From fossils to fashionables, energy poised to be an out-performer in FY23

It’s a new financial year and with the change comes a time for resolutions. And while this column is not in the business of giving investment advice, there is one sector of the market which investors might overlook to their cost: energy.
30th June 2022
Tim Treadgold

In a nutshell, governments of all colours have made a dog’s breakfast of energy policy and unscrambling the mess represents a decade-long opportunity.

On one side of the energy book are traditional fossil fuels which over the past 12-months have enjoyed bumper prices despite forecasts of their demise followed by an embarrassing discovery that the world cannot yet function without them.

This week saw a return of buyer interest in oil and coal stocks as prices hovered near all-time highs, oil at US$115 a barrel (up 60% on this time last year) and thermal coal at US380 a tonne (up 170% on this time last year).

On the other side of the ledger are new energy metals favoured by government but likely to be in short supply as demand accelerates, which means an indefinite period of high prices, with the occasional hiccup during periods of imbalance.

This week’s lithium expansion moves by Pilbara Minerals, Liontown and Sayona Minerals are a taste of what’s to come as industrial customers, such as car makers, start to scramble for supplies of essential raw materials.

Of the three deals, it was Liontown’s signing of the Ford Motor Company which rang the loudest bell because it is the latest in a series of moves by car companies to secure access to lithium which they must have for their shift to battery-powered vehicles or risk going out of business.

Ford’s provision of a $300 million loan comes on top of Liontown’s sales contract with Tesla and the direct investment in European lithium hopeful Vulcan Energy by Stellantis, the company which makes Peugeot, Renault, Dodge, Jeep and Maserati (to name a few of its brands).

Periods of lithium oversupply are possible, as Goldman Sachs warned last month, but when it comes to investment themes, there is the inescapable reality of the trend being your friend and new energy metals are on an unstoppable upward trend.

Most of Australia’s lithium stocks continued to recover this week from the Goldman driven sell-off. Pilbara added 21c to $2.31 with Macquarie Bank refreshing its buy tip and price target of $4.20. Liontown was up 14c to $1.07 with Macquarie seeing $1.85 as the target.

Ford, Tesla and Stellantis will not be alone with a stampede likely to develop as car makers rush to buy what they need and invest directly in mining companies to ensure future supplies.

But as a note of caution, it’s worth remembering that Australia is not the only supplier of lithium, with South American producers also planning to expand, as is the biggest of the U.S. producers, Albemarle Corporation, which unveiled plans this week to build a 100,000 tonne-a-year lithium processing plant in the U.S.

More later about what happened this week (spoiler alert: it wasn’t much), but first a look back at the 2021-22 financial year which started with promise even though seasoned observers could see the first dark clouds of higher interest rates which signalled an end to the era of easy money.

Not on the horizon 12-months ago was Russia’s invasion of Ukraine and the way that event has upended global trade flows, which could see a re-run of the cold war (and an associated arms race), as countries are forced to pick sides, with Australia cementing its position as a key provider of minerals and food.

Major ASX indices tell the story of last financial year with the all-ordinaires down 9.7% (even with a bounce over the last two weeks). The metals and minerals index down 7% and the energy index up 25%.

More of the same can be expected this year but with one important variation - sharply rising costs such as those being experienced in the goldmining sector where the impact of an estimated 30% increase in operating costs is proving to be disruptive.

Evolution Mining was the focus of the cost crisis this week, suffering a 27% share price crash after releasing a poor outlook for the year ahead, complete with delays to two planned ore processing upgrades.

Northern Star did a bit better but was still down 12% over the week after unveiling a proposed overhaul of its flagship Kalgoorlie Superpit gold mine which could ensure another 20 years of operation at a cost of between $400 million and $1.4 billion..

While the two companies have opted to go in different directions (one expanding and the other not) the worry for investors remains the costs outlook, which was addressed mid-week by Canaccord Genuity, a stockbroker specialising in the resources sector.

In a report which should be essential reading for all investors with an appetite for gold mining, Canaccord factored into its analysis a sector-wide 12% increase in sustaining costs and then applied a stress test (which included a 10% fall in the gold price) to the stocks it follows most closely to highlight liquidity risks.

St Barbara, for example, might need to defer growth capital expenditure, Canaccord said. Regis might need to defer the McPhillamys project.

“We have cut our price targets on average by 17%, largely driven by higher all-in sustaining cost (AISC) expectations,” the broker said.

Canaccord’s cost warning applies to all commodities, not just gold, because the effects of inflation approaching an annualised 10% will be felt in all sectors of the economy, which will be a novel experience for anyone under 40.

Other metals with a role to play in the new energy sector, including copper and nickel, recovered after three down weeks with copper adding a few cents to trade at US3.77 a pound while nickel added US90 cents a pound after Russia’s leading “metals” oligarch, Vladimir Potanin, the major shareholder in Norilsk Nickel, was added to Britain’s sanctions list.

Sandfire led the local copper sector with a rise over the week of 8.5c to $4.53 after reporting a significant increase in the mineral resource at its Matsa mine in Spain. OZ Minerals went the other way with an 8c slide to $18.15 after releasing soft production guidance.

Mincor was the pick of the nickel sector with a 5c rise to $1.64 while Widgie, which reported encouraging assays from drilling at its Gillett North project, lost 6c to 32c

Iron ore was another commodity showing early signs of a rally after six months of being sold down with the latest positive moves linked to speculation that China is on the edge of a revival after its prolonged period of Covid lockdowns.

The price of high-quality iron ore is back to US$124/t, up US$12/t over the past two weeks, with a corresponding effect on producers such as Fortescue, which added $1.16 this week to trade at $18.13, Champion Iron was up 47c to $5.46 and Mt Gibson added 3.5c to 54c.

Mineral sands miners had a good week following news that sector leader Iluka had achieved a US$100/t increase in the price of its zircon and said it expected strong demand to continue.

Goldman Sachs upgraded its view of Iluka, which helped the stock add 76c to trade at $9.40, though Goldman reckons it will keep going to a target price of $13.90.

Strandline was another winner in the sands camp, adding 5c to 34c after reporting an early start to mining at its Coburn project in WA.

Other news and market moves of interest included:

  • QX Resources made a splash on the market yesterday with a report of rock chip samples assaying 4.9% lithium oxide from field work at its Turner River project near the Wodgina mine of Albemarle in the north of WA. Thinly traded QX added 1c (45%) to 3.2c.
  • Jupiter Mines creeping up by 0.2c to 19c after reporting a mixed quarter which ended on May 31 but with the more important news being a management comment about increasing spot market prices for manganese. Macquarie remains a supporter of Jupiter with a buy tip and price target of 30c.
  • Cyprium Metals slipped 1c to 12c after announcing a $26 million capital raising to help fund work at its Nifty copper mine in WA.
  • Highfield Resources added 11c to 88c after reporting the start of construction work at its Muga potash project in Spain.
  • Sky Metals added 0.4c to 6.1c the release f encouraging tin assays from drilling at its Tallebung project in NSW with a best hit of 60.2 metres grading 0.54% tin and 40.4 grams per tonne of silver.
  • ABX Group, better known as a bauxite explorer, reported encouraging rare earth results from its Deep Leads project in northern Tasmania. The stock added 1c to 14c, and
  • Lynas Rare Earths added 44c to $8.90 despite a Chinese disinformation campaign against it and other western rare earth companies which threaten China’s stranglehold on the material.

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