Iron ore and gold stocks lead charge, with many hitting 12-month highs despite deteriorating outlook for corona pandemic

Australia’s iron ore producers are riding a perfect storm of reduced Brazilian supply and surging Chinese demand which has lifted the benchmark price of the steel-making material to within sight of the magic $US100 a tonne mark ...
22nd May 2020
Tim Treadgold

Australia’s iron ore producers are riding a perfect storm of reduced Brazilian supply and surging Chinese demand which has lifted the benchmark price of the steel-making material to within sight of the magic $US100 a tonne mark – before possibly surging to $US120/t.

Share prices of every company exposed to iron ore, including Fortescue and Mineral Resources, have moved up sharply, reaching 12-month highs in most cases, but the story of recovery and fresh heights being reached, does not end there.

While iron ore, which last traded at $US98/t, has snatched the headlines, a large number of companies involved with other minerals and metals are also trading at 12-month highs.

The elevated gold price has seen Saracen, Evolution, Ramelius, Sultan, Navarre, Musgrave, Kin, Hawthorn and Capricorn reach their highest prices in a year, and in some cases a lot longer.

A quick check of what happened this week shows that at least 25 mining stocks hit fresh peaks for 2020, a remarkable performance given the unstable economic outlook which includes the threat of an outbreak of the China v US trade war and slowing global growth as the Covid-19 pandemic shows no sign of abating – when looked at internationally.

Australia, New Zealand, Greece, and some other countries appear to have tamed the virus, for now, but it is still running rampant in the US, Russia and Brazil, leading to the creation of a Global Covid-19 Recovery Index by the leading investment bank, J.P. Morgan.

The latest reading from the recovery index, despite growing confidence of a Covid-19 vaccine breakthrough, is not encouraging. The index fell this week because of an increasing overall level of global infection, slower consumer activity and declining measures of industrial activity, such as shipping movements.

It’s against this background that the Australian stock market steamed higher, shrugging off a Chinese attack on some agricultural exports and the threat of worse to come.

One reason for the Australian resources sector outperforming is that it is one of the few sectors of the stock market delivering strong profits with the promise of generous dividends to come.

The iron ore situation is a perfect example of an industry widely seen as cyclical filling a defensive role in portfolios despite decades in the doghouse as far as cautious investors are concerned.

Citi, an investment bank, has calculated that this year the aggregate dividend payouts from Australian resource stocks will be equal to what the traditional leader, banks, distribute to shareholders.

BHP, Rio Tinto and Fortescue will dominate dividends this year and, if the Covid-19 situation in Brazil is unchanged, and China continues to stimulate its economy, it could be the same next year.

Fortescue, the leading pure-play iron ore miner, added $1.20 during the week to $13.58. Minerals Resources was up $1.82 to $19.35 and Mt Gibson added 10c to 70c.

The primary reason for seeing iron ore continuing to rise is that the current situation has the hallmarks of what happened last year when Brazilian exports were cut after the Brumadinho tailings dam disaster, an event which saw the iron ore price hit a mid-year high of $US124/t.

This time around, Brazil looks to be in even more trouble and Chinese steel demand is soaring with steel mills demanding more virgin ore because scrap has become fiercely expensive – hence the perfect storm for Australian iron ore miners.

Other minerals consumed in steel-making, such as nickel and manganese, are also riding higher.

Among the local nickel producers, Independence led the way this week with a rise of 73c to $5.21, a moved aided by the company’s exposure to gold. Mincor was less active, adding 1c to 65c, but with Macquarie Bank tipping a future price of 85c, while the nickel news-maker was Nickel Mines which announced a big fund-raising to expand its exposure to Indonesian nickel production, a deal which lifted the stock by a modest 2c to 56c.

Thinly-traded manganese could turn out to be an investment sleeper given the ongoing Covid-19 crisis in South Africa, the world’s leading exporter of the steel-hardening mineral.

With manganese production curtailed by pandemic restrictions, the price of the material has rocketed from less than $US4 per metric tonne unit (that’s how it is traded) to more than $US6/mtu – without much effect on two local companies with manganese interests, Jupiter Mines and OM Holdings, which have crept up by just a few cents even as their revenues rise.

Gold stocks performed strongly through the week even as the underlying gold price slipped slightly, especially in Australian dollars thanks to a modestly stronger Australian dollar.

Evolution and Saracen were the pick of the major producers, adding 40c and 62c respectively, as Evolution moved up to $5.92 and Saracen reached $5.61. Northern Star continued to recover lost ground with a rise this week of 50c to $14.49. Perseus put on 13c to $1.22, and Kingston added 3c to 17c after announcing a resource increase at its Misima project in Papua New Guinea.

Lithium stocks were another surprisingly strong sector given the background economy. Pilbara Minerals added 2.5c to 26.5c and Galaxy rose by 5.5c to 83.5c.

Other market moves and newsworthy developments included:

  • Salt Lake Potash added 6c to 46c after reporting strong flows of potash-rich brine from testing at its Lake Way project in central WA.
  • Alderan reported that Kennecott Exploration, a division of Rio Tinto, had started drilling at the jointly-owned Frisco copper/gold/silver project in the U.S. State of Utah, a development which saw Alderan add 2c to 6.6c
  • Alkane Resources said it would demerge its Dubbo zirconia and rare earth project into a separate business called Australian Strategic Materials, leaving Alkane as a gold play. The announcement of the split helped Alkane rise by 5c to 81c.
  • Jadar Resources added 0.2c to 1.3c after announcing the discovery of borate and lithium mineralisation at its Rekovac project in central Serbia.
  • Golden State Mining became the latest small gold stock to top up its bank balance with a $2.2 million raising to fund a maiden drilling program at in Mallina Basin prospect in WA. On the market, the stock added 2c to 18c.
  • Xanadu Mines was also in the market for money, raising $1.1 million to fund the next phase of work at its Kharmagtai gold prospect in Mongolia. The stock added 1c to 3.8c
  • Navarre, which hit a 12-month high of 18c on Monday, eased back to 15c later in the week for a gain of 2c thanks to growing interest in its Stawell Corridor gold project in Victoria with the latest drill hits including 7.7 metres at 5.6 grams a tonne from a depth of 141.8m
  • Kin Mining rose by 3c to 11.5c after reporting fresh shallow gold intercepts from drilling at its Cardinia project in WA, including 7m at 2.44g/t.
  • Strandline Resources added 2c to 14c after releasing technical and economic due diligence assessments to support its project funding process for the Coburn mineral sands project in WA, and
  • Hot Chili added 0.5c to 1.9c after announcing that it had raised $8.9 million through a placement and rights issue to support work on the company’s copper and gold projects in Chile.

 

Image: Iron Ore, BHP

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