Like iron ore and nickel before them, rare earths set to be next beneficiary of supply shock

It’s not easy being an optimist during a trade war, but there is a positive pattern emerging from negative events such as Brazil’s iron ore crisis and Indonesia’s nickel export ban, and if you look closely there could be another outage-event looming.
6th September 2019
Tim Treadgold

It’s not easy being an optimist during a trade war, but there is a positive pattern emerging from negative events such as Brazil’s iron ore crisis and Indonesia’s nickel export ban, and if you look closely there could be another outage-event looming.

Rare earths, which have been on investor radar screens for the past year, have come off the boil lately, with local sector leader Lynas Corporation sliding over the past month by 44c (15%) to $2.41.

But what the trade war is taking away from most industrial materials such as copper, zinc and lithium it could soon put back in a major way with fresh signs emerging of the long-promised Chinese embargo on the export of rare earths to the US.

A rare earth ban has been talked about for so long that most investors have probably consigned it to a list of other unlikely events. But that could be a mistake because of hints that China is dusting off the ban plan as its tit-for-tat tariffs fail to affect US policy benefitting stocks such as Lynas, Northern Minerals, Hastings Technology Metals and Alkane.

First clue that something’s brewing in the rare earth pot came earlier this week when the Australian Defence Minister Linda Reynolds said Australia was working with the US to plan the development of a number of projects to offset Chinese control of rare earths and other strategic metals.

The next clue was a re-print yesterday by Citi, a big US investment bank, of an earlier analysis of the global rare earth industry which said a Chinese ban on direct exports to the US was manageable but more serious if restrictions across the supply chain were enforced.

Whether rare earths become the next trade-war weapon is not the key to developing a “negative events” investment strategy because commodity prices can react spectacularly when the supply line is squeezed as was seen with iron ore earlier this year, nickel today and perhaps rare earths tomorrow – and the effects can last a long time.

Iron ore, for example, was expected to fall sharply once Brazil resumed exports at a near normal rate and Australia shook off the effects of a cyclonic-events outage, and while the fall did occur, it went too far, as did the sell-off in iron ore miners.

Over the past two days, an iron ore recovery has kicked in with $US3 a tonne rise to $US88/t and while forecasts are split between a fresh fall and a fresh high it could be significant that one of the world’s leading investment banks, Goldman Sachs, reckons iron ore will rocket up to $US115/t before Christmas because the sell-off has been over-done.

Fortescue Metals, the local pure-play iron ore leader, has reacted positively to the second-wind in iron ore with a rise this week of 26c to $8.26 while Mount Gibson Iron added 2c to 72c.

Nickel, however, is the hot outage story of today as Indonesia prepares to impose a long-threatened ban on the export of unprocessed ore, an event which is doing wonders for the share prices of Australian miner’s of the metal and companies planning to resume production to catch a nickel price which has risen by 15% over the past two weeks to a multi-year high of $US8.15 a pound.

Independence Group, which enjoys a double-whammy from being exposed to gold as well as nickel, has been the big winner with a rise this week of 82c (15%) to a 12-month high of $6.27.

Most other nickel-exposed stocks also moved higher. Mincor added 4c to 66c (it was trading at 41c in June). Western Areas rose by 66c (23%) to $3.14, down slightly on a 12-month high reached in early Thursday trade of $3.22, and Nickel Mines, the locally-listed nickel producer with its best assets in Indonesia, gained 13c to 66.5c.

Panoramic was the odd man out in the nickel sector as it moves to recapitalise after a slower-than-expected re-start of its Savannah mine in WA. It slipped 4c lower to 31c as it wraps up a fund raising priced at 30c.

Encouraging as the looming Indonesian nickel outage event is for Australian nickel stocks, it would be wise to assume that there will be a supply response as mothballed mines are dusted off and returned to production, such as the Ravensthorpe and Poseidon projects in WA with the Andrew Forrest-backed Poseidon up this week by 1.6c (42%) to 5.5c.

Good news for investors in nickel has not been matched by lithium, another metal with connections to the business of making batteries for electric cars.

A lithium price crunch caused by over-supply and slower-than-expected EV sales has led to Pilbara Minerals undertaking a share placement at 30c a share and a continued slide in the price of another local producer, Galaxy Minerals.

Despite Galaxy’s fall to a 12-month low of $1.05 during the week, analysts at Bell Potter remain optimistic, with a buy tip on the stock and a price target of $2.05, which is a downgrade on the previous price tip of $2.20.

Gold continued to dominate investor interest, as it has for months (and as we said it would) and while not strictly an outage event, it is undoubtedly a trade war beneficiary.

Most gold stocks moved modestly higher during the week, led by the usual suspects such as Northern Star, up 34c to $11.93 and Evolution, up 18c to $5.24 – but with a number of smaller gold players rising more quickly, including Bardoc, which added 2c to 12c (a 12-month high) before easing to 11c, Red 5, which traded up to 40c (also a 12-month high) before easing to 36c for a gain of 2c, and Dacian, which added 16c to $1.28.

Other newsworthy and market-moving events included:

  • Copper stocks were sold off early in the week as the trade war bit, along with Brexit and the Hong Kong riots, but staged a late revival as the copper price stabilised. OZ Minerals had been down 61c at $8.55 but bounced back to $9.10 on Thursday. Sandfire had been down 42c at $5.83 but bounced back to $6.11.
  • Catalyst Metals added 22c to $2.42 after reporting high grade gold assays from drilling at its Boyd’s Dam prospect near Bendigo in Victoria with a best hit of 11 metres at 37.2 grams a tonne.
  • Northern Minerals, mentioned earlier as a potential winner from a Chinese rare earth embargo, added half-a-cent to 6.3c after reporting strong assays results from drilling at its Browns Range project in WA, including 52m at 4.15% total rare earth oxides.
  • Metals X said it was making progress with the re-organisation at its troubled Nifty copper project in WA, news which lifted the stock by 3c to 19c.
  • Lucapa reported a June-half profit of $1.6 million from its diamond mining operations, which lifted the stock by 1c to 16c.
  • Orion Minerals reported a series of positive developments at its re-emerging Prieska base metals mine in South Africa, including the formal granting of a mining right, boosting the stock by 0.3c to 3.1c, and,
  • A large number of small mining stocks topped up their cash reserves with share issues, including Pacifico ($4.6 million), Syndicated Metals ($1 million), Investigator ($2.2 million), Lake Resources ($2 million) and RBR ($1 million).

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