It’s ‘Springtime for commodities’ declares bullish Citi
Battery metals, after a six-month sabbatical, surged back to the top of the mining-sector league table this week
3rd May 2019
Battery metals, after a six-month sabbatical, surged back to the top of the mining-sector league table this week thanks to a high-priced takeover bid from Wesfarmers for lithium project developer, Kidman Resources, and a plan to re-open the mothballed Ravensthorpe nickel project.
Both moves demonstrated a return of confidence in battery metals and for the overall health of the broader market for minerals and metals.
Before looking closer at the battery deals, it’s worth a bit more of a look at the big picture, one which has got the New York-based team of Citi a bit excited.
In a remarkably upbeat research report, the investment bank this week said the rest of the year looked like: “Springtime for Commodities”, a catchy title which summed up an unusually bullish analysis.
According to Citi there is: “A sunnier picture ahead, with fewer flies in the ointment in commodity land”.
Put aside the flowery language and the message from Citi is that metals, energy and agricultural commodities have not only been the stars of the March quarter but will continue to be the best performing investment class for the rest of 2019 as global economic growth accelerates and fears of a full-blown trade war fade.
Key price forecasts from Citi include copper moving up from its current $US2.83 a pound to $US3.18/lb in the September quarter, iron ore easing from $US95 a tonne to $US88/t and nickel rising from $US5.50/lb to $US6.13/lb.
Citi dismissed last year’s commodity price slump as a reaction to trade war fears and a possible global economic slowdown. The bank now sees a period of strong growth thanks to accommodative monetary and fiscal policy and increasing demand for basic materials.
The Kidman deal, at a 47% price premium, highlights the significant growth Wesfarmers sees in lithium and other battery metals which had suffered a price falls from what now looks to be a temporary phase of over-supply of the metal and under-demand for battery-powered electric cars.
Wesfarmers, which is also trying to enter the electric car race though a contentious takeover proposal lobbed at rare earth specialist Lynas Corporation, sees Kidman as a neat fit with its chemicals-processing division.
Kidman reacted immediately to the $1.90 per share offer from Wesfarmers, but did not trade above the bid price, closing yesterday at $1.86 with the 4c gap reflecting the time it is likely to take to wrap up the acquisition via a scheme of arrangement and a belief that a rival bid is unlikely.
The Ravensthorpe nickel proposal, floated by Canadian-based First Quantum Minerals, is in a less certain category and largely dependent on the nickel price moving higher, something First Quantum appears to expect as battery makers demand more of the metal.
Forgotten in the latest battery metal developments is Lynas, which is fighting on two fronts as it opposes the Wesfarmers move and tries to meet demands from the Malaysian Government, a tough task that sapped more strength out of the Lynas share price. The stock sagged this week to $1.96, well below the proposed Wesfarmers bid price of $2.25.
Other lithium stocks reacted positively to the Kidman move. Pilbara Minerals added 6c to 66c, shaking off a slide which had seen the stock test its 12-month low of 57c reached just before Christmas. Credit Suisse, in a fresh research note on Pilbara, tipped a 12-month price for the stock of $1.15. Citi was more cautious with a 90c price target.
Galaxy added 7c to $1.52, but did get as high as $1.56 on Thursday. Orocobre added 11c to $3.43 (with Bell Potter targeting $5.30). Alliance Mineral Assets put on 2c to 18c (with Canaccord tipping 35c), and US-focussed Piedmont Lithium slipped 2c to 14c (with Canaccord forecasting a future price of 30c).
Among the lithium explorers, the stand-out news of the week came from Liontown Resources, which reported exceptionally rich grades from drilling at its Kathleen Valley project in WA, with best hits of 30 metres at 2.1% lithium from a depth of 143m, within which was a 13m section at 2.1%. On the market, Liontown added half-a-cent (20%) to 3.2c.
It wasn’t all good news in the battery-metals sector, with some graphite stocks continuing to struggle, led by Syrah Resources, which lost 13c to $1.10 as its operations in Mozambique were threatened by flooding after a cyclone. The stock has now dropped by 65% since this time last year.
Syrah also suffered the dubious distinction of reclaiming top spot among Australia’s most shorted stocks, with 17.5% of its issued capital reported to now be short-sold. Galaxy took second spot with 16.8% shorted while Orocobre was 7th with 12% short sold.
Gold stocks were mixed in a week when the price of the metal rose to $US1286 an ounce before falling back to around $US1273/oz. Northern Star rode out the downturn to add 24c to $8.24, clawing back ground lost after a poorly received March quarterly.
Saracen added 18c to $2.74 after reporting excellent drill results from its Atbara discovery, with a best hit of 27m at 8.1 grams of a gold a tonne.
Iron ore stocks weakened as the Brazilian squeeze on supplies continued to ease. Fortescue was 26c weaker at $7.15 and Mount Gibson slipped 7c to $1.13.
Other news and price-moving events in the resources sector included:
- Bardoc Gold added 1.4c (31%) to 6.2c after reporting broad zones of shallow, high-grade, gold at its Lady Kelly project near Kalgoorlie in WA with a best intersection of 19m at 3.55g/t from a depth of 34m, with a core of 7m at 8.3g/t.
- Havilah Resources announced a $100 million capital injection from Indian-backed GFG Alliance which owns the Whyalla steel works in South Australia. The funds will be used to develop iron ore and copper assets. On the market, Havilah added 2c to 18c.
- Metals X said it was “re-setting” the mine plan at the Nifty copper project in WA after a series of disappointing quarters. Investors were wary, rubbing 2c off the stock, which sold down to 26c even as Macquarie Bank said it was a buy with a price target of 62c.
- New Century Zinc slipped 2c to 75c despite a strong March quarter production result, and one-time nugget-gold star Artemis Resources fell to a 12-month low of 4.4c, down 0.8c over the week. In late 2017 Artemis traded up to 52c during the height of the nugget-gold rush, and
- Calidus Resources rose by 0.3c to 2.6c after reporting a $2.16 million share placement to Alkane Resources with the funds being allocated to work on the promising Warrawoona gold project in WA’s Pilbara region.
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