Gold stocks resist worst of broader mining sell-off in telling sign for precious metals sector

Most commodities continued to fall this week, taking share prices with them, including gold, which hit a nine-month low, though gold’s decline of US$70 an ounce to US$1744/oz was offset by an eye-catching increase in deal flow.
7th July 2022
Tim Treadgold

The Genesis Minerals merger with financially-stretched Dacian Gold was a hint of what might be to come in gold, and possibly the broader Australian mining sector, where the key word for the next 12-months will be consolidation.

Inflated costs, which continue to storm higher, combined with lower commodity prices, are a perfect recipe for rationalisation, either through voluntary mergers (such as Genesis and Dacian) or via hostile takeovers aimed at achieving economies of scale and cost cuts.

The market reaction to the Dacian deal was an example of what to expect with the target enjoying a handy 1c (9%) share price boost to 9.7c while the buyer, Genesis, paid a modest price in the form of a 2.5c (2%) slip to $1.21.

Next objective in what looks like the start of the creation of a major gold producer under the leadership of former Saracen Minerals boss Raleigh Finlayson could be financially stretched St Barbara, which rose this week by a telltale 1.5c to 81c in the face of a falling gold price.

This latest burst of corporate action among gold stocks started late last month when iron ore billionaire, Andrew Forrest, launched an unsuccessful raid on Regis Resources with the aim of achieving a 20% stake in the company, which might need a helping financial hand in developing the McPhillamys mine in NSW.

Regis shares rose by 7.5c (5%) this week to $1.50, slightly above the $1.48 offered by Forrest’s bidding vehicle, Wyloo Resources, the same company which beat BHP last year in a bidding duel for Canadian nickel explorer Noront Resources.

Another clue pointing to increased interest in gold stocks even as the price of the metals slips could be seen in widespread price rises this week which included:

  • Calidus Resources adding 2.5c to 62c after reporting the start of steady state production at its Warrawoona mine in WA.
  • Alkane Resources reporting higher than budgeted gold output of 66,804 ounces last financial year which helped the stock’s price rise by 3c to 67c.
  • Flynn Gold jumping 4c high to 14c after a promising hit of 10.6 grams a tonne over 5.4 metres at its Trafalgar project in Tasmania.
  • Kairos rising by 0.4c to 2.2c after a technical review showed the potential for a substantial increase in the resource at its Mt York project in WA, and
  • Gold Road losing 6c to $1.08 despite reporting a record output of 85,676oz of gold in the June quarter.

The ultimate test of gold stocks resisting the worst of the commodity price correction could be seen in the ASX gold index which has declined by 2.8% over the past five days. This is significantly better than a 9% fall in the broader metals and mining index, dragged lower by the majors.

BHP, for example, has fallen by $2 (5%) to $38.37. Rio Tinto is down $4.38 (4.4%) to $96.73 and Fortescue Metals has lost 40c (2.3%) to $16.92 – with all three of the big iron ore miners burdened down by concern about a slowing Chinese economy and the potential for a global recession.

As well as the China factor, there is the toxic combination of Putin and Powell weighing on investor confidence, along with an inverted bond yield (short-dated bonds yielding more than long-dated) which is seen as a reliable predictor of recession.

The Ukraine war and a sky-high oil price is the contribution of Russia’s President Vladimir Putin to market-churning events. Grindingly higher interest rates are the work of U.S. central bank boss Jay Powell as he leads the charge against a dangerously high inflation rate.

Combined, the Putin/Powell effect is adding to concern that a global recession is underway with Dr Copper, the soothsayer of metals, leaning that way with a price down another US10 cents this week to US$3.43 a pound, taking its fall over the past 30-days to US94c, or 21% -- and the drop since early March to 30%.

Technically, the fall by copper qualifies as a crash but more importantly it is the clearest sign yet that the global economy is slowing and with the slowdown will come reduced demand for Australia’s all-important commodity exports.

Former Rio Tinto chief executive, Jean-Sebastien Jacques, weighed into the debate about the economic outlook citing the copper price fall as one side of a “nightmare” scenario, rising costs and falling commodity prices.

The latest cost warning came in a report from potash and salt developer BCI which said the company’s Mardie project in WA was experiencing significant cost increases with the planned start of production being pushed back, a move which lowered BCI’s share price by 3c to 25c. It was 60c at this time last year.

Jacques said on his LinkedIn account that: “Dr Copper’s trend was alarming regarding the health of the global economy and could become a direct concern for a large part of the mining industry”.

J.P. Morgan, an investment bank, was less concerned than Jacques, saying it expected copper to “bounce back” by 20% over the next six months as China’s economy recovers.

UBS, an investment bank, said it was cautious about Australian resources apart from selective buying with its preferred sectors being gold and lithium. Iron ore stocks were being helped up by the prospect of big dividends but the downside outlook was not promising.

Good news, and it was hard to find this week, is coming in the form of negative events, such as speculation that the so-called “Pilbara killer”, the long-delayed Simandou iron ore project in Guinea might face another delay as the government of that remarkably corrupt country tries to force Rio Tinto into a development decision under threat of losing title to the deposit.

Any fresh attempt to find developers prepared to risk more than US$20 billion on an iron ore mine as recession looms would be a tough assignment, meaning that Australia’s iron ore producers could again dodge the Simandou bullet.

Another perverse event flowing from a major economic downturn could be a collapse in the price of oil with Citi, an investment bank, warning that “if a recession unfolds, oil prices could fall into the US$60 a barrel range by year end”.

That low-ball price forecast sits against tips going the other way, including US$200/bbl from Sweden’s SEB Bank and an alarming US$380/bbl from J.P. Morgan – with both of those extreme predictions guaranteed to spark a recession, if they eventuate.

Other market moves this week, included:

  • Chalice Mining adding 25c to $4.05 after reporting a fresh nickel and copper and palladium discovery close to its Gonneville flagship on the outskirts of Perth.
  • Leo Lithium losing another 9c to 47c as doubts swirl around the company from which it was spun-out, Firefinch. Leo is now 33% below last month’s issue price of 70c.
  • Galileo Mining continuing to attract support for its promising Callisto palladium discovery in WA, shrugging off the effects of a $20.4 million capital raising at $1.20 to add 5.5c to $1.25.
  • Greenland Minerals fighting on after having its rare earth and uranium project rejected by the government of Greenland, adding half-a-cent this week to 5c after securing litigation funding to fight the government.
  • Australian Rare Earths adding half-a-cent to 43c after reporting a big increase in the minerals resource of its Koppamurra rare earth discovery in South Australia.
  • Group 6 Metals rosing by 1.5c to 22c on news of solid progress at its Dolphin tungsten mine on King Island in Bass Strait.
  • Staveley Minerals adding 1.5c to 17c after reporting the successful raising of $4 million for work on its Victoria copper project with the potential for another $1.5 million to come from a share purchase plan, and
  • Hastings Technology Metals saying it was exploring downstream processing options for the rare earths mined at its Yangibana project in WA. The stock fell 18c to $3.91 over the week but Macquarie Bank reckons it’s a buy with a price target of $6.40.

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