Markets get set for boom times, betting it won’t all go boom in the meantime

Is the boom back? Maybe, is the only correct answer to that provocative question after a remarkable week on global markets triggered by confidence in the success of Covid-19 vaccinations.
4th December 2020
Tim Treadgold

Is the boom back? Maybe, is the only correct answer to that provocative question after a remarkable week on global markets triggered by confidence in the success of Covid-19 vaccinations.

On one side of the returning-boom debate was the evidence of commodity markets where iron ore and copper hit seven-year price highs and gold shrugged off last week’s price correction to move back above the $US1800 an ounce mark.

But even as the good news flowed, there were unresolved issues which could derail everything, starting with the one-sided trade war China is waging against Australia, rolling into the deadly winter which lies ahead for Europe and the U.S.

What appears to be happening on financial markets is a case of investors looking beyond the immediate to a time around the middle of next year when conditions could indeed be perfect for a re-run of the commodity-sector super-cycle.

And even if that word super-cycle sounds extreme, it might be best to get used to it appearing in more headlines after a first mention mid-week on a Canadian resources-sector website which said “Mining supercycle talk back as copper, iron ore prices surge to a 7-year high”.

Whether it’s a super-cycle or just a normal supply/demand cycle will provide food for investor websites in the final weeks of the year.

What can be said today is that the seeds for a boom have certainly been sown with China’s rapid growth providing a bottomless market for most commodities.

Smaller countries have followed, with Europe and the U.S. likely to join in next year as Covid-19 vaccinations become commonly available and their economies start to reflect government stimulus and growing consumer confidence.

Copper, the bellwether commodity, is certainly signalling a boom ahead, briefly trading at $US3.52 a pound, its highest since 2013, before easing to $US3.48/lb.

Goldman Sachs, one of the best-connected investment banks, reckons copper could keep rising, possible reaching $US4.50/lb, or the magic $US10,000 a tonne, sometime next year as demand rises and supply is crimped by mine outages in South America as worker strikes return as a major management headache.

A significant local winner from the 65% rise in the copper price over the past nine months (the price dropped to $US2.10/lb in March) is Sandfire Resources, which got the timing right with a decision to proceed with the development of its T3 copper and silver project in Botswana. In a flurry of trading, Sandfire rose 35% to $5.83, back to pre-pandemic levels.

Other copper stocks rode the metal price higher. OZ Minerals added $1.41 to $17.98 (up 9%). NSW-focussed explorer Peel Mining put on 5c (18%) to 27c, while Aeris rose by 1.7c (23%) to 9c, but also received a fresh buy tip from Bell Potter, which sees a future share price of 11.2c.

Gold, after a few torrid weeks, staged a strong comeback as investors worried about what happens to currency values next year as governments print ever more paper money to force-feed their economies and interest rates, despite signs of rising, are held at near record lows.

Investment banks maintained their faith in gold with several seeing the price fall below $US1800/oz as a buy signal, which is exactly what happened as the price moved back to around $US1830/oz, with Goldman Sachs holding its price tip for next year at $US2300/oz.

Most local gold stocks moved up with the price recovery. De Grey added 12c to $1.11. Bellevue put on 10c to $1.36. Saracen gained 8c to $4.88 and West African Resources was 9c stronger at 97c.

Iron ore, despite repeated forecasts of a significant correction, refuses to lie down thanks to strong Chinese demand for steel, the prospect of other economies boosting their appetite for construction materials and the continued failure of Brazil to restore full iron ore production.

Fortescue led the way among iron ore producers, reaching an all-time high of $20.62, up $1.95 for the week as the price of iron ore stretched out to the seven-year high mentioned earlier of $US133/t.

Other iron ore players also did well. Mineral Securities followed Fortescue to an all-time high of $34.31 before easing to $34.03, up $1.77. Champion Iron repeated the all-time high trick, closing yesterday at $4.92, a rise of 43c, and newcomer Fenix added 5c (30%) to its all-time high of 22c after announcing an access deal with the Geraldton port authority in WA.

A warning bell for iron ore investors was rung by analysts at Morgan Stanley, an investment bank, who are concerned about rising stockpiles of scrap steel in China which will become a critical source of feedstock, as it is in most other steel producing countries.

The combination of scrap increasing its share of electric arc furnace raw material from 20% today to 30% by the year 2030, plus a natural decline in Chinese steel demand could see the iron ore price drop to a long-term price of $US56/t by the end of the decade.

Before getting that far ahead in the cycle, there is a significant iron ore event expected in the new year when the miners file their half and full year results which Credit Suisse described as a “big February for iron ore names” with BHP, Rio Tinto and Fortescue likely to declare bumper dividends.

At the other end of the resources spectrum, the flood of cash into small and medium explorers and miners continued unabated this week with the latest share issues building on the $2 billion raised in the September quarter.

Big capital moves this week included Nickel Mines raising $364 million for its Angel Nickel project in Indonesia, Chalice raising $100 million for its Julimar palladium project in WA,  Hot Chile raising $25.6 million for its Chile copper and gold projects,  New World Resources raising $10 million for work on its Antler copper project in the U.S. and Calidus securing a $110 million debt facility for its Warrawoona gold project as well as refreshed buy tip from Canaccord Genuity. Canaccord has a 90c price target on the stock, which is currently trading at 60c

Other newsworthy and market moving events this week included:

  • Pilbara Minerals resumed its rise after securing control of its collapsed neighbour, Altura Mining, adding 6c to 76c, a 12-month high. Other lithium stocks did less well. Galaxy fell 12c to $2.04. Orocobre was 15c weaker at $3.99, and Piedmont slipped 2c lower to 37c.

 

  • Australian Strategic Materials led the rare earth sector higher with a rise of 41c to an all-time high of  $4.45. Lynas Corporation, which changed its name this week to Lynas Rare Earths, wasn’t far behind, with a rise of 33c to $3.96.

 

  • Nickel Mines, which topped fund raisings this week, saw its share price weaken under the weight of new shares, slipping 4c lower to $1.04. Other nickel stocks barely moved. Mincor was steady at 98c while Western Areas added 8c to $2.38.

 

  • Jervois Mining, which has several cobalt and nickel projects in North and South America, caught the eye of investors this week with an 11c share price rise to 39c after Shaw and Partners noted progress on the company’s Idaho cobalt operation and Sao Miguel Paulista refinery in Brazil, tipping it as a stock likely to rise to 52c, and

 

  • De Grey Mining added 15c to $1.11 after reporting high grade depth extensions and visible gold from drilling at the Falcon prospect within its broader Hemi project in WA.

 

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