Sell-off a mere bump on a long, profitable road for commodities investors

Separating reality from speculative share trading has probably never been harder but if you look through the dust stirred up by day-traders and this week’s stock market correction you will see the start of the world’s seventh great resources boom.
28th January 2021
Tim Treadgold

Separating reality from speculative share trading has probably never been harder but if you look through the dust stirred up by day-traders and this week’s stock market correction you will see the start of the world’s seventh great resources boom.

Recent events highlight those points because on one hand there was a feeding frenzy in the U.S. of online traders using mobile phone apps to stir the market, while on the other hand there was growing confidence that supply shortages will drive commodities higher for at least the next decade.

On the downside, there’s been the latest boom-and-bust of Bitcoin, followed by potentially more serious market manipulation by traders acting in concert through social media networks such as Reddit to drive share prices up and down.

One of the “games” being played in the U.S. involves small retail traders organising themselves through social media to push up the share prices of companies which are the subject of short bets by hedge funds, forcing the hedge fund to buy or risk huge losses.

U.S. and European regulators say they are aware of the practice which sees traders swarming over a stock triggering a “flash rally” such as that in a U.S. computer game retailer called GameStop which rose 700% this week to be up 7000% since last August.

The speculative rush, fuelled by ultra-low interest rates, and the sharing of stock tips which lead to co-ordinated buying (and selling), cannot be ignored because it is laying the groundwork for a deeper correction than that seen this week, which lopped 3% off the all ordinaries index and 6.5% off the ASX metals index.

Gold stocks were also caught in the sell-off, which rubbed 6% off the ASX gold index even through the gold price was only 1% weaker at $US1836 an ounce.

Hints of an overdue correction in stock markets can be seen everywhere, not least in the creation by Goldman Sachs of a special index which tracks overheated stocks which are not yet making profits, such as big-name tech-darlings, Snap, Uber and Spotify.

Amazingly, the Goldman Sachs Non-Profitable Technology Index has risen by 379% over the past 10-months. No profits, just a world-beating share price.

Meanwhile, in the real world of commodity supply and demand, it’s worth considering the view of analysts at Denmark’s Saxo Bank, who see the next 20 years as a time of the world’s seventh great commodity bull market.

“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,” said Steen Jakobsen, Saxo’s chief investment officer.

The last great commodity boom is remembered by some people. It was happening when I started writing about Australia’s resources sector in the late 1960s, but for the earlier events you have to go back a lot further.

Saxo’s list starts with the boom which started in 1812, the final stages of the Napoleonic wars, followed by the booms after U.S. Civil War, first World War, second World War, during the Cold War and the latest, the Chinese industrial revolution.

What makes the Saxo analysts confident that a seventh boom has started is the combination of strong demand courtesy of synchronised global growth and government stimulus (much like post-war recovery in some of the previous booms), and supply shortages caused by decades-long under-investment in new mines and processing plants.

And then there’s the new factor at play, increased demand for commodities used in fast-developing technologies such as electric cars, which could consume the lion’s share of some metals.

Tesla, for example, has a target of making 20 million cars a year but to achieve that a single car company would consume 94% of the world’s current output of graphite, 31% of the world’s nickel and 165% of the world’s lithium annual supply.

It’s the outlook of rising demand and tight supply which makes it easier to see past the slide on global markets this week. This saw top stocks such as BHP retreat by 5% while Fortescue Metals fell back by 10% despite strong first half iron ore production and the promise of a bumper dividend accompanying next month’s mid-year report.

Other iron ore stocks were caught in the backdraft of a market being buffeted by a slowdown in Chinese steel production after last year’s post-pandemic surge.

Mineral Resources fell by $2.58 (7%) over the week, which was interrupted by the Australia Day holiday, with $1.85 (4.9%) of the fall occurring yesterday (Thursday). Mt Gibson was 8c weaker at 88c and newcomer Fenix shed 3c to 23c.

Investment banks, which have been warning for some time of an iron ore fall, freshened up their alerts. UBS repeated its iron ore average price forecast for 2021 of $US110 a tonne, down $US65/t on latest trades.

Battery metal stocks couldn’t dodge the sell-off despite a strong price for lithium in China. Pilbara Minerals lost 36c to $1.09 though the fall simply took the stock back to where it was three weeks ago.

Galaxy Resources fell 42c to $2.84 and Orocobre was 50c weaker at $5.45 despite a strong December quarter production report. Citi reckons Orocobre is a buy with a price target of $6.75.

Gold stocks, as mentioned earlier, retreated faster than the gold price. Northern Star lost 80c to $12.80. St Barbara was 20c weaker at $2.19 while OceanaGold performed relatively well with a fall of just 9c to $2.29, aided by strong exploration results from its WKP project in New Zealand including a 48.9 metre drill intersection assaying 22.8 grams of gold a tonne.

Palladium and platinum exploration star Chalice Mining was buffeted by the exit of speculative traders even as it reported four new high-grade zones at its Julimar project in WA. The stock dropped by 13% to $4.16.

Copper and nickel couldn’t escape the sell off, dragging down local producers. The price of copper fell by US10c to $3.54 a pound, which is where it was just before Christmas. Nickel lost US18c to $8.06/lb.

Most copper and nickel stocks lost ground over the week. OZ Minerals was down $1.86 at $18.37 while Sandfire shed 44c to $4.70. Mincor held up reasonably well among the nickel stocks with a fall of 14c to $1.01 while Western Areas was off 29c at $2.81.

Diamonds, a commodity barely mentioned in the past 12-months, attracted attention thanks to reports of stronger-than-expected sales by the industry leader, De Beers.

The reaction to the positive diamond news has been significant. Gem Diamonds on the London market is up from 34 pence in November to 51p. Petra is up from 1.35p to 1.64p, and Canadian listed Lucara has risen from C56 cents to C80c since the start of the year. Locally, Lucapa has moved up from a pre-Christmas price of 5c to 6.6c

Other news and market moves, included:

  • Sayona Mining swimming against the outgoing tide to add 1c to 5c after reporting plans for a fresh drilling campaign at its Authier and Tansim lithium projects in Canada. The stock was trading at 1c three weeks ago.
  • Newfield Resources outperformed most of the market by remaining steady at 28c after reporting an increase to 8.3 million carats in its diamond resource at the Tongo project in Sierra Leone.
  • Firefly Resources reported significant gold intersections from drilling at its Yalgoo project in WA including 3m at 3.6g/t from a depth of 10m. On the market, the stock slipped 2c lower to 16c.
  • Silver Mines lost 1c to 21c despite announcing excellent drilling results from its Bowdens silver project in NSW, including 26.1m at 252 grams a tonne of silver from a depth of 229m, and
  • Predictive Discovery reported wide gold intersections from drilling at its Bankan project in Guinea with a best hit of 88m at 1.8g/t, good enough to lift the stock by 0.4c to 6.4c.

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