Iron ore miners the new banks as investors switch their hunt for yield

The first whiff of a sustainable economic recovery wafted across the Australian economy this week, boosting banks and miners of industrial metals while rubbing some of the gloss off gold stocks....
29th May 2020
Tim Treadgold

The first whiff of a sustainable economic recovery wafted across the Australian economy this week, boosting banks and miners of industrial metals while rubbing some of the gloss off gold stocks.

Reserve Bank Governor, Philip Lowe, painted a rosy picture about the outlook when addressing a Senate committee yesterday with his words forming the basis for the all ordinaries index cracking the 6000-point market for the first time since early March.

Iron ore miners were the biggest beneficiaries of renewed investor optimism, with leading producers rising despite a fall in the price of the steel-making material, which dropped from $US98 a tonne at the start of the week to around $US94/t towards the end.

The reason for Fortescue Metals, BHP and Rio Tinto all rising by the best part of 2% (and more) even as iron ore fell was a yield-hunter investor rush to buy a slice of what promises to be a bumper round of iron ore dividends early in the new financial year – and reduced bank payouts.

In effect, iron ore miners have become the new banks for investors seeking a reasonable yield on their funds, though how long that game can be played will depend a lot on Brazil’s battle with Covid-19.

As things stand, the iron ore dividend outlook is excellent but it would be wise to watch what happens in Brazil to see how quickly it can restore full iron ore exports along with events in China - and that means port stockpiles as well as political payback from the Chinese Government for Australia’s role in achieving a Covid-19 origination inquiry.

In the meantime, there is a fascinating gap between what iron ore stocks are fetching today and what they might get if receiving the full benefit of the latest iron ore price.

Fortescue, according to an analysis by the investment bank, Morgan Stanley, should be trading at $18.05 rather than $13.45. Mineral Resources should be at $23.75 rather than $18.82 and Rio Tinto at $108 rather than $93.24.

The iron ore situation this week was also influenced by investors adjusting their portfolios ahead of the June 30 end of the current year, either to snap up a bargain as Covid-19 fades as a factor, or to clean their books ahead of tax time.

Gold, which has added more than $US400 an ounce since this time last year (and $A600/oz in Australian dollars), slipped below $US1700/oz on Wednesday before clawing back to trade around $US1716/oz.

Top Australian gold stocks had a roller-coaster ride as the mood of the market swung from optimism to pessimism and back again. Northern Star, for example, closed at $15.04 on Tuesday before falling to $13.36 on Wednesday and then back up to $13.64 on Thursday.

Saracen, Newcrest and Evolution performed in the same way while Macquarie Bank blamed the gold correction on a “growing global risk appetite from the rolling back of lockdown measures”.

Citi, an investment bank, told clients in a note yesterday that “the recovery is underway”, fast in some sectors, slow in others, but looking increasingly like a U-shaped revival with iron ore miners in a sweet spot.

In other developments this week, there were signs of a funding freeze for small-to-medium miners starting to defrost in what is probably another sign of economic optimism rising and the spate of recent discoveries by explorers such as Chalice, Alkane, Stavely, De Grey, Legend and Bellevue.

Over the past few days, a string of significant capital raisings has been completed or launched, including:

  • Kingston Resources raising $8.4 million to advance work on its Papua New Guinea and WA gold projects, including an oversubscribed $6.4 million institutional placement.
  • Silver Mines receiving strong institutional support for its $12 million capital raising exercise to fund the next phase of its Bowdens silver project near Mudgee in NSW.
  • Kairos Minerals raising $4.2 million to accelerate work on its gold assets in the Pilbara region of WA.
  • Rox Resources launching a $12.7 million raising to expand work on its Youanmi project in WA.
  • Panoramic Resources raising $90 million to boost operations at its troubled Savannah nickel mine in the far north of WA.
  • Mako Gold raising $3.25 million to fund exploration on its promising Napie gold project in the African country of Ivory Coast, and
  • White Rock Minerals raising $7.35 million to fund work on its Last Chance gold prospect in Alaska.

All of the fund raising, apart from Panoramic, is for precious metal projects in what’s a good indication of ongoing investor interest in gold and silver during the current period of ultra-low interest rates.

Gold also dominated news flow during the week with reports from:

  • Bellevue Gold, which hit a 12-month share price high of 79c yesterday after reporting bonanza gold hits in the Deacon lode at the Bellevue gold project with a best assay of 1169 grams a tonne over 0.3m from a depth of 100m.
  • Calidus announced the acquisition of the Otways project near the Warrawoona gold project in WA’s Pilbara region a moved which lifted the stock by 3c to 41c.
  • Kin Mining rose to a 12-month high of 16c after reporting high-grade gold intersections at its Comedy King project near Leonora in WA. The stock later eased back to trade around 13c, and
  • De Grey was another explorer to reach a 12-month high as interest grows in its Hemi project in WA, but after trading up to 46c, De Grey sank back to 40c for a 3c decline over the week.

Apart from gold and iron ore, the commodity which generated the most attention last week was the Australian base metal specialty, nickel.

Not everyone’s favourite because of its reputation for extreme price moves, a flurry of corporate activity might be signalling the next up-leg for nickel thanks to strong demand in its major market, the production of stainless steel, and its emerging growth market, the batteries used in electric cars.

While the price of nickel has edged higher to an uninspiring level of around $US5.54 a pound, it’s the deals which make it the newsworthy base metal, with moves that included:

  • New Century Zinc announce plans to buy the troubled Goro project in New Caledonia, a move which failed to stir the stock as it slipped 4.5c lower to 19.5c.
  • Mincor award a contract for mining at its Cassini project in WA, adding 6c to 70.5c in the process.
  • Prominent mining investor Kerry Harmanis, who made his $500 million fortune from nickel 13 years ago, acquire a 5.1% stake in an emerging miner of the metal, Centaurus Metals, which slipped 1c to 28c this week, and
  • Nickel Mines raise funds to increase its ownership of nickel smelters in Indonesia, with its shares steady at 54c.

Other news and market moving events during the week included:

  • Sandfire Resources adding 10c to $4.48 after announcing solid exploration results in Botswana and upgraded copper production guidance for its flagship DeGrussa project in WA. Credit Suisse used the latest report to upgrade its future price tip to $5.70.
  • Chalice Gold slipped back by 15c to 95.5c despite further encouraging assays from drilling at its Julimar palladium/nickel discovery near Perth, and
  • RareX added 1c to 6.2c after reporting encouraging grades of the most valuable rare earths, neodymium and praseodymium from work at its Cummins Range project in WA’s Kimberley region.

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