Investors caught in middle of conflicting signals

To buy, or not to buy, that is the question dogging investors as they’re swamped with the competing evidence driving volatile financial and commodity markets, with gold leading the way down and copper trying to lead the way up.
21st July 2022
Tim Treadgold

“Lower prices and higher costs” was the five-word headline on a Macquarie Bank midweek research report which summed up the gloomy side of the situation, followed by a BHP warning that global growth will slow as monetary policy continues to tighten.

The world’s biggest mining company said in its June quarter report that the outlook was for soft prices, a view which reflects the 10% fall in BHP’s share price over the past month, a drop mitigated by a 2% recovery this week – a sign that opinion had flicked from sell to buy.

Rio Tinto did better than BHP despite both companies being heavily exposed to iron ore and copper (Rio is down 7.7% over the month, but up 3.5% this week), while pure play iron ore miner, Fortescue Metals remains a traders favorite, up 1% over the month and 8% this week.

Fortescue’s rise could be attributed to an expectation of another bumper dividend, but might also reflect news that Brazil’s iron ore champion, Vale, has trimmed its production outlook.

Into that news mix there are fearless punters seeking a quick win, something encouraged by an outrageously upbeat report from Macquarie rival Bell Potter with a list of double-your-money opportunities among mineral explorers – a classic “boom is back” report.

Over the week, the metals and mining index rose by an encouraging 2.45%, leaving it down 7% for the past month, while the all-ordinaries performed much the same trick, rising against a backdrop of uncertainty.

More of the up-today, down-tomorrow conditions can be expected for the rest of the year, or until central banks are satisfied that they’re taming inflation, and that could take a while and be quite panful if people do not stop spending, jobs growth slows, and the economy reverses – which is not an appetising outlook.

Bell Potter, as mentioned, has a solution for the sidelined investors with an appetite for risk and a willingness to load up on what it regards as high-quality, small-cap, exploration stories – the stuff which spices up financial markets.

Every stock on the broker’s list is said to be a speculative buy, which is what you would expect, though unexpected are the yawning gaps between latest prices and where Bell Potter sees its chosen stocks heading.

Chalice Mining, for example, is tipped to rise by 160% from last sales at $4.23 to $11.10 – and while that looks ambitious, Chalice was $3.99 when the broker published its “Exploration Tracker” tip sheet.

Very much a document for the fearless speculator, a few other examples of Bell Potter’s rampant optimism include:

  • Liontown rising from latest sales of $1.19 to $2.87 (the stock was 97c when the broker published its tip sheet).
  • Breaker Resources, 20c to 56c.
  • Rumble Resource, 25c to 60c.
  • BCI Minerals, 23c to 53.
  • Tulla, 54c to $1.15, and
  • Boss Energy, $2.02 to $3.32.

Those forecast price moves are, obviously, the view of one stockbroking firm, but they can also be seen as a guide to what might happen over the next 12-months if the widely forecast recession turns out to be less damaging than feared.

Gold, a favorite of many investors, had a difficult week as the U.S. 10-year bond (gold’s nemesis) moved back up to 3%, a rise which knocked the gold price down through the US$1700 an ounce mark to be last trading at US$1693/oz, its lowest in 15-months.

Despite the latest fall in the gold price (it’s down US$346/oz, or 17%, since its early March high of US$2039/oz) a number of gold producers saw their share prices rise over the week, including Northern Star, which met full year production guidance and delivered a 30c price rise to $7.01, and Evolution, which delivered a June quarter report in line with guidance to add 4.5c to $2.35 – but it was $4.68 as recently as April.

Other gold news this week included:

  • Wiluna finally collapsing after weeks of speculation that it was struggling with an old and difficult business. Voluntary administrators, FTI, plan to continue operating the business as they try to work through the problems.
  • A Chinese move on Tietto Minerals, emerging West African producer, which added 5.2c to 45c after a report that Zhaojin Mining had built a 5.2% stake.
  • Alkane Resources adding 1c to 72c after reporting encouraging exploration results from its Boda project in NSW, and
  • Los Cerros adding half-a-cent to 3.3c after reporting solid drilling results from its Tesorito project in Colombia with a best hit of 28 metres at 3.34 grams a tonne from a depth of 121.2m

Coal, once the black-sheep of the mining world, shone again this week as China edged close to ending a two-year ban on Australian coal, a move which is less about diplomacy than necessity as the reality of a significant shortfall in energy supply hampers a post-pandemic recovery.

Energy coal moved back up to US$408 a tonne, a remarkable price which means coal to produce electricity is currently selling for more than steel making (metallurgical) material.

Whitehaven was the big winner on the stock market, adding another 57c (10%) to trade at $6.19 thanks to investors hunting a potentially generous dividend from bumper profits expected to top $3 billion in the year just ended, rising to $3.5 billion this year.

Morgan Stanley listed seven reasons to buy Whitehaven, ranging from a 19% dividend yield (wow) to net cash already sitting at $3 billion compared with a stock-market value for the company of $5.9 billion.

Uranium, another energy source once in the bad books of environmentalists, but now seen as one of the saviours from climate change, traded at a steady US$46.70 a pound, good enough to encourage deals and development commitments.

Paladin Energy added 5.3c to 68c after confirming the restart of the Langer Heinrich uranium mine in Namibia, while Deep Yellow put on 6.5c after getting the all-clear to merge Vimy Resources.

A third energy play, lithium, also had a strong week after news that leading electric vehicle maker, Tesla, beat profit forecasts and said it expects sales to rise by 50% a year for the foreseeable future. Tesla boss, Elon Musk, went a step further, describing lithium prices as “insane”.

Liontown led the lithium pack with a rise of 26c to $1.21, thanks to the Tesla effect and news that it had awarded a construction contract for its Kathleen Valley project to mine building specialist Lycopodium. Pilbara Resources wasn’t far behind with a 15c rise to $2.53 while Vulcan rocketed up $1.53 to $6.99 and Allkem put on 28c at $9.98 after reporting record production.

Other news and market moves included:

  • Strandline said it was on track to produce heavy mineral concentrate at its Coburn project in WA during the December quarter. The stock added 6.5c to 38c.
  • Lunnon Metals added 19c to 88c after reporting exceptional nickel grades from the latest drilling at its Baker project near Kambalda with a best hit of 23m at 6.78% nickel.
  • Burgundy Diamond Mines staged a delayed reaction to an announcement made earlier this month that it had launched a range of luxury diamond products in Paris. After that July 6 report that stock barely moved, but yesterday it was a small-cap star, jumping 5c (38%) higher to 18c. It could be a case of watch this space.
  • 29 Metals added 17c to $1.38 after reporting strong June quarter production, including 11,000 tonnes of copper, 10,000 tonnes of zinc and 8200 ounces of gold.
  • Hot Chile reported a new high-grade copper intersection at its Costa Fuego project in Chile, including 56m at 1% copper and 8m at 3.6% copper. On the market, the stock added 3.5c to 70c.
  • Panoramic Resources declared commercial production at the born-again Savannah nickel mine in WA’s Kimberley, adding 1.2c to 19c on the market, and
  • Foundation shareholders in Mincor, an early mover in the rebirth of Kambalda, might have noticed that a project their small company once controlled, the Reko Diq copper deposit in Pakistan, has finally got the green light for development to start under a deal between the government of Pakistan and Canadian miner, Barrick Gold.

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