Hi-ho silver as lone-ranger investors unite then split, leaving lithium stocks to steal the show

Silver shone brightly on financial markets for a few days this week as speculators played games while serious investors were drawn to another white metal, lithium.
5th February 2021
Tim Treadgold

Silver shone brightly on financial markets for a few days this week as speculators played games while serious investors were drawn to another white metal, lithium.

The silver frolic was fun to watch as a new breed of tech-savvy day traders bid up the price of a commodity which has a track record of destroying more wealth than it creates.

There are reasonable supply and demand fundamentals underpinning silver but whether they are strong enough to support a price above $US30 an ounce seems unlikely.

A 10% fall from Monday’s high of $US29.50/oz to $US26.54/oz on Thursday was a warning that silver is pretty, but it can also be quite slippery.

Lithium has also stung a few investors over the past three years, but largely because of premature forecasts of a boom demand for the batteries used in electric vehicles (EVs).

There is a risk that the latest surge of interest in battery metals will be a re-run of the 2018 price collapse, though that seems unlikely given the latest batch of optimistic investment bank research reports and market news.

In China, the price of lithium carbonate has risen by 40% over the past four weeks, a move which encouraged one of the world’s biggest producers of the metal, Albemarle Corporation, to raise $US1.3 billion in fresh capital to accelerate growth projects such as the Wodgina and Kemerton developments in WA.

Macquarie Bank attributed the latest lithium price rise to a worldwide EV rush as consumers reacted to government incentives, greater EV availability and a fall in vehicle prices.

“After a period of stagnation from mid-2019, when EV sales were hit by a combination of subsidy withdrawal in China and then Covid-19, there was a remarkable recovery during the second half of 2020 (with EV sales) massively exceeding all forecasts,” Macquarie said.

It wasn’t just one bank getting excited again about lithium. Morgan Stanley chimed in a day after Macquarie with a note which also highlighted the consumer rush into EVs – but there was a sting in the tale of its analysis - idle lithium capacity poised to restart.

Wodgina and Kemerton, the two Albemarle-led WA projects (with Mineral Resources a junior partner) are highest on the Morgan Stanley lithium watch list with the potential to plug a large supply gap.

On the market, the big lithium winner of the week was Vulcan Energy Resources which announced a $120 million capital raising to fund work at its the European-focused lithium and geothermal energy producer. On the market, Vulcan added $1.25 (16%) to $9.10, taking its increase since early November to $8.12, a rise of 800%.

The Vulcan story has eluded most local investors because its major operations are in Germany, but it has strong Australian connections, chaired by a WA technology entrepreneur, Gavin Rezos, with Gina Rinehart as a shareholder.

Other lithium stocks shared in the revitalised interest in battery metals. Pilbara Minerals, after a sell-off last month, added 15c this week to $1.01. Orocobre was up 15c to $5.05, and Liontown put on 5c to 40c.

Independence Group, while best known for its gold and nickel assets, add 7c to $6.26 as investment banks started to factor in its deal to acquire a stake in the big Greenbushes lithium mine in WA. UBS has increased its price tip for the stock from $5.85 to $7.50.

Overall, the Australian stock market was fractionally stronger this week with gold the sick man of the mining sector, shedding $US40 an ounce to be last trading around $US1822/oz.

The lower gold price rubbed the gloss of most producers of the metal. Northern Star, in the first full week after its merger with Saracen, lost 70c to $12.13. Evolution was 13c weaker at $4.63 while De Grey managed to swim against the tide with a rise of 2c to 95c after announcing more encouraging exploration news from its Greater Hemi project in WA.

Iron ore continued to slide, taking producers of the steel-making material with it despite the prospect of monster profit news later this month when the big three of Australian iron ore (BHP, Rio Tinto and Fortescue Metals) report – and despite surprisingly upbeat research notes from a number of well-connected banks.

At the latest price for high grade iron ore of $US148 a tonne, the mineral is down $23/t (13.5%) in less than three weeks, which largely explains a weaker trend across the sector, but a trend which seems to be breaking down.

Fortescue Metals is an example of the change, with its share price down since late last month but up $1.50 this week, perhaps a result of yield hunters returning ahead of the company’s half-year profit (and dividend) announcement expected on February 18.

Three leading banks dusted off their iron ore price forecasts during the week.

Credit Suisse led the revisions with a remarkable about face that saw it make a 55% upgrade in its iron ore price tip for the current half-year from $US110/t to $US170/t. UBS lifted its forecast for 2021 from $US110/t to $US125/t, and Morgan Stanley said there was a chance the price could hit $US215/t thanks to a potential supply squeeze.

Copper, the bellwether metal, had a mixed week, first falling to $US3.54 a pound before recovering to $US3.58/lb, a performance which left most copper stocks roughly where they started though Sandfire managed a 3c rise to $4.87, well short of the $6.50 price target of Credit Suisse, which likes the company’s growth outlook.

Exploration and discovery news, noticeably absent in January after the Christmas and New Year slowdown, picked up this week with a number of noteworthy moves, including:

  • King Island Scheelite more than doubled from 12c to 26c after reporting that the Tasmanian Government had offered financial support to redevelop the historic but dormant Dolphin tungsten mine on King Island in Bass Strait. Tungsten is regarded as a critical metal which is overly controlled by China.
  • Tombador Iron added 4.5c to 11c after signing an offtake agreement with global commodities trader Trafigura for iron ore produced at its namesake project in Brazil.
  • Centaurus Metals, another Aussie active in Brazil, put on 7c to 86c after reporting a resource increase in its Jaguar nickel project, which is now estimated to contain 557,800 tonnes of metal in 58.6 million tonnes of ore grading 0.95% nickel.
  • Perenti Global led the way up among mining service providers with an 18c share price rise to $1.44 after announcing contract extensions including a $200 million renewal of work at Agnew gold mine.
  • RareX added 2c to 13c after announcing a marketing deal with Shenghe Resources over future production from its Cummins Range rare earths project in WA.
  • Paladin Energy was the best of an improving group of uranium stocks with a 4c rise to 31c as confidence grows in the expansion of the nuclear power industry. Shaw and Partners reckon paladin is heading to 45c.
  • Matador Mining reported encouraging assays from its Cape Ray gold project in Canada with a best hit of 18 metres at 11 grams a tonne. On the market, Matador added 5c to 33c, and
  • Challenger Exploration put on 4c to 34c after reporting a 130.8m intersection assaying 2.5g/t gold equivalent (gold, silver and zinc) from a depth of 237.2m at its Hualilan project in Argentina.

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