Gold stocks roar back into favour as inflation genie shows more signs of escaping

Investors caught a glimpse of the elephant in the room this week as inflation in the U.S. bolted to a 13-year high in June, triggering a predictable response from gold which rose to a six-week high and looked poised to keep going.
15th July 2021
Tim Treadgold

The return of gold to a price above $US1825 an ounce followed news on Tuesday that inflation in the U.S. hit an annualised 5.4% last month, triggering a debate about whether the increase was temporary or the start of a significant upward trend.

The only answer to the inflation question, at this stage, is that the jury of professional opinion is out. Jay Powell, head of the U.S. central bank, reckons the June number was a blip, but if he’s wrong then gold could take off, as it does whenever there’s an inflation scare and fear of a collapse in the value of money.

On the Australian market, most gold stocks rode the metal price higher. Evolution added 30c to $4.82 and Northern Star put on 45c to $10.63, De Grey was up 2c to $1.25.

Gold companies also had a busy news week with developments that included:

  • Chalice Mining unveiling a plan to spin off its gold assets which include the promising Pyramid Hill discovery in Victoria, leaving Chalice to focus on its palladium discoveries in WA. On the market, Chalice added 45c to $7.67.
  • Bellevue Gold was bowled over by offers for the debt component of its namesake mine development in WA, with that vote of confidence from financiers (plus the higher gold price) helping the stock rise by 6c to $1.06.
  • Auteco reporting a 71% increase in the resource at its Pickle Crow project in Canada with its shares adding 1c to 12c.
  • Calidus saying it was close to starting mining at its Warrawoona project with overall construction 40% complete. The stock was steady on the market at 50c, and
  • Saturn Metals reported encouraging drill results from its Apollo Hill project in WA, including a hit of 9 metres at 4.72 grams a tonne, and while the stock only added 1c to 46c, Shaw and Partners said it was heading for 87c.

For many investors in Australian mining, the next big event for their portfolios will be the start of reporting season, especially for iron ore producers which have been riding a monster wave of cash courtesy of Chinese steel demand.

The iron ore producer which will be most closely watched is BHP, which is being tipped to set a new record for dividend payments, with RBC Capital markets advising mid-week that shareholders could get all of the company’s profit as dividend.

It goes without saying that a 100% payout ratio could set a new benchmark for Australia and goes a long way to explaining why BHP added $1.70 (3.5%) this week to trade at $51.16, perhaps on its way to the RBC target price of $54 or possibly on its way to Macquarie’s all-time high of $63.

At the other of the iron ore sector there were a number of interesting upward movers, led by Fenex, which revelled in the handsome profit margin on its June quarter shipment of 281,000 tonnes of ore at a profit margin of $127/t, good enough to the propel the stock to an all-time share price high of 45c before easing to 44c for a gain of 6c.

Another iron ore stock on the move after years of dormancy was Red Hill Iron which has its foot on a large tenement position in the Pilbara and a number of high-powered partners. Thinly traded, Red Hill added 20c this week to $1.10, taking its rise since the start of the year to 83c, (307%).

Citi, another investment bank, didn’t provide price tips this week but it did advise clients of a significant change in macro-economic settings, an end to China’s monetary tightening with easier money in the world’s commodity “sink” good news for metal prices.

“Our risk appetite framework suggests that mining stocks other than gold have underperformed their commodity price drivers, indicating that equities are undervalued relative to their commodity exposure,” Citi said.

One deeply unloved sector of the market which is certain to surprise on the upside is coal, a commodity consigned to the sin big by western politics but storming higher as the rest of the world continues to power its economies with a reliable source of electricity.

Credit Suisse reckons Whitehaven and New Hope are likely to return an investment yield of more than 12% thanks to the thermal coal price sitting above $US100 a tonne, a tempting return on funds for anyone lacking finely tuned environmental sensitivity.

Two other commodities in the news this week for the wrong reason were uranium and palladium.

Morgan Stanley lost patience with uranium, warning clients that while it remained bullish the chances of a substantial price rise in the future was not high because there wasn’t much evidence of a big supply shortfall and idle capacity would eventually return.

“Indeed, compared with the average spot (short-term) price of $US35 a pound over the last 10 years, the current spot price of $US33/lb suggests there is no acute shortage of uranium yet,” Morgan Stanley said.

The bank reckons the uranium price will not be much higher next year ($US36/lb), or the year after ($US41/lb), only reaching $US49/lb in 2024m by which time Canada’s Cameco will have restarted its big McArthur mine and Kazakhstan will be lifting output.

Among locally-listed uranium stocks, the newsmaker was Berkeley Energia which received a knock-back from Spain’s National Safety Council for its plans to develop the Salamanca project, a development which effectively half the share price with a fall from 63c to 32c.

Other uranium stocks had a poor week. Deep Yellow lost 4c to 66c while Paladin and Bannerman were down 1c each to 48c and 15c respectively.

Other news and market moving events this week included:

  • Sandfire beat copper production guidance for the June 30 financial year with output of 70,845 tonnes plus 39,459 ounces of gold at a cash cost of US81 a pound. The result has set the company well for its shift in focus to the Motheo project in Botswana. On the market, Sandfire slipped 11c lower to $6.75 while Shaw and Partners tipped a future price of $8.40, and Macquarie Bank went better with a $10 target.
  • Orocobre led a stronger battery metals sector with a rise to an all-time high of $7.46 on Wednesday before easing to $7.26 for a week’s gain of 64c. The driving force behind that record price was a report from the company that lithium prices in the June quarter were up 45%.
  • Liontown moved quickly to capitalise on the latest lithium surge, announcing a $52 million capital raising priced at 76c a share to accelerate work at its Kathleen Valley project in WA. On the market, Liontown eased by 3c to 81c. Macquarie said the stock was heading to $1.05.
  • Sayona joined the lithium capital raising rush with a $50 million issue of new shares priced at 7.5c with the funds earmarked for the company’s Abitibi project in Canada.
  • Mincor was top performer among nickel stocks with a rise of 9c to $1.11 after reporting strong mineralised intersections from underground drilling in the gap between the Long and Durkin North mines. Assays are pending.
  • MetalsX added 1c to 24c after reporting solid tin assays from resource definition drilling at the Hastings project within the broader Renison tin project in Tasmania with best hits of 1.87% tin over 35m from a depth of 237m and 3.52% tin over 17m from 385m.
  • Galileo Mining rose by 2.5c to 30c thanks to a report that it had started a sampling program for palladium near Norseman in southern WA, and
  • Alta Zinc updated the mineral resource estimate at its Gorno project in Italy 530,000 tonnes of metal in 7.8 million tonnes assaying 6.8% zinc. The stock rose by 0.2c to 8.4c.

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