Rising gold price signals trouble ahead, but industrial metals roar on

Gold reclaimed the high ground this week as U.S. interest rates slipped on fears that the global economy is not recovering as quickly as hoped, or that a significant correction is brewing – or both.
9th July 2021
Tim Treadgold

Look anywhere in markets today and there are warnings flashing and value disconnections caused by the inflationary effect of cheap money which has created a hothouse economic effect and asset bubbles.

A good example of contradictory pricing is that while lower interest rates and slower growth might have helped gold move back above $US1800 an ounce (before easing) it is a lot harder to explain copper, nickel and iron ore rising at the same time.

Copper’s increase this week to $US4.32 a pound, nickel’s rise to $US18,300 a tonne and iron ore sitting comfortably above $US220/t are boom-time prices and while there has been a powerful recovery from the Covid shock, the best of that bounce has probably passed.

The challenge for investors is to know whether to continue riding the wave of enthusiasm or move to the sidelines to see what happens over the next few months, remembering that some of the great market events, for whatever reason, seem to occur in October.

Iron ore will be the sector to watch most closely over the next few weeks because much of the strength in the share prices of the iron ore miners can be traced to reporting season which kicks off in a few weeks, accompanied by a dividend bonanza.

BHP, Rio Tinto and Fortescue Metals are all expected to pay record (or near record) full and half-year dividends over the next few months with collective payouts tipped to top $US26 billion, which is a pretty good reason to be loading up on those stocks, or hanging on to what you already own.

Interestingly, and another of those contradictions, the share prices of the major iron ore miners barely moved this week with the best performers being further down the pecking order. Fortescue, for example, rose by a lowly 16c (less than 1%) to $23.78 whereas newcomer Fenix put on 3c to 40c, a rise of 8%.

UBS and Macquarie were the most enthusiastic of the banks about the iron ore outlook with Macquarie publishing some remarkable optimistic share price forecasts, especially for the two biggest miners, BHP and Rio Tinto.

According to Macquarie, BHP is heading for a price of $63, up another $13 on what is already an all-time high. Rio Tinto will not stop until it gets to $163, up another $35 on what is already its all-time high, and Fortescue is heading for $27, up another $4.

It is possible that the iron ore miners will reach the prices tipped by Macquarie, but it would be a brave investor buying today given their heavy dependence on Chinese steel demand, which is reported to have peaked.

Gold stocks, with a few exceptions, did not perform strongly this week despite the $US10/oz rise in the price, perhaps because investors are becoming aware of the problem of creeping costs and a shortage of skilled workers, factors which are eating into profits.

Ramelius Resources became the latest gold miner to issue a cost alert when it blamed a labour shortage for a gold production shortfall for the year to June 30. The company had earlier signalled an output target of up 280,000 ounces but delivered 272,109oz, a result that rubbed 9c (5%) off the company’s share price which slipped to $1.67.

Other leading gold producers suffered a similar sell-off even as the gold price rose. Northern Star eased back by 15c over the week to $10.10 and Evolution was 11c weaker at $4.59.

Explorers and project developers did better than producers, led by Auteco, which has reported encouraging results from its high-grade Pickle Crow project in Canada. The stock added 2.3c to 11c this week while Shaw and Partners put a buy tip and an 18c price target on the stock.

Other moves among smaller gold stocks included:

  • Bellevue adding 3.5c to $1 after reporting a resource increase to three million ounces at its namesake project in WA, with Canaccord Genuity telling clients that the stock is heading to $1.40.
  • Emmerson rising by 0.7c to 7.4c after reporting high-grade drill hits at its Tennant Creek project in the Northern Territory with a best hit of 57 grams of gold a tonne over 3.95 metres from a depth of 207m.
  • Apollo Consolidated reporting more encouraging drill results from its Lake Rebecca project in WA with a best hit of 7.8g/t over 8m. On the market, the stock rose by 3.5c to 33c, and
  • PolarX adding 0.2 to 3.5c on encouraging field work and soil samples at its Humboldt Range project in the U.S.

Sandfire was the newsmaker in the copper sector with final government approval received for its Motheo development in Botswana. The new mine will supersede the depleting DeGrussa mine in WA.

Investors gave Sandfire’s news a cool reception, lifting the stock by a modest 10c to $6.79, whereas analysts at Macquarie got quite excited, using the Motheo green light as a reason to hang a buy tip and a $10 price target on the stock.

Battery metal stocks generally moved up but not without controversy as two of the really big names in global banking exchanged differing valuations of IGO.

Goldman Sachs enthused about IGO (the former Independence Group), which added 36c this week to $8.31, but with Goldman tipping a price of $9.30. Morgan Stanly disagreed telling clients to sell IGO because it’s heading for $6.40, though later in the week it issued a second report to contest what it called “pushback” against its conservative view.

Most other stocks exposed to the battery metal theme moved up. Pilbara Minerals touched an all-time high of $1.55 before easing to $1.53 for a gain of 5c and ioneer rose by 3.3c to 38c after securing a deal with a battery market for lithium from its Rhyolite Ridge project in the U.S.

Other news events this week and market moves of interest (up and down) included:

  • Macarthur Minerals adding 5c to 49c after reporting that it had signed a preliminary rail haulage deal with Pacific National for ore from its Lake Giles project in WA to the south coast port of Esperance.
  • BCI Minerals said it had won government environmental approval for its Mardie salt and potash project in WA’s north-west. On the market, the stock moved 2c higher to 57c.
  • Highfield Resources lost 10c t0 71c after announcing that it had been awarded a mining concession for the Muga potash project in Spain.
  • Liontown Resources added 7c to 88c after Macquarie Bank published an upbeat assessment of the stock, describing its Kathleen Valley lithium project as being of “strategically significant scale”. The bank reckons Liontown is heading for $1.05.
  • Jervois Mining raised $US100 million for construction of its Idaho cobalt project in the U.S. The company’s shares eased back by 3c to 56c.
  • Mincor added 2.5c to $1.05 after receiving a buy recommendation from Bell Potter which reckons the nickel developer will rise to $1.35.
  • Centaurus reported a record nickel intersection of 56.1m at 2.05% nickel at its Jaguar project in Brazil, including 17.6m at 4.86% nickel. The stock added 5c to 83c, and
  • Poseidon rose by 0.2c to 9c after reporting a high-grade drill result from its Golden Swan project in WA with a best hit of 13.79% nickel over 2.1m.

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