Rising rates put renewed investor focus on cash generation and dividends

Interest rates rose in the U.S. and Australia this week as expected, but so did the stock market, gold, copper, and most other commodities, which was unexpected, and perhaps an interesting case of premature enthusiasm.
6th May 2022
Tim Treadgold

What could have started with a period of excess caution in the lead up to the rate rises was quickly replaced by a global exhalation of “phew, that wasn’t so bad,” without many people looking a little further down the track at a river of rate rises to Christmas and beyond.

Investor seemed to forget that interest rates (also known as the cost of money) affect all asset values, including property. Rates really are the glacier of financial markets, slow, powerful, and unstoppable – crushing everything in their path, even the biggest boulders which are reduced to a moraine of waste rock.

Whatever the cause of this week’s roller-coaster market ride, down early and up later, there was one company which best told the story, the Canadian mining major Barrick Gold, which was a star performer despite delivering bad March quarter news.

Barrick’s 4% share price rise to $US23.19 followed the company’s 20% fall in net profit for the quarter on lower gold and copper output. But offsetting everything was what investors crave - cash in the form of an increased dividend.

Cash could become the crucial ingredient in the market over the next 12-to-24 months with dividend-paying Australian mining companies hunted for their dividends flowing from sky-high commodity prices.

Whoever said “cash is king” got that one right, especially if the cash helps service debts which will become steadily more expensive as the year rolls on and rates grind higher.

In Barrick’s case, even a weak quarterly result couldn’t mask strong earnings which left the company with a $US5.9 billion cash pile that is being used to the fund a new dividend policy based on the amount of cash the company has accrued.

If Barrick’s share price boost was a surprise, then the reaction of the investors to a 0.5% increase in official U.S. interest rates was a bigger surprise because the popular view before the well-telegraphed increase was that it would trigger a market sell-off.

Investors, however, were primed for the interest rate hike and seem willing to cop more as the U.S. central bank leads a global fight against inflation which saw Australia’s Reserve Bank chime in with a modest 0.25% increase during the week.

Overall, the Australian market had a topsy-turvy week, down 1.4% as measured by the all ordinaries index but trending up after a sluggish start.

Energy, in its many forms, was the top sector thanks to a $US7 a barrel rise in the oil price courtesy of ongoing troubles in Russia and Ukraine, topped by what looks like a determined effort by the European Union to stop buying Russian oil.

Local oil and gas stocks did well out of the latest rise in the price of Brent quality crude oil to $US110/bbl. Woodside added 40c to $31.71, the stock is now up $9, or 40% since the start of the year). Santos added 17c to $8.19, and WA-focussed gas explorer, Strike Energy rose by 1.3c to 35c after reporting encouraging flows from its Walyering well near Dongara.

The higher oil price worked its way into the lithium sector despite an ominous forecast at a Sydney mining conference during the week when Harry Fisher from the respected CRU commodities group said the lithium price would eventually drop by 70% from this year’s peak as supply rose.

Most local lithium-exposed stocks ignored that price crash prediction because its too far into the future to effect today’s share prices.

Allkem, for example, added 50c to $12.43 easily outstripping the latest price forecast of $11.60 from Morgan Stanley. Pilbara Minerals eased back by 3.5c to $2.80 even as Macquarie Bank tipped a future price of $4, while Mineral Resources lost $2.77 (4.7%) to $$55.97, possibly out of concern for its high-cost iron ore operations.

Interest in the lithium business of Mineral Resources is expected to grow after a mid-week announcement that it is looking at a lithium hydroxide processing circuit at its co-owned Wodgina project in WA, news that helped Macquarie upgrade its future price for the stock to a whopping $85, up 51% on last sales.

At the finished end of the lithium story there was extraordinary news from Volkswagen, the world’s second biggest maker of electric vehicles (EVs) when it hung a “sold out” sign on the front door of its Wolfsburg head office in Germany.

VW said it sold 99,000 EVs in the first three months of the year and was being forced to scale back production as global supply chain blockages inhibited the flow of raw materials.

Gold, always an Australian favourite, stormed back over the $US1900 an ounce mark after a difficult start to the week as investors considered what the 0.5% U.S. interest rate hike meant for the metal.

In two words, the answer to that question is “safe haven”, a role gold plays superbly when market fundamentals are hard to read.

Gold, however, is never a one-way street because of its dual personality as a commodity and currency wrapped into a single element, with proof of that observation lying in the falling Australian dollar gold price caused by a rising local currency.

Up $US50/oz on the international market, gold was down $A3/oz in Australia as the Aussie dollar moved up from US70 cents to US72c.

Local gold leaders, after a poor start when the gold price dipped as low as $US1850/oz, regained much of their ground as buyers returned to the sector.

Gold moves included Evolution, down 12c over the week to $3.98 but up 12c yesterday. Newcrest, down 63c over the week at $26.69 but up 50c yesterday and Northern Star, down 17c over the week but up 24c yesterday to $9.70 while Sydney investment bank Barrenjoey reckons the stock is heading back up to $13.

The story of down early, up later, was repeated across the gold sector with gold analysts such as those at Canaccord Genuity advising clients to stay the course with explorers and project developers. An analysis of small gold stocks tipped big possible gains ahead, such as these:

  • Bellevue Gold, which reported an increased gold resource at its namesake project in WA, added 5c over the week to 98c with Canaccord forecasting a future price of $1.60.
  • De Grey Mining, which reported encouraging drill results from its Charity Well and Geemas prospects, slipped 2c lower to $1.19 but could be on the way to $2.15, according to Canaccord.
  • Auteco, which reported high grade gold assays from the latest drilling at its Pickle Crow project in Canada, added 0.2c to 7.3c, but could be heading to 26c according to Canaccord.

Other news and market moves of interest this week included:

  • Recently listed Belararox added 8.5c to 84c after reporting visible copper and zinc sulphides from a depth of 19 metres in the latest round of drilling at its Belara project in NSW.
  • Champion Iron said it had made the first shipment from the second phase expansion of its Bloom Lake project in Canada. On the market, the stock added 16c to $7.45 while local iron ore leader, Fortescue Metals slipped $1.03 to $20.75.
  • S2 Resources added 1c to 17c as interest grows in the start of a drilling program at its Fosterville project in Victoria. The company’s tenement was the subject of a competitive tendering process with intense interest thanks to its proximity to the prolific Fosterville mine on its western boundary.
  • Altamin added 1.5c to 10c after receiving a takeover bid priced at 9.5c from interests of Melbourne’s Smorgon family, and
  • OM Holdings added 2c to 89c after reporting that it has received a $US120 million offer to buy the remaining 25% stake in the company’s Malaysian metal smelter.

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