Markets riddled with uncertainty as investors weigh trade war or peace in our time

Load up with gold and head for the hills or rush into industrial metals and oil
28th June 2019
Tim Treadgold

Load up with gold and head for the hills or rush into industrial metals and oil. That seems to be your choice from Monday, when a new financial year kicks off and we’ll know whether Trump and Xi shook hands and smiled – or not!

The handshake the world wants to see could occur today or tomorrow when Chinese President Xi Jinping is expected to have a face-to-face meeting with US President, Donald Trump at the G20 summit in the Japanese city of Osaka.

The fact that the presidents are meeting just as the world rolls into a new financial year and official US interest looks like clicking down a notch adds to the uncertainty which is making investors nervous.

Top of the Xi/Trump agenda is the China v US trade war, with some investment banks optimistic that a settlement will be reached.

Citi, for example, reckons that markets will move up strongly over the next three months. “We’re outright bullish,” the big US bank said on Wednesday in a research report which warned of the need to get ready for “sharp near-term price moves”.

“Oil looks set to rally on global stock draws (falling stockpiles) and escalating geopolitical risks (Persian Gulf incidents),” Citi said.

“Copper should benefit from a Trump-Xi handshake at the G20 summit. Gold has a tailwind from a dovish Fed (U.S. central bank) and a weaker U.S. dollar.”

But the most interesting forecasts from Citi was that it expects thermal coal to be the top performer over the next 12-months and iron ore to be the worst.

UBS was not as brave as Citi with its thoughts for the new financial year and the potential outcome of the Xi/Trump meeting with a report headed: “Trade War & Peace” – a nifty way for a banker to say it could go either way.

On the positive side, a handshake and a smile, UBS said a “de-escalation” of trade war rhetoric would be favourable for base metals whereas a continuation of the mutual name calling would see downward revisions to global growth forecasts – but a fresh round of Chinese domestic economic stimulus which would be good for bulk commodities such as iron ore and coal.

“Our top picks if the trade war de-escalates are nickel and copper,” UBS said.

RBC Capital Markets is keenest on copper in the new year while iron ore is expected to “come back to earth”.

“The mining sector continues to be whipsawed by macro headlines but the underlying fundamentals remain steady,” RBC said.

A flurry of fresh interest in base metal stocks could be seen on the Australian market during the week, though most price moves were modest as the year headed for a Friday close.

Other sectors also had a mixed week. Gold stocks retreated as the price of the metal pulled back and investors worried about the way equity prices had outstripped the commodity.

Morgan Stanley reckons some Australian gold stocks are factoring in a metal price of $US2270 an ounce, more than $US850/oz higher than the current market.

The upward rush in gold-company share prices has caught some investment bankers napping with no better example than that from RBC, which praised a promising discovery by Silver Lake at its Deflector project near Kalgoorlie in WA and retained a buy rating on the stock with a price target of $1 – even as it traded up to $1.21.

Iron ore miners were steady despite indications of a crisis developing in the Chinese steel industry as port stocks drop to a record low and mills are forced to buy whatever they can just to keep their furnaces operating.

Credit Suisse said iron ore at the port of Tangshan had reached a critically low level with the biggest winner being Fortescue Metals which is receiving top dollar for the its low-grade ore with a price-damaging discount disappearing.

Battery-metals had another torrid week as electric-car sales continued to slow and an over-supply of graphite, lithium and cobalt dragged prices down.

Leading lithium producers all lost ground, including Galaxy, down 4c to $1.26. Orocobre, down 32c to $2.82, and Pilbara, down 4c to 54c.

Syrah, the graphite leader which has been forced into a fifth capital raise in four years, lost 8c to 82.7c. Kibaran was up 0.5c to 12.5c and Talga added 1c to 48c.

Deal flow showed signs of picking up during the week with Sandfire’s acquisition of MOD Resources the most interesting as it accelerated the process of re-positioning Sandfire as a global copper player rather than a one-mine Australian company.

With MOD comes the potential for a new mine in the Kalahari copper belt of mining-friendly Botswana while another project, Black Butte, continues to take shape in the US.

On the market, MOD added 12c to 42c while Sandfire slipped 24c lower to $6.80 though that price also represented a 44c rise after initial uncertainty about the merger saw Sandfire drop as low as $6.44.

Investment banks generally welcomed the MOD acquisition. Shaw and Partners refreshed its Sandfire buy tip with a price target of $9. Macquarie agreed but saw $8 as its target, while Morgan Stanley said buy with $8.45 as the expected price.

Other news and price moves, mainly modest either way, included:

  • Emerald Resources, a well-connected gold developer, took a big step towards developing its Okvau project in Cambodia by negotiating $US160 million in project construction and acquisition funds from Sprott Private Resources. On the market, Emerald moved up by 0.3c to 4.3c.
  • Millennium Minerals added 2.5c to 11c after announcing the start of gold production from the sulphide circuit at its Nullagine project in WA.
  • Ausdrill continued its recovery with a 30c share price rise to $1.88 after announcing an $800 underground services contract with the owners of the Khoemacau copper project in Botswana.
  • Orion Minerals added 0.3c to 3.2c after the release of a bankable feasibility study into its Prieska copper and zinc redevelopment project in South Africa.
  • Venus Metals reported high grade gold intersections at its Currans Find North prospect in WA with a best hit of one metre at 72.67 grams of gold a tonne. On the market, the stock added 2.5c to 14.5c.
  • New Century Zinc lost 6c to 50c after reporting weaker than expected zinc recoveries from the tailings at the Century mine in Queensland. Credit Suisse remains positive, tipping the stock as a buy with a 12-month price target of $1.53.
  • Berkeley Energia said it was adding a hunt for battery metals on its Spanish exploration tenements which are best known for their uranium. The stock added 2c to 36c on the news, and
  • Sheffield Resources put on 2c to 34c after reporting that it had mandated Taurus Mining Finance to provide $US10 million in bridging finance for its Thunderbird titanium minerals project in WA.

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