Investors’ dilemma: Is it buying a bargain or catching a dead cat?

Buy the dip theory took hold among Australian investors earlier week as they helped the all-ordinaries index claw back 200 of the 700 points lost since early April but by Thursday they discovered the meaning of “dead cat bounce”.
19th May 2022
Tim Treadgold

The net result was a week which ended not far from where it started, still down 600 points on a month ago.

Adding to concern that the market is struggling to overcome multiple negative forces that include rising interest rates, higher inflation and shortages caused by the Ukraine war is Saturday’s Federal election and the prospect of a new, and less business-friendly Australian Government, on Monday.

Against that clouded outlook were flashes of blue sky that included record low unemployment and the way in which Australia’s commodity-powered economy compares favourably, especially with Europe and the U.K. from where this edition of Prospector’s Diary is being filed.

Fear of sky-high inflation, and how central banks might use ever-higher interest rates to crush what is becoming a global economic crisis, dominates activity on the London stock market, as well as those in Europe and the U.S.

In London this week, investors were rattled by inflation hitting a 40-year high of 9%, thanks largely to surging energy costs which have added $1200 a year to the average household cost for heating and hot water which, in turn, means less to spend elsewhere.

Pressure on consumers from rapidly inflating costs was the key factor in this week’s wipe-out of retail-focussed stocks on the New York Stock Exchange.

Australia, from the other side of the world looks like an outlier of confidence as the Ukraine war grinds on and once proudly neutral countries such as Sweden and Finland sign up for a spot under the nuclear umbrella offered by NATO membership.

The remarkable difference between a European and Australian view of the world is best explained by access to energy needed to power industry, transport and homes. In a nutshell, Australia has it, Europe did, but by severing relations with Russia the region is sliding into a deep recession.

“Greenflation” is the snappy term coined this week by analysts at Citi, a U.S. investment bank which is watching prices rise as governments enforce climate-change policies that are boosting the cost of power, food and shelter.

“The questions for households, business and policymakers are how surging and persistent greenflation could become, and how tolerable it is politically,” Citi said.

“It is not just climate-related transition risks such as environmental regulatory costs driving inflation, it also involves physical risks such as drought which can feed back to exacerbate risks.”

Australian companies are exposed like the rest of the world to the economic and financial sea-change flowing from inflation and rising interest rates as well as the food and energy crisis caused by the war in Ukraine but there is also a big difference – some Australian companies will be winners from what’s happening.

BHP is an interesting example of the war delivering an opportunity as it plans to upsize its Jansen potash project in Canada before it even starts production thanks to the loss of potash exports from Russia and its friendly neighbour, Belarus, which together account for 40% of the global potash trade.

The two-stage development in the prairie province of Saskatchewan is scheduled to produce first potash in 2026 at an annual rate of four million tonnes a year with another 4m/t a year to follow sooner than originally planned.

While impossible to demonstrate, it is likely that potash was a factor in BHP’s $1.04 share price rise this week to $46.20, with smaller potash-exposed stocks edging higher, including Kalium Lakes, up 0.2c to 9.3c and Agrimin, up 4c to 54c.

Replacing Russia as a world-class provider of industrial commodities such as oil and gas, aluminium, fertiliser, nickel, copper and wheat is a challenge for much of the world, but not for Australia, which is a competitor in most of those materials and therefore a winner from reduced Russian exports.

But the shift in trade flows as Russia increasingly looks east to China as its only world-class friend means Australia will be forced to expand trade with more distant markets, such as Europe and North America.

From a distance, and despite the challenge of being the best part of a day behind the action in Australia, a number of significant share price moves caught the eye of London investors who are becoming more interested in Australian stocks as the appeal of European exposure fades.

Galileo Mining was the talk of City traders thanks to its Norseman palladium and platinum discovery in WA and its 45c (82%) share price rise this week to $1.

Lithium and rare earth stocks performed well despite reports of China’s economic slowdown weighing on demand for electric cars with Europe’s energy crisis delivering positive news as governments increased demands for more investment in renewable energy with the latest legal requirement likely to be compulsory solar panels on all new buildings.

On the Australian market, lithium stocks were some of the best performers this week as they rebounded from earlier selling.

Pilbara Minerals added 25c to trade at $2.76. Macquarie Bank reckons the stock is heading to an all-time high of $4. Liontown added 4c to $1.24 but could get to $2.50, according to Macquarie, while Allkem starred with a rise this week of $1.55 (14%) to $12.39 – on track for Macquarie’s target of $17.70.

Copper stocks, which are also exposed to energy transition, performed well thanks to a modest recovery in the copper price which rose to $US4.24 a pound after slipping to a six-month low of $US4.09/lb.

Top copper stock was Havilah Resources which is offloading its Kalkaroo project in South Australia to OZ Minerals for a handy $205 million, with more to come depending on resource growth and the future copper price.

On the market, Havilah stormed up by 12c (70%) to 28c, a price which values the stock at an untaxing $84 million. OZ was also in demand, putting on $1.24c to $22.57, but Citi reckons it is heading to a target price of $30.50

Other copper moves included:

  • Develop, up 24c to $2.38 after announcing new high-grade assays from its Sulphur Springs project in WA with a best hit of 65.1 metres at 3.5% copper, and
  • Cyprium, up 0.5c to 17c after reporting a 28.4% increase in the measure resource at the Nifty project to 940,200 tonnes of copper metal.

Mineral Resources was the pick of the iron ore exposed stocks, adding $5.65 (10%) to $59.20, undoubtedly aided by its lithium interests, while Champion Iron rose by 58c to $7.26 after announcing an acquisition close to its existing operations in Canada.

Fortescue Metals, the iron ore miner morphing into a renewable energy company, failed to follow its rivals, perhaps burdened by the latest management shuffle which will see its founder, Andrew Forrest, return as chief executive. On the market, FMG was steady at $19.43.

Other news and market moves of interest, as seen from the other side of the world, included:

  • Ardea adding 18c to $1.16 after reporting high-grade nickel and cobalt assays from drilling at its Goongarrie project in WA.
  • Stanmore Resources rising by 38c to $2.70 as investors digested its company-changing acquisition of a BHP-run metallurgical coal project in Queensland. Morgans, a stockbroking firm, reckons Stanmore is heading up to $3.80.
  • Arafura signed a rare earth supply deal for material from its Nolans project in the Northern Territory with Korea’s Hyundai Corporation, a transaction which lifted the stock by 8.5c (26%) to 41c.
  • Kingsgate Consolidated added 16c to $1.49 after reporting a 46% increase in gold ore reserves at its Chatree project in Thailand, and
  • Jervois Global said it has started a bankable feasibility study aimed at expanding its cobalt refinery in Finland. On the market, the stock added 11c to 86c while Shaw and Partners forecast a future price of 92c.

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