Seeds of next super-cycle now being sown, says Goldman Sachs

27th October 2017
Tim Treadgold

Explorers and mine developers rushed to fill their Christmas stockings with cash this week as investor enthusiasm for resources continued to grow, perhaps aided by the return of a widely discredited term: “super-cycle”.

Whether the mining sector is on the verge of a re-run of the super-cycle that drove commodity and share prices through the roof a decade ago is a great debating topic, except it might be more serious than that.

While most investors have mixed memories of the super-cycle that ran for a decade from 2002-to-2012, few would have expected a return bout. But there is at least one leading investment bank warming to the idea of a second super-cycle: Goldman Sachs.

Widely-recognised for its astute reading of markets, Goldman Sachs’ report, titled “Underspending their way to the next super-cycle”, recognises the importance of two events:

  • China’s crack-down on environmental pollution and,
  • Western-world mining companies opting to pay dividends to shareholders rather than explore and develop new mines.

The net result, like the original super-cycle, is a mismatch between supply and demand, albeit with a variation.

This time around, according to Goldman Sachs, it will be changes to China’s internal supply of raw materials, rather than demand, which acts as one price driver, while mining companies which were slow to recognise the size of China’s appetite in the first super-cycle are now proving to be slow in recognising the change in supply dynamics.

As far as a theory which could affect mineral prices for the next 10 years, what Goldman Sachs is proposing has to be treated as extremely positive and could be enough to trigger a long-term surge in share prices.

The China factor, which has flipped from demand shortage to supply shortage, is a direct result of the country’s most polluting mines and mineral processing plants being forced to close, driving customers into the international market place.

Rising prices for rare earths, alumina, zinc and even iron ore can be traced to China’s international hunt for supplies to replace mothballed domestic production.

Meanwhile, big mining companies such as BHP and Rio Tinto are focussed more on rewarding shareholders and beating back activist investors by boosting dividends than in exploring and developing.

It’s the combination of the two drivers which underpins the Goldman Sachs thesis that mining companies are underspending their way into the next super cycle.

While investors, especially those running institutional portfolios and hedge funds, were this week digesting the super-cycle re-run theory, it was a perfect week for smaller mining companies to dip into the market for a pre-Christmas cash top up with fund raisings that included:

  • Sheffield Resources raising $32 million in an underwritten placement for its Thunderbird titanium minerals project in WA.
  • Volte Resources looking for $30 million for its Banyu graphite project in Tanzania.
  • Piedmont Lithium, the former WCP Resources, seeking $16 million to fund a namesake lithium project in the US and,
  • Celsius Resources raising $3.9 million for its Opuwo cobalt project in Namibia, Sovereign Metals rising $6.5 million through an institutional placement to fund work on its Malingunde graphite project in Malawi, and Arafura Resources attracting an additional $1.6 million from a share placement that tops up an earlier raising.

Apart from providing funds to accelerate exploration and development work, the ready availability of the additional capital demonstrates the high-degree of confidence in the small end of the mining sector – neatly fitting the Goldman Sachs hypothesis about a looming mineral-supply shortfall as big miners focus on returning capital.

Another theme of the past week was evidence of the rush into the Pilbara nugget-gold hunt turning into a stampede as drilling starts to test the South African conglomerate-ore look-alike theory.

Nugget-gold events this week featured a flood of new arrivals all looking for the gold-bearing conglomerate host rock that is said to bear a resemblance to the rocks of the Witwatersrand region of South Africa, including the arrival of:

  • West Wits Mining, a company which took its name from the Witwatersrand but which has now added tenements in the Pilbara region of WA, using the acquisition of a prospect called Mt Cecelia to raise $1.75 million in fresh capital. Its shares rose by 0.3c to 2c.
  • Kairos Minerals, a prominent Pilbara player, topping up its bank account with a fresh $7 million. Its shares rose by 0.6c to 6.3c.
  • Elysium Resources making its move into the Pilbara through a deal to acquire Hardey Resources which has a portfolio of prospective nugget-gold tenements. Its shares rose by 0.5c to 1.3c
  • Arum Resources pegging the Sheela gold prospect west of the iron ore mining centre of Paraburdoo in the Pilbara. Its shares rose by 0.1c to 1.5c, and
  • Sayona Mining announcing that it is about the start field exploration at its Deep Well prospect in the Pilbara. Its shares rose by 0.2c to 1.8c.

Pilbara gold wasn’t the only staring act on the market with the battery metals sector and a number of gold and copper stocks performing well, along with a zinc favourite earning a big buy tip.

Those events, starting with the zinc event, included:

  • New Century Zinc getting a tick from Credit Suisse, an investment bank, which said the stock, currently trading at $1.49 could rise to $2.40 over the next 12-months as work on a tailings dam at the mothballed Century mine gets underway.
  • Great Boulder Resources rose to record high of 26c after reporting thick sulphide mineralisation in drill holes at its Mt Venn copper project in WA including visible chalcopyrite, a high-grade ore of copper.
  • Medusa Mining returned from the sin bin reserved for mining companies operating in the Philippines after reporting strong gold production in the September quarter from its Co-O mine at a very attractive cost of $US539 an ounce. On the market Medusa added 10c to 37c, though it did trade as high as $8.35 in 2011.
  • Aeon Metals added 5c to 20c after reporting bonanza copper and cobalt grades from drilling at its Walford Creek project in Queensland with a best hit of 2.01% copper over 9 metres, with an associated 0.24% cobalt and 25 grams of silver per tonne, and
  • AVZ Minerals hit a fresh 12-month high of 22c before easing back to 21.7c after reporting positive mineral “characterisation” at its Manono lithium project in the Democratic Republic of Congo.

 

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