Price spikes cause investors to question if commodities are in super-cycle or just a feeding frenzy

Feeding frenzy or supercycle? That is the question which dominated the thinking of seasoned market watchers this week as everything (well, almost everything) went up and the rotation out of precious metals into industrial commodities gathered pace.
26th February 2021
Tim Treadgold

Feeding frenzy or supercycle? That is the question which dominated the thinking of seasoned market watchers this week as everything (well, almost everything) went up and the rotation out of precious metals into industrial commodities gathered pace.

Management moves, often seen at this stage of a sea-change in the commodity sector, also caught the eye of investors, especially the planned shift of Northern Star’s executive chairman, Bill Beament, for something smaller and presumably more fun.

Beament’s decision to swap his job at the top of a world-class gold miner, which he helped build, for the challenge of “doing it again” at copper hopeful Venturex had the expected effect on both companies. Northern Star down and Venturex up.

Whether Venturex remains focused on its promising but relatively small Sulphur Springs project or becomes a launching pad for Beament to build a substantial mining business in which he has more than a modest stake will be the key to the future of Venturex, and Beament.

Investors who have followed Beament’s career will remember how he launched Northern Star with the small and unloved Paulsens goldmine in WA’s Pilbara region and leveraged that position into a business valued today at $11.7 billion.

On commodity markets this week, activity verged on the frantic with copper and nickel doing what was tipped last week, heading up to almost $US10,000 a tonne for copper and almost $US20,000/t for nickel, prices last seen 11 years ago when a supercycle followed the economic stimulus unleashed after the global financial crisis.

This time, the supercycle speculation is being driven by post-Covid-19 stimulus which has formed a base ahead of a vaccine-driven global growth.

Gold too regained some recently lost ground but is struggling to keep its head above $US1800 an ounce and slipped back during the week to around $US1795/oz.

The upward creep of U.S. interest rates and a shift by investors away from safe havens and into growth opportunities are weighing on gold. During the week, the yield on U.S. 10-year Treasury notes hit a 12-month high of 1.423% almost three-time the 0.5% in April last year.

The Australian dollar is also rising with the tide of optimism, taking a peek at an exchange rate of US80 cents, a level not seen since 2017. The Aussie dollar could be on its way back to the 2014 high of US94c and after that the magic measure of parity with its U.S. currency cousin.

Much depends on that opening question in this week’s Diary notes, whether we have a genuine supercycle or a feeding frenzy and while the jury might be out, a few glitches can be seen emerging in the supercycle theory, including a mid-week Reuters report that a small Shanghai broking firm had amassed in four days a $US1 billion position in copper.

Shanghai Dalu Futures placed its big bet on copper in the days after the Chinese New Year holidays in what appears to be outright speculation and enough to artificially pump up the copper price – until the position is unwound.

Overshooting is a common event in commodity markets, up and down, and when you see developments such as a small Shanghai dealer placing a $US1 billion bet on copper it might be wise to see a copper price correction looming before the next upward move.

Other hints of overheating in the mining market could be seen in the remarkable events at Australia’s leading pure-play iron ore miner, Fortescue Metals, which has suffered a cost blow-out at an ambitious ore processing project (Iron Bridge), and announced plans to commit 10% of future net profits to renewable energy investments.

Fortescue might pull off a second miracle, but investors are shifting to the sidelines, which is why some investment banks see a fall ahead. Morgan Stanley has the gloomiest view of Fortescue, tipping a future share price of $17.45, down 28.7% on last sales at $24.87.

Overall, the Australian stock market had a relatively flat week as measured by the all-ordinaries index managing a rise of 0.7%, well below the 4.6% rise in the metals and mining index which was powered by iron ore profits and rising base metals prices.

Oil stocks, largely overlooked since the collapse of the oil price early last year, were some of the top performers this week as the price of Brent-quality crude added $US4 a barrel to trade at $US66.37/bbl, the highest in 20 months, with the potential for more to come as global energy demand rises with the overall economic recovery.

Woodside Petroleum added $1.65 to $25.70. Santos put on 52c to $7.35 and Oil Search, which is pushing ahead with an oilfield development in Alaska, rose to 33c to $4.38.

Other news and market-moving events included:

  • Sandfire Resources added an eye-catching 99cc (19.3% to $6.18 after reporting a strong profit from copper production for the six months to December 31 which has set the company for its next growth phase.
  • Orion Minerals took another step forward with its South African copper mining plans by raising $25 million in a well-supported share issue at 3.6c. The stock ended the week at that price after hitting a 12-month high on Monday of 4.5c.
  • KGL Resources joined the capital raising rush by copper stocks with a share issue that generated $23.77 million for work on its Jervois project in the Northern Territory. On the market, KGL put on 5c to close yesterday at 54c.
  • Venturex, mentioned earlier as the new home for Northern Star’s Bill Beament, added 10c over the week to reach a 12-month high of 34c.
  • Galena Mining, a company named after a primary lead ore, rose by 3c to 37c after reporting encouraging copper and gold assays from the latest drilling at its Abra project in WA. Best hit of 4.2 grams of gold plus 1.1% copper came from a depth of 670.7 metres.
  • Lefroy Exploration was the pick of the gold explorers with a 50c (255%) share price rise to 70c after reporting highly encouraging assays from drilling under Lake Lefroy (a dry salt lake) near Kambalda in WA. Best hit was 60m at 5.22g/t gold plus 0.38% copper from a depth of 112m to the end of the hole with a 20m section assaying 12.2g/t, 0.87% copper and 1.7g/t of silver.
  • Carawine Resources added 13c (65%) to 32c after reporting gold assays of up 25.9g/t from 84m from drilling at its Tropicana North project in WA.
  • Syrah Resources led the battery metals sector for the first time in more than a year after announcing plans to restart production at its mothballed Balama project in Mozambique. On the market, Syrah added 8c to $1.18.
  • Auroch Minerals took a step into the lithium market, reporting that it was investigating significant lithium mineralisation near its Nepean nickel project in WA. Early explorers around Nepean noted the lithium in their drill holes in the 1960s but thought it nothing but a nuisance at the time. On the market, Auroch added 1c to 26c.
  • Regis Resources paid a price on the stock market when its shares fell 12c to $3.08 after reporting a cut in its interim dividend from 8c to 4c to preserve capital for the development of the McPhillamys project in NSW.
  • Great Boulder added 1c to 5c after reporting encouraging assays from its Mulga Bill gold prospect in WA, including 16m at 4.98g/t from a depth of 28m, and

 

  • Element 25, named after the atomic number of its prime target, manganese, rose by 8c to $1.64 after reporting that it was close to commissioning the first stage of its Butcherbird manganese project in WA.

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