Gold stocks turn red as US Fed’s warning on end of free money outweighs benefit of new Covid strain

2nd December 2021
Tim Treadgold

A virus and a banker were a toxic combination on financial markets this week as the latest Covid strain rattled investor confidence and Jerome Powell, head of the U.S. central bank, warned that the punch bowl of free money could be removed sooner rather than later.

The net result was red ink across most sectors with gold equities hit hardest as measured by a 5.5% fall in the ASX gold index, a drop significantly higher than what turned out to be a modest $US15 an ounce slide in the gold price over the week.

Always a useful pointer to investor sentiment, the gold index drop, heavily influenced by Northern Star’s 5.8% decline to $9.10 and Newcrest’s 4% fall to $23.07, could be a sign of local investors adjusting their portfolios before Powell starts to taper bond buying and triggers an overdue round of interest rate increases.

Macquarie Bank, a committed gold bull, said that while gold had tried to rally in the early days of the Omicron Covid variation with a surge up to $US1815/oz, it gave back all of the gain after Powell’s threat of “faster/sooner” tapering of bond purchases.

The uncertain outlook for gold did not stop Macquarie from maintaining its enthusiasm for the sector with a reminder that it had recently initiated coverage of De Grey with a buy tip and $1.70 price tag, a target which slipped further away as the stock slipped 9c this week to $1.15.

The flipside of the falls was another solid week for Chalice Mining which moved up against an outgoing tide with a rise of 4c to $9.52, helped along with discovery news, this time of a shallow mineralised intrusion near the Hartog anomaly outside the area of the Gonneville project.

While markets struggle to fairly price assets against a blizzard of negative background noise in the final few weeks of the year, there could be a significant positive event forming in metal markets – a chronic shortage of most minerals.

A warning bell has already been rung about lithium slipping into a perpetual deficit (Macquarie mid-year), followed by sharp falls in stockpiles of nickel and copper, and an alert this week from Morgan Stanley that aluminium could be entering a decade-long supply deficit.

It doesn’t require too much imagination to see a pattern forming that starts with active government disincentives to explore and develop new mineral resources, followed by the displacement of fossil fuels with metal intensive renewables energy and battery storage which feeds into one of those stronger-for-longer commodity-price theories (will it be different this time?).

But before getting to a new phase of commodity demand and higher prices, it’s a case of shaking off the Covid bug and dealing with Powell’s tapering and interest rate increases – not to mention making it successfully to the end of 2021 and getting ready for an interesting ’22.

Looked at on a sector-by-sector basis there were exceptions, as there always are, to the overall downtrend, with Firefinch outperforming its gold peers with a rise of 11c to 75c as its Morila project in Mali continues to shine, with Canaccord tipping a future price of $1.30 ,followed by the company being forced to deny a media report that talks had been held about a capital raising.

Other gold moves included:

  • Benz Mining, a Canadian explorer with an Australian listing, added 3.5c to 68c after reporting a new high-grade discovery in the D zone of its Eastmain project in Quebec with a best intersection of 7.9 metres at 35.9 grams a tonne.
  • Musgrave Minerals added 1c to 35c after reporting what it called stunning high-grade hits at its Break of Day project near Cue in WA with a best assay of 15m at 111.6g/t.
  • Emerson Resources slipped 1c lower over the week to 7.3c but was in recovery mode yesterday, clawing back 0.5c after reporting a 40% increase in the resource of its Chariot project at Tennant Creek in the Northern Territory to 556,200oz, and
  • Dacian slipped 0.5c lower to 21c after announcing a fully underwritten $20 million capital with new shares being issued at 17c.

Lithium stocks had a mixed week, with the sector leaders heading south as a pair of hopeful newcomers proved yet again that it’s better to travel than arrive (hands up anyone who remembers the joy of travelling!).

Pilbara Minerals, a week after hitting an all time high of $2.67, slipped back by 12c to $2.55 while Orocobre fell harder with a 52c loss to $9.34. Liontown, after a stellar rise, lost 28c to $1.61 after unveiling a $450 million capital raising exercise with new shares to be issued at $1.65.

It was a different story for Jadar Resources, which added 1.8c (36%) to 6.8c after announcing a deal with China’s Yahua, a lithium chemical processor, to acquire and develop lithium mining projects, and Minrex, which did even better with a rise of 1.9c (85%) to 3.9c after reporting the acquisition of lithium exploration projects in WA’s Pilbara region.

J.P. Morgan, a leading investment bank, reinforced the lithium growth story with an update on global electric vehicle sales which revealed a 14% market penetration rate for battery-only EVs in Europe and 43% including hybrid vehicles. In China, the battery-only EV penetration rate has risen to 15% while total EV sales account for 21% of vehicle sales.

Iron ore news was dominated by a surprise joint venture between Mineral Resources and the private interests of Gina Rinehart over the planned development of new export facility in the south-west corner of Port Hedland.

The port deal helped Mineral Resources post a 57c share price rise to $44.18, easily outstripping arch-rival Fortescue Metals which ran out of steam after a strong month to slip 29c lower to $17.28.

Morgan Stanley, another investment bank, said a “round table” conference organised by Rio Tinto’s iron ore boss, Simon Trott, was told that inflationary pressures remained high and that the company needed to invest $US2 billion a year on replacement iron ore mines.

Other news events and market moves of interest included:

  • Lucapa and Burgundy continuing the resurgence of interest in diamond miners thanks to strong gem sales by industry leader, De Beers. Lucapa added 1c this week to 8.6c (it was down to 5c in June), while Burgundy was up 1.5c this week to 27c (it was down to 22c at mid-year).
  • Coda Minerals was the pick of the copper stocks with a 15c rise this week to 86c as interest grows in its Elizabeth Creek project in South Australia. Shaw and Partners pushed the boat out a long way with a by tip on Coda and a whopping share-price target of $2.30.
  • Iluka Resources reinforced interest in the titanium minerals and zircon sector with a maiden resource estimate for its Wimmera project in Victoria with an estimate of 340 million tonnes at 4.7% heavy minerals, good enough to lift the stock by 7c to $8.62. Strandline joined in the titanium minerals revival with a rise of 1.5c to 26c.
  • QMines earned a splash of useful publicity over an upgrade to its Mt Chalmers copper project in north Queensland which is said to now contain 101,000 tonnes of copper equivalent, but didn’t get same treatment on the stock market were it slipped 1.5c lower to 37c, half the 74c price target set by Shaw and Partners.
  • Toro Energy rejoined the uranium club after a diversion into nickel and gold with a report that the company was assessing “value opportunities” in its uranium portfolio, a move which didn’t stop a fall in Toro’s share price of 0.3c to 2.5c.
  • Lunnon Metals was the newsmaker among nickel stocks announcing an expanded resource in its Warren project near Kambalda in WA to 6400 tonnes of metal, which wasn’t good enough to stop a 3c share price slide to 34c. Other nickel stocks also fell with Mincor down 1.5c at $1.20 while Western Areas was also 20c cheaper at $2.91, and
  • Heavily promoted Firebird Metals said it had double the manganese resource at its Hill 616 project after re-assessing historic drill core data, a move which didn’t help the share price as it eased back by 0.5c to 43c.

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