% and 0.5% respectively) followed by further consecutive hikes”.

Even oil started to buckle under the threat of a significant downturn, with Brent, the international standard, losing US$10 a barrel over the week to close yesterday at US$108/bbl. In the U.S. the oil price edged down to US$103/bbl.

UBS was a late arrival at the pessimism party with a report released yesterday which sharply downgraded share price forecasts for the whole market by slashing earnings estimates.

New resource sector floats were hammered during the week as investors who had subscribed in better times rushed to get some of their money back.

Leo Lithium, hailed as mining’s biggest initial public offering this year, sank quickly when trading started yesterday with its 70c shares opening at 52c, rising to 60c and then slipping away to 54c.

OD6 was another new float bowled over in a rush for the exits with its 20c shares posting first sales at 15c, rising to 16c and staying there.

Overall, thanks to bargain hunting among bank and retail stocks, the Australian market (as measured by the all-ordinaries index) had a positive week, rising by 1.2% though that welcome reversal of a downward trend needs to be seen against a 10% monthly decline and a 15.5% fall since the year.

Next major events for investors will be annual reporting season for companies with a June 30 balance date with market analysts seeing earnings, and profit guidance for next financial year, as a key to market sentiment.

Among the small resource stocks to outperform in a lacklustre week were a number with encouraging discovery and development stories to tell, including tin explorer, Elementos, which added 2.5c to 46c thanks to growing interest in its Oropesa project in Spain. Morgans, a stockbroking firm, reckons Elementos is heading for a price of $1.02.

Other upward moves among small resources stocks included:

  • Lode Resources added 4c to18c after reporting exceptionally high-grade silver assays from the latest drilling at its Tangoa West project in the Webbs Consol area of NSW, including 5.9 metres at 1074 grams a tonne (the equivalent of 34.5 ounces to the tonne) from a depth of 30.1m.
  • Revolver Resources, up 3c to 30c after reporting fresh high-grade copper assays from the Green Hill deposit at its Dianne project in Queensland, including 37.5m at 1.23% copper from the surface.
  • Gascoyne Resources initially added 1c to 26c after reporting encouraging assays from its Gilbeys North gold discovery near its Dalgaranga project in WA with a best drill hit of 54m at 6.55g/t, but the stock later retreated to be steady at 25c.
  • Nimy Resources jumped 8c higher to 43c after reporting a potential copper, silver and zinc discovery at the Deese prospect in its Mons project area of north-west WA. No assays are available yet, but the company said it had encountered a 487m zone of ultramafic material which gave off encouraging readings using hand-held X-ray fluorescence (XRF) devices, and
  • Musgrave Minerals added 1.5c to 28c after announcing the appointment of a seasoned mine manager in Anthony Buckingham for its Cue gold project in WA.

The significance of those share prices rises, in a largely weaker market, is that they were all driven by discovery or development news, adding to a view that the next phase of the small-to-mid sized sector of the resources market will be about exploration results and not commodity price moves.

Gold stocks weakened even as the gold price clung to US$1834 an ounce, down just US6/oz and up A$3/oz on conversion to Australian dollars thanks to a weaker Aussie currency (or stronger U.S. dollar, depending on your point of view).

In any event, the commodity price did little for gold miners, especially St Barbara which was battered by bad news from its PNG and Canadian operations, plunging 40c (34%) to 78c, its lowest in seven years.

Gold leaders were weighed down by the news from St Barbara (and the Dacian cost blowout). Northern Star lost 56c to $7.87. De Grey was down 14c to 81c. Evolution shed 28c to $3.35 and Bellevue was 3c weaker at 68c.

Other news and market moving (mainly down) events included:

  • Pilbara Minerals slipping 2c lower to $2.04 despite announcing its latest high-priced sale of 5.5% spodumene (lithium) concentrate in pre-auction trading on the BMX website at a price of more than US$7000 tonne.
  • Coda Minerals continuing to attract interest in its Emmie Bluff copper discovery in South Australia and while the stock shed 4c to 24c it won a fresh buy tip from stockbroker Shaw and Partners which sees the stock rising to 90c.
  • Galileo Mining tumbled 42c to $1.12 despite reporting encouraging results from multiple drill holes at its Callisto project in WA with a best new result of 33m at 2.05g/t of 4E (combined platinum, palladium, gold and nickel + rhenium).
  • Mincor Resources lost 18c to $1.64 but was trending up towards the end of the week after bottoming on Tuesday at $1.51 with the recovery coming after the company reported receipt of first payment from BHP for nickel ore delivered to the Kalgoorlie concentrator.
  • 92 Energy reported the best uranium readings yet on a handheld scintillometer from its GMZ discovery in Canada only to see its shares ease back by 10c to 40c.

 

  • Bitcoin, the bane of sensible investing, climbed back above the US$20,000 mark but the cryptocurrency sector remains mired in controversy with the latest twist being a Korean Government investigation into the collapse of Terraform Labs, creator of the Luna and terraUSD coins.

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