Running of the metal bulls well underway, with records being trampled across the board

It doesn’t get much better for investors in Australian resources as surging global demand drives prices to multi-year highs with the promise of more to come as confidence rises in vaccines taming the spread of Covid-19.
12th February 2021
Tim Treadgold

It doesn’t get much better for investors in Australian resources as surging global demand drives prices to multi-year highs with the promise of more to come as confidence rises in vaccines taming the spread of Covid-19.

Dr Copper, the metal used in almost everything and a widely quoted prophet of future economic growth, is leading the way, rising to a nine-year high of $US3.77 a pound. Platinum, the forgotten precious metal, is trading at a six year high of $US1215 an ounce.

Most other commodities, bar gold, are also trading at multi-year highs, especially battery metals.

Across the spectrum of commodities, there are records being broken as the once-in-a-lifetime bull market predicted last month by Denmark’s Saxo Bank picks up speed.

For anyone who missed what Saxo’s chief investment officer, Steen Jakobsen, said in The Weekly Wrap two weeks ago when predicting that the world was entering its seventh great commodity bull market in the past 200 years, here’s a refresher:

“A commodity bull market is part and parcel of a new secular inflationary regime, a development few investors alive recall during their professional careers, as the last one ended about 40 years ago.”

If Jakobsen, and other bankers who have subsequently jumped on the bull market bandwagon are right, then 2021 could be the start of a boom to rival anything ever experienced in Australian resources.

China and Brazil started the bull rolling early last year with a combination of post-lockdown stimulus growth and iron ore supply cuts which sent the price of the steel-making material into orbit, where it has stayed, ensuring that next week’s profit reports from the big Australian producers will be spectacular – as will dividends.

Iron ore sector leader Rio Tinto led the way up this week with a share price rise of $5.37 to $119.30. BHP followed with a rise of $1.76 to $43.56, while Fortescue put on 65c to $23.90.

Interesting as the share prices moved might be, the far more interesting number in iron ore is $US70 a tonne because that, according to analysts at the investment bank J.P. Morgan, is the iron ore price “imputed” in current producer share prices.

In fact, it’s less than $US70/t, with BHP’s imputed iron ore price said to be $US57/t, Rio Tinto’s imputed price is $US61/t and Fortescue’s price is $US69/t.

Even the drover’s dog knows that with iron ore trading at $US163.30/t a remarkable value gap has opened up. If you’re a pessimist, you might expect the gap to close soon, though that’s been the popular view among some analysts for some time and it has consistently wrong.

A reason for being an optimist is that the outlook is no longer China-dominated.

Today, it’s the rest of the world chiming in with its surge in demand for commodities, aided by vast stimulus programs and ultra-low interest rates which are force-feeding commodity-heavy infrastructure building programs and driving investors into commodities partly because of FOMO (fear of missing out) and partly because of FOI (fear of inflation).

Even the U.S., sidelined for four years, is charging back into action as its whopping stimulus program and increasing rate of Covid-19 inoculations wakes the world’s biggest economy.

Capping off the commodity boom is a sea-change in the world’s vehicle fleet as electric vehicle (EV) demand soars, taking the full suite of battery metals with it, led by lithium but with graphite starting its move up.

Hugely impressive sales data highlights the advent of the EV era with sales in Europe doubling to 1.3 million in 2020 as overall revenue from battery metals used in new vehicles rockets up to $US2.6 billion.

Macquarie Bank said during the week that it expected EV sales to grow by another 50% this year, underpinning demand for lithium, nickel, graphite and cobalt.

Morgan Stanley noted in the latest edition of its lithium price tracker that lithium carbonate in China had moved back above $US10,000 a tonne for the first time in two years.

Ken Brinsden, chief executive of Pilbara Minerals, said during the week that 2021 would be a pivotal year for lithium. “The market has well and truly turned the corner,” he said, a remark which was followed by a “best of breed” comment from Credit Suisse in its look at lithium miners.

Graphite, an overlooked but key player in the battery business, regained some of its lost limelight as emerging producers such as Talga and Magnis locked away big capital raisings with another potential leader, EcoGraf, preparing a raising to capitalise on its powerful share price run from 18c to $1 over the past four weeks.

Talga added 12c this week to trade up to $1.60 (it was 18c in March last year) while BlackEarth Minerals more than doubled from 10c to 21c after reporting a graphite supply deal with a German distributor of the mineral.

Robert Friedland, who made his first billion dollars out of nickel when he sold the Voisey’s Bay discovery in the last boom, was back in action this week, describing the EV revolution as bigger than the “supercycle” triggered by the start of China’s industrial awakening 20 years ago.

“We’re not even at the beginning,” Friedland said, adding that the cycle unfolding today was all about the greening of global industry, which will require huge volumes of metal to feed a fast-growing battery industry.

Gina Rinehart, Australia’s richest woman who made her fortune from iron ore, joined the EV rush by taking a cornerstone placement in an emerging European lithium producer, Vulcan Energy. Her son, John Hancock, is also a major shareholder in Vulcan.

A stock market star since late last year, Vulcan this week ran out of puff, slipping by $2.15 (23%) to $7.38 but largely thanks to a whopping $120 million capital raising. The stock was trading at $1.10 three months ago.

Another capital raising which speaks loudly about investor enthusiasm for the resources sector is a $150 million share issue by the specialist drilling contractor DDH1 Group, which is heading for an ASX listing backed by some of the big names in banking, including Macquarie, UBS and Bell Potter.

Gold, a favourite of many investors over the past two years, risks being left behind as the global economy picks up speed, but the yellow metal does have a trick up its sleeve, the prospect of an outbreak of inflation as widespread financial stimulus threatens to debase fiat currencies.

A whiff of inflation concern could be seen in the gold price during the week as it recovered lost ground after last week’s dip below $US1800 an ounce to now trade around $US1839/oz.

Most gold producers firmed with the underlying price of the metal. Evolution added 13c to $4.80. Newcrest put on $1.35 to $26.54 after a solid December half year profit, and Northern Star rose by 50c to $12.34 after reporting a record half-year profit with UBS forecasting a target price of $14.20 but adding that accounting charges would “mask” in the short term the benefits of merging with Saracen.

Other newsworthy events and market moves this week included:

  • Deep Yellow led the way in a slowly revitalising uranium sector with a rise of 14c to 82c after reporting the start of a definitive feasibility study into the Tumas uranium project in Namibia.

 

  • Firefinch added 6c to 26c after reporting an indicated and inferred resource of 2.2 million ounces of gold in its recently acquired Morila gold project in Mali.

 

  • Matador Mining reported encouraging drill results from its Cape Ray project in Canada with a best hit of 10.5 metres at 2.4 grams of gold a tonne from a depth of 59m. On the market, the stock added 3c to 36c while Canaccord said the target share price was 80c.

 

  • Orion Minerals traded up to a 12-month high of 4c with a 1c gain this week after reporting a maiden resource at its Okiep copper project in South Africa, and

 

  • Cyprium Metals was steady at 24c after announcing a $90 million deal to buy the Paterson Province copper interests of Metals X, including the troubled Nifty mine.

 

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