Growing fears over China debt burden creates opportunities for those willing to buy against trend

Buy when others are selling. It’s one of the oldest pieces of investment advice and its one that Karl Simich and Andrew Forrest put into practice this week with copper and nickel deals.
23rd September 2021
Tim Treadglod

Buy when others are selling. It’s one of the oldest pieces of investment advice and its one that Karl Simich and Andrew Forrest put into practice this week with copper and nickel deals.

Simich, chief executive of Sandfire Resources, took the WA-based company he leads into Spain via the $1.2 billion acquisition of the Matsa mining complex.

Forrest, chairman of Fortescue Metals Group, boosted his private stake in a Canadian nickel explorer to 37.3% through the conversion of a loan into shares in what could be the knock-out blow in a fight with BHP for Noront Resources.

Both men would have looked at the opportunity presented by expanding the interests of the companies they run and reckoned that there was undoubted upside in the battery metals sector, which includes nickel and copper.

Noront shares are yet to react to the overnight announcement about Forrest’s loan conversion, which puts his nose in front of BHP in a race for what looks to be a major nickel discovery in northern Ontario.

Investor reaction to the Sandfire deal will also have to wait for a trading restart on Monday, with last sales on Wednesday at $6.22.

Interestingly, two days before Sandfire moved on Matsa, Morgan Stanley refreshed a buy tip on the Australian miner (setting a target price of $7.95) in reaction to a separate development, an upgrade of the company’s Motheo copper project in Botswana.

The bank will be busy redoing its Sandfire numbers over the weekend to factor in the Matsa purchase, which is being funded through a combination debt, equity and cash reserves.

Simich and Forrest were not alone in taking advantage of an uncertain tone to global financial and commodity markets this week caused by a debt crisis in China’s property sector, which has seen its biggest developer, Evergrande, lurch dangerously close to collapse.

The potential failure of a business said to be carrying $US305 billion in debt has shaken markets far from China, with the impact on Australia being felt most acutely among the iron ore miners because a collapse in property development means a collapse in steel demand.

What elevates the concern about Evergrande into other sectors, especially banks, is the famous “cockroach in the kitchen test” because when you see one you know there are more hiding behind the cupboards.

Jim Chanos, arguably the world’s biggest investment bear and a serial short seller, reckons Evergrande could be worse for China than Lehmann Brothers was for the U.S. in 2007 when its collapse triggered the sub-prime crisis which morphed into the global financial crisis.

Chanos is obviously talking his book and busy selling down any China-focused stocks he might hold but the thing with Jim is that he doesn’t often get it wrong and has a knack of knowing when to sell and when to buy back. Right now, he’s a seller after delivering a classic one-liner about the Chinese property market being “built on stilts”.

How China handles its debt-fuelled emergency, which has been an accident waiting to happen for years, will be a key to what happens next, but it’s safe to assume that the “build, build, build” policy which has powered commodity demand is coming to an end.

Fortescue Metals Group, the world’s biggest pure-play iron ore miner, has emerged as a litmus test of events in China with a share price that has crashed by 40% since late July but managed to recover from a low of $14.15 on Monday to close around $15.47, up 9.3%.

Enrouraging as that end-of-the-week rise looks, the reality is that Fortescue is having a torrid time trying to convince investors that it’s not facing a crisis of falling profits, rising costs of development projects and internal executive ructions.

Other iron ore miners are also under pressure with smaller and high-cost producers already closing some operations even as the price staged a $US17 a tonne rebound late this week to move back up to $US108/t.

Perhaps the best analysis of the problem caused by the fall in the iron ore over the past six months can be found in a J.P. Morgan comparison of three miners, Rio Tinto, Fortescue and Mineral Resources.

According to J.P. Morgan, Rio Tinto’s all-in sustaining cost per tonne, plus discounts, is $US50/t. Fortescue’s all-in cost is $US69/t and Mineral Resources all in cost is $US103/t, dangerously close to the current price.

UBS weighed in with its iron ore forecast during the week, taking it down to an average next year of $US89/t, well below the consensus of other banks which is at $US132/t.

Nickel, which moved over $US20,000 a tonne earlier this month, was sold down to $18,865/t as the Evergrande crisis spilled over into the Chinese stainless-steel sector, before recovering late this week to around $US19,235/t

Multiple factors continue to shake the nickel market with Macquarie Bank describing it as “nickel in a pickle” with Chinese stainless-steel cuts depressing the price while the threat of a revised Indonesia ban on some semi-processed material was a positive.

Local nickel miners had a mixed week. Indonesian focused Nickel Mines lost 11c to 98c over the week. Mincor was steady at $1.31. Poseidon slipped 1c lower to 11c and Centaurus was 12c weaker at 96c.

Uranium stocks also hit a wall with most suffering a sell-off as profit takers took some of their winnings off the table after four fabulous weeks. Deep Yellow, for example, fell 14c to $1.12 which is still double its January price of 50c. Paladin was 15c weaker at 84c and Boss lost 5c to 28c.

For Australian investors, the next few weeks promise to be a challenging time, with September living up to its reputation as being the cruelest month for price falls, topped only by October and its record for hosting major corrections (who said crash?).

Evergrande and the rotten health of the Chinese banking and shadow finance world is just one of several worries. The start of the U.S. winding back stimulus is another and that’s before getting to what the world’s biggest gold bull, Egon von Greyerz of Matterhorn Asset Management likes to call “the everything bubble” as a key plank in his “buy gold now” slogan.

Unfortunately for Egon and local gold miners, the price of the metal is being buffeted by U.S. taper talk, which outweighed China’s debt crisis speculation, leading to a mid-week price slide which rubbed $US30/oz off the price to around $US1764/oz – with the Australian dollar price doing a little better as the exchange rate eased back by US1c to $US72c.

Other news events and markets moves of note this week included:

  • Genesis Minerals was star performer of the week, doubling its price to 15c after announcing a major overhaul which includes a $20.8 million funding injection and a new management team led by former Saracen and Northern Star managing director, Raleigh Finlayson.
  • Norwest Energy topped the oil and gas sector with a rise of 35% (0.7c) to 2.7c after reporting a significant gas discovery near Dongara, north of Perth. The major shareholder in the Lockyer Deep project is iron ore and lithium miner Mineral Resources, which fell by $1.75 (3.5%) this week to $47.74.
  • Miramar Resources added 3c to 23c after reporting multiple high grade gold assays from drilling at its Marylebone project near Kalgoorlie in WA ,with best hits of 1m at 6.92g/t from 48m and 3m at 2.61g/t from 45m.
  • Carawine Resources reported an encouraging drill result of 4.61m at 14.7g/t from 165.24m at its Hercules prospect in WA. On the market the stock added 1c to 23c.
  • Predictive Discovery added 2c to 16c after reporting a 2m intersection assaying 12.1g/t from drilling at its Bankan prospect in Guinea. Canaccord Genuity reckons the stock is heading for 24c.
  • Emerald Resources added 1c to 85c after reporting it had reached full production at its Okvau gold mine in Cambodia, and
  • Macquarie Bank upgraded its lithium price forecast, with spodumene tipped to trade at $US1385 a tonne next year, a 5% increase on the previous forecast of $US1283/t.

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