Growing caution around iron ore bubble makes Westpac’s bullish call look like kiss of death

Iron ore and gold marched higher this week for different reasons
5th July 2019
Tim Treadgold

Iron ore and gold marched higher this week for different reasons and while a continuation of gold’s upward move seems assured, the first sign of an end to the iron ore boom came in the form of a forecast from a big bank that the commodities super-cycle has returned.

Westpac, Australia’s oldest bank, said growth in the domestic Chinese economy coupled with the rise of India and Indonesia seemed poised to launch the next phase of the super cycle.

Tipping a return of the commodities boom which petered out the best part of a decade ago might please some investors but it could also be the equivalent of predicting an Australian win in the cricket world cup – the kiss of death.

Westpac’s view, via its institutional banking arm, is based on a belief that the China v US trade war is moving towards a resolution and that demand for Australia’s commodity exports remains as strong as ever.

Support for the bank’s optimism could be found in Australia’s near-record trade surplus of $5.7 billion in May and an expectation that the country could enjoy its first current account surplus in almost 40 years if the trend continues.

Encouraging as the official numbers might be, they do not reflect realities in the market place, where the iron ore boom is looking like a balloon waiting to be popped – though perhaps after a final hurrah and a rise closer to $US150 a tonne as Chinese steel mills are forced into panic buying before Brazil resumes full-scale shipments and the price crashes

Caution in iron ore, even as the price this week touched $US127/t, roughly double where it was at the start of the year, could be seen in share prices with the biggest individual winner, Fortescue Metals Group, rising by 22c over the week to $9.22 – though that rise masked a 17c fall yesterday.

The big boys of iron ore, BHP and Rio Tinto, delivered similar performances, up early in the week and then down, while the smallest iron ore stock, Mount Gibson slipped 11c lower over the week to close at 99c, well down on its $1.30 of six weeks ago.

Gold had an erratic week but ended up as investors continued to shift funds away from falling interest rates, adding $US40 an ounce to $US1434/oz at once stage before easing to $US1416/oz, good enough to leave the local gold price above A$2000/oz.

Miners with gold interests had a mixed week with rises and falls evening out, perhaps influenced by a gloomy gold equities report from Credit Suisse, an investment bank.

Whether someone at Credit Suisse got out of bed the wrong way is an interesting question because it’s probably the only way to explain a forecast that Evolution, which was steady at $4.36, is a sell with a 12-month price target of $2.60. Newcrest, which added 70c to $32.34, is also a sell with a target price of $20.30, and Northern Star, which added 18c to $11.72, could fall to $6.10.

Other interesting research notes released during the week included:

  • Macquarie giving mid-tier base metal miners the thumbs up as it expects continued strength in copper and nickel. Buy tips were assigned to OZ Minerals which is expected to rise from its latest price of $9.89 to $12.30. Independence, up from $4.93 to $5.10. Panoramic, up from 30c to 60c and Sandfire, up from $6.82 to $8.
  • Morgan Stanley warning (again) that the lithium market is over-supplied, a view echoed by Macquarie which is cautious about sales of electric vehicles, a trend which could see more lithium mining projects delayed while demand catches up with supply.
  • Morgans getting bullish about junior miners with a report which previewed the July 17-to-19 Noosa Mining Conference. The title told the story: “Buy when no-one is shopping”. Stocks highly rated by Morgans include Panoramic which is said to be heading for a price of 70c (up 10c on the Macquarie tip), Staveley which could rise from 24c to 28c, and Strandline which is forecast to move up from 14c to 38c.

Among the smaller gold stocks, one of the most interesting developments was resolution of the long-running internal fracas at Capricorn Metals, which has appointed new senior executives and raised a fresh $18.26 million to push on with its stalled Karlawinda project in WA.

The new man in charge is former Regis Resources chief executive Mark Clark, who will become Capricorn’s executive chairman, while another former Regis executive, Mark Okeby, was appointed to a non-executive board seat.

On the market, Capricorn added 3c to 12c – with Canaccord Genuity forecasting a future share price of 20c.

Other newsworthy and market-moving events included:

  • Gold Road poured the first gold from its half-owned Gruyere mine in WA, a development which lifted the stock by 11c to $1.13, down slightly on the all-time high of $1.15 reached on Wednesday.
  • Adriatic Metals, which is exploring a polymetallic project in Bosnia, added 12c to $1.11 after Sandfire Resources outlaid $5.3 million to lift its Adriatic stake to 11.1%.
  • Red River added gold to its zinc interests through a $4 million deal to buy the Hillgrove project in NSW, a deal which lifted Red River’s share price by 4c to 20c.
  • Red5 reported more encouraging assays from drilling at its King of the Hills gold project in WA with a number of exceptionally thick intercepts which continue to point towards a future bulk mining opportunity. Best hits were 1.5 grams a tonne of gold over 459 metres, and 162m at 3g/t. On the market, Red5 added 3c to 20c.
  • Chalice Gold added 2c to 14c after reporting the sale of its East Cadillac and Kinebik projects in Canada for $C12 million in shares while also retaining a royalty on the assets.
  • Independence Group was first cab off the June quarter reporting rank with a suite of positive production reports from its Nova and Tropicana nickel and gold projects with output within or exceeding guidance in all cases. On the market, the stock added 20c to $4.92 – with Canaccord tipping a future price of $5.65, and
  • Alt Resources added 0.2c to 2c after reported high-grade gold intercepts at its Tim’s Find property with the broader Mt Ida project with a best hit of 9m and 7g/t.

 

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