Growing calls to jump aboard base metals express as metals-for-reflation theme gains traction

Gold faded after a solid start to the week thanks largely to a stronger US dollar but as that was happening, more evidence emerged of renewed interest in copper and other commodities.
4th September 2020
Tim Treadgold

Gold faded after a solid start to the week thanks largely to a stronger US dollar but as that was happening, more evidence emerged of renewed interest in copper and other commodities.

A series of events highlighted what could be the start of a significant rotation of capital with the raw materials sector challenging the dominance of technology and finance.

The first hint of a change in sentiment was a move by legendary US investor Warren Buffett to invest $US6 billion through the acquisition of 5% stakes in five leading Japanese commodity-trading houses, Mitsui, Mitsubishi, Itochu, Sumitomo and Marubeni.

Those investments, which significantly expands Buffett’s exposure to commodity trading as mineral and food prices move higher after the Covid-19 pandemic, was followed by a report from Citi, an investment bank, that copper was likely to continue rising and that “metals are the place to be for the reflation trade”.

Citi’s target price for copper over the next six-to-12 months is $US8000 a tonne ($US3.65 a pound), up 18% on its latest price of $US3.05/lb which is already 45% higher than the $US2.05/lb of late March.

Other banks are also warming to the “metals for reflation” theme and some prominent investors reckon it’s time to lighten exposure to recent technology leaders.

In a related development, Tesla’s biggest independent shareholder, the UK-based fund manager, Baillie Gifford, trimmed its Tesla stake after generating a $US17 billion profit on the electric car company.

On the Australian market, the modest rise (and equally modest slide) in gold saw sector leaders such as Evolution, Northern Star, Newcrest and Saracen trade around their opening prices for the week, handing the running to explorers where good news drove prices higher with two of the best results being:

  • De Grey Mining, which reported another promising discovery at its Hemi project in WA’s north west, added 10c to $1.30, but that price followed the stock trading up to a multi-year high of $1.33 on Wednesday. Best assay at the new Falcon discovery was 21 metres at 3.4 grams of gold a tonne from a depth of 68m, and
  • Wiluna Mining, the old Blackham Resources, was also in demand after reporting high grade intercepts from infill drilling at the Golden Age project, including 5.96m at 112.98g/t with a bonanza zone in the core assaying 880g/t over 0.65m. On the market, Wiluna rose by 18c to $1.48 but did reach a 12-month high of $1.59 on Wednesday.

Other significant events during the week included evidence of increased deal flow across the resources sector and continued fund-raising success for companies with a good story to tell.

Evolution Mining chairman, Jake Klein, acknowledged the growing interest in corporate moves with a simple message that “the drum beat for mergers and acquisitions” is loud with investors demanding action, a mood shift which also brings heightened risk.

Three deals (two in and one out) caught the eye this week. They were:

  • Russia’s Nordgold lifting its takeover offer for Cardinal Resources to 90c a share, as well as boosting its stake in the target to 28.5%, leaving it up to China’s Shandong Gold to respond in the battle for Cardinal which owns the promising Namdini gold discovery in Ghana.
  • Mali Lithium undergoing a conversion to gold on the road to Bamako (capital of Mali) through a deal to buy the historic but heavily mined Morila gold project from two gold majors, Barrick and AngloGold, for up to $US27 million. Out with a light metal in with a heavy metal – in a high-risk location. The stock rose by 2c to 20c before trading was suspended pending an announcement, and
  • Independence Group selling a recently acquired 19.5% stake in New Century Resources, which is in the process of acquiring the big but ill-fated Goro nickel project in New Caledonia. Independence held the stake for less than five months with the exit rubbing 3c off New Century’s price, which fell to 16c.

Fund raising, a feature of the market for much of the year, continued during the week, starting with the release of a study by the accounting firm BDO which calculated that Australian junior resource companies raised $1.34 billion in the June quarter, up $500 million on the march quarter.

This week’s raisings included: Rex Minerals, $10 million to help fund its U.S. and Australian copper and gold projects. Magnetic Resources, $7.1 million for accelerated exploration at its Laverton gold projects in WA. Taruga Minerals, $4 million to push ahead with a South Australian copper search. Canyon Resources, $10 million to help fund the Minim Martap bauxite project in Cameroon. Alta Zinc, $2 million for its Gorno zinc project in Italy, and Toro Energy, $1.2 million to fund nickel exploration.

Other commodities to make the news this week included uranium which, despite its poor fundamentals, appears to be turning positive with one of the world’s biggest producers, Kazatomprom, an arm of the government of Kazakhstan, reporting an 11% profit increase and improving market sentiment towards the nuclear fuel.

Iron ore prices remained elevated at $US125.50 a tonne which helped local stocks shake off some early selling. Fortescue, after falling to $17.18 as it went ex-dividend, rose back to $18.05, which was still down 80c over the week, while Mineral Resources powered up to an all-time high of $30.16 before easing to $29.84, still good enough to turn its founder, Chris Ellison, into a billionaire.

A note of iron ore interest is that the rest of the world finally seems to be following China’s iron ore lead with the Platts news service reporting that Atlantic Basin contracts for premium iron ore were tracking higher.

Copper, as mentioned earlier, led a stronger base metals sector with Macquarie Bank repeating a “buy almost everything” advisory note despite evidence of a surplus developing in nickel.

Leading local copper stocks moved up. OZ Minerals added 78c to reach a 12-month high of $15.06 before easing to $15.04 and Sandfire Resources was up 20c to $4.84.

Other news and market-moving events included:

  • DGO Gold adding 13c to $3.68 after reporting DeGrussa-style mineralisation in drilling 75km south of Sandfire’s DeGrussa mine in WA. Best assay was a thick 132 metre zone at 1.3 grams a tonne of silver.
  • Anglo Australian Resources said it had bought all third-party royalties covering its promising Mandilla gold project south of Kalgoorlie in WA. The stock rose by 3c to 20c and also received a buy recommendation from Petra Capital which reckons it’s headed for 33c.
  • Nickel Mines added 8c to 76c after surprising the market with a maiden 1c a share dividend after reporting a net profit of $US45.5 million from its Indonesia operations. Bell Potter and Shaw repeated buy tip with price targets of $1.04 and $1.08, respectively.
  • Malachite Resources rode the nickel market higher after acquiring an 80% stake in the Kolosori project in the Solomon Islands, a deal which helped the stock rise by1c to 4.7c.
  • Western Areas was another nickel winner adding 16c to $2.34 after declaring a maiden ore reserve for the AM6 deposit at the Cosmos nickel project, and
  • New World Resources put on 0.2c to 4.2c after reporting thick and high-grade assays from its Antler copper project in the U.S. with a best hit of 30.5m at 1.99% copper, plus useful grades of zinc and lead which produced a copper equivalent assay of 3.6%.

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