Investors’ big new dilemma: Is Greensill a worrying smoke signal or isolated issue?

Instability caused by last week’s rise in U.S. bond rates remained the dominant theme on financial markets this week with iron ore and copper the pick of the commodities sector while gold struggled to recover lost ground.
5th March 2021
Tim Treadgold

Instability caused by last week’s rise in U.S. bond rates remained the dominant theme on financial markets this week with iron ore and copper the pick of the commodities sector while gold struggled to recover lost ground.

More of the same can be expected in future weeks until a clear picture emerges of the post-pandemic world and investors learn to live with the aftershocks of the wild ride on markets over the last 12-months.

What’s happening with the specialist financier Greensill Capital is an example of the effects which always follow a dramatic financial event, and while Covid-19 is largely a public health issue it has also delivered an economic shock to business and governments.

Greensill is not a household name, but its slick system of financing corporate debt with associated insurance protection, has run into severe trouble, including the forced closure of a banking arm in Germany and doubts about its relationship with Sanjeev Gupta, a high-profile investor in Australian resources, including the Whyalla steel works in South Australia.

There is concern developing that London-based Greensill, a creation of Queensland financier Lex Greensill, could be the tip of a debt-laden iceberg that is starting to melt, creating a mess in the same way the collapse of Bear Stearns in 2007 led to the failure of Lehmann Brothers in ’08, and on to the global financial crisis (GFC).

There is not yet evidence of a rolling financial emergency but if Greensill’s problems, which are linked to securitised debt structures (a bit like the securitised debt obligations at the heart of the GFC) are as bad as is being reported, then what started in an obscure corner of the finance and insurance sector could have much wider repercussions.

For most investors, the crisis at Greensill and movement in U.S. interest rates seem to be light years away, but it would be wise to watch what happens with both because they have the potential to move markets.

Gold is easily the best example of the effect of rising interest rates on assets which looked good last year as the world struggled with Covid-19, but which have a problem today as investors rotate out of safe havens into assets exposed to accelerating global growth.

Since starting the year at $US1943 an ounce, gold has fallen by 11% to last trade around $US1717/oz. Over the past two weeks, the rate of the fall has slowed but a test of the $US1700/oz mark could come next.

Local gold miners have been dragged down by the tumbling price. Sector leader Newcrest lost another $1.25 this week to trade at $23.41, well down on last year’s peak of $38.15. Evolution also continued its decline, shedding 30c this week to $3.92 (it topped out last year at $6.59), while Northern Star was down 20c this week to $9.54, the first time the stock has been below $10 since this time last year.

It’s a different story among the gold explorers where good drilling results still prompt a positive response, led this week by Liontown which added 6c to 49c after reporting a thick (44 metre) intersection assaying 1.6 grams a tonne from drilling at its Moora project in WA.

Carawine Resources was also a winner from encouraging assays at its Hercules prospect in WA, adding 2c to 34c after reporting hits as good as 26.6g/t over 6m from a depth of 136m. Yandal Resources added 5c to 45c after encountering an 8m zone grading 24.3g/t with a core of 129g/t over 1m from its Sims Find project near the Bronzewing mine in WA.

Iron ore and copper, as mentioned earlier, largely held on to recent gains with iron ore at $US175 a tonne underwriting the profitability of all producers but not necessarily their share prices.

Fortescue Metals, which started trading ex-dividend this week, lost $2.32 to settle around $22.08, its lowest since early December. Mineral Resources went the other way with a rise of 30c to $38.51 while Champion Iron added 37c to $5.77.

Macquarie Bank retains outperform investment advice on the entire iron ore sector thanks to ongoing global demand for steel and further evidence of sluggish Brazilian exports. The bank reckons Fortescue will climb back to $25.50 this year. UBS has a price target of $25.

If there is a note of concern about iron ore it comes from another bank, Morgan Stanley, which sees an emissions control crackdown in China likely to see a cutback in overall steel production and iron ore demand, especially for second-grade ore.

Coppers stocks were led higher by Venturex, an emerging producer and focus of the next stage of Bill Beament’s career after he leaves the goldminer, Northern Star. Following on from last week’s jump from 11c to 34c, Venturex this week powered on to a new peak of 46c before easing to 36c for a gain of 2c.

Other copper-exposed stocks were more influenced by a modest fall in the price of the metal to $US4.14 a pound, down US15c on the peak price of $US4.29/lb reached two weeks ago. OZ Minerals slipped 35c lower to $21.92 and Sandfire was 10c weaker at $6.02.

The rise of copper and gold’s slide has sparked a subtle shift in fund raising with copper hopefuls attracting greater support than gold stocks. A $5 million raising by Magmatic Resources and $2.6 million by Redstone Resources were examples of increasing investor appetite for copper.

Other market moves and news events this week included:

  • Xtract Resources, a London listed explorer with its best assets in Australia, added 1.8 pence to 7.96p after reporting encouraging hand-held “assays” in the field of 0.3% copper over a whopping 297m of core from drilling at its Bushranger project in the Lachlan Fold belt of NSW. Before Christmas, Xtract was trading at 1.5p.

 

  • Western Areas led a retreat by nickel stocks with a fall of 12c to $2.43 after the price of nickel fell sharply in London thanks to reports of a sharp increase in supply, especially from Russia, which knocked the nickel price down by US65c (8%) to $US7.91/lb. Mincor was down 11c at 98c.

 

  • Tasman Resources doubled to 10c after reporting encouraging drill intersections at the Lake Torrens copper project with its farm-in partner Fortescue Metals. Assays are yet to be finalised but a “substantial” intersection of hematite breccia which is often associated with copper in central South Australia has been observed. At the close yesterday, Tasman was in a trading halt, which is often a precursor to a fund raising.

 

  • Strandline Resources added 3c to 24c after reporting a final offtake deal to cement future sales of mineral sands from its Coburn project in WA. Shaw and Partners reckon Strandline is heading for $1.02 with a commercial debt package expected to be the next step in project funding.

 

  • ioneer successfully raised $60 million through a share issue priced at 38c to fund the next stage of work at its promising Rhyolite Ridge lithium project in the U.S. The stock closed steady at 44c.

 

  • Hawkstone Mining rose from 4c to 5.2c during the week after reporting the production in a research trial of high-grade lithium carbonate from its Big Sandy project in the U.S. The stock later retreated to where it started 4c.

 

  • Lynas led a mixed bag of rare earth stocks with a rise of 45c to $6.43 as the threat of a Chinese embargo on exports of the specialized metals captured global interest. Other rare earth stocks modest a few cents either way. RareX added 1c to 14c while Hastings lost 1c to 19c, and

 

  • Vulcan Energy, the red-hot lithium stock of a few weeks ago continued to fade despite the potential of its carbon-free process base on extracting metal from geothermal fluids. The stock closed yesterday at $6.01, down 50c for the week and $3 on last month’s high of $9.01.

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