Markets rocked despite metal prices and major economies rolling on 

9th February 2018
Tim Treadgold

Stock markets around the world were rocked this week by the naval equivalent of a shot across the bows, the international demand to halt and prepare to be boarded. But if everything suddenly went pear-shaped, how could Rio Tinto report that it is wallowing in cash and how could the global economy continue to be growing at a break-neck annualised speed of 4 per cent?

Each of those events, the shock correction and the remarkable flow of positive news from the mining sector (with more to come over the next two weeks), needs to be put in context, and if you still feel panicky after that then you’re mis-reading both the economy and the market and you can’t tell the difference between a speed bump and a brick wall.

The market event was easily the most telegraphed correction in the history of business and was all about the sudden awakening of investors who had been asleep at the wheel that interest rates are rising and the era of super-low rates is over.

As Homer Simpson would have said: “doh!”.

Adjusting to higher rates sent investors who prefer to play the bond market into a flurry, which was the first surprise because it was a change two-years in coming, while the other surprise was that equity markets also fell when they should have been rising, or at least held their ground.

Growth in every major economy is reaching speeds unseen for a decade. China is on track for a 6.6% expansion this year. India is targeting 7.5%, while the overall global growth rate, according to the International Monetary Fund, is 4%.

What that means for metals and minerals is crystal clear: when the world grows it needs more commodities, not less – which is why the big investment bank, Goldman Sachs, reckons conditions for miners are the best since the boom years of 2004-2008.

Smaller companies are the normal focus of this weekly report, but before getting to them it is worthwhile considering the significance of the Rio Tinto annual result and the flow of half-and-full year reports over the next two-to-three weeks.

The number which ought to have everyone interested in mining sitting bolt upright is 0, because that is likely to be the net debt position of Rio Tinto sometime in the next few weeks having slashed borrowings by 60% last year to just $US3.8 billion, which implies a gearing ratio of 7%.

Going debt free, if that’s what Rio Tinto wants, is a direct result of generating $US13.8 billion in net cash last year, repaying $US9.6 billion of debt, and still having enough left over for a 71% increase in the annual dividend.

That is a boom-time result, with a repeat expected this year, and next year, begging the question: what will Rio Tinto do with all its cash?

Answer: hopefully spend it wisely. But if history is a guide don’t hold your breath.

If the Rio Tinto result doesn’t sit starkly enough against the 4% fall by the ASX metals index this week, then consider it in the light of an analysis of the global economy by another investment bank, UBS, which looked at international trade, purchasing manager’s indices in major economies and industrial production with all of those key metrics glowing green.

“World trade and industrial production growth remain near highest year-on-year levels in six years,” UBS said.

For the mining world, the data means increased demand and the likelihood of higher metal prices with a better look at the year ahead coming in the flow of financial reports that accelerates next week, first with South 32 on Thursday, followed by a mega Tuesday when BHP, Sandfire, Northern Star, Regis, Western Areas and Saracen are scheduled to report.

Before getting to next week, it is worth a glimpse back at how mining stocks performed last week, a time when standing still was almost as good as a rise.

In the standing-still category was a crop that included Spitfire Materials, which hung on to its price of 11c after a Monday dip to 9.5c, Geopacific, which held its ground at 2.9c after reporting gold grades of up to 6.75 grams a tonne over 11m from drilling at its Woodlark project in PNG, and Capricorn Metals which reported significant exploration results from its Karlawinda gold project in WA and remained at 8.1c.

Less successful was a group which lost some ground, including:

  • New Century Resources which announced a long-term zinc offtake deal covering material to be produced at the re-developed Century mine in Queensland, while also acknowledging a legal dispute with big zinc processor Nyrstar, a double-edged announcement which trimmed New Century’s share price by 7c to $1.21 – though the stock did fall to $1.05 on Wednesday.
  • Draig Resources reported fresh drilling results from its Tribune project in WA, including 12m at 12g/t from a depth of 68m but lost 3c to 18.5c, and
  • West African Resources continued its run of excellent drill results which this week featured a hit of 14m at 39.33g/t from a depth of 448.5m, while on the market the stock slipped 1.5c lower to 41.5c.

On the winning side of the ledger, in what was widely seen as a down week, were a surprising number of stocks, including:

  • Magnis Resources, up 2.5c to 43c after announcing further progress with its US lithium battery project. At one stage yesterday, the stock traded as high as 46c.
  • WPG Resources doubling to 3.9c on Wednesday after announcing rich grade-control drilling at its Tarcoola gold project in South Australia, with a best intersection of 11m at 73.31g/t from a depth of 11m. After that peak price, the stock eased by to 2.8c for a gain over the week of 1.2c.
  • Blackham Resources started to dig itself out of a hole with a record month of gold output at a record low all-in cost. Ounces for January totalled 6498, up 19% on December production. The all-in sustaining cost fell by 15% to $A1158/oz. On the market, Blackham added 0.5c to 6.1c but did trade as high as 7.2c yesterday.

On balance, it was a remarkable week with a correction followed by a recovery but to twist slightly the words of former Prime Minister, Paul Keating, it was the correction we had to have, one which has set the stage for the next period of expansion -- a view that great investor Homer Simpson would probably share.

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