Shaken by the Covid spread, investors brace for US election volatility

Virus 1. Rest of the World 0. That’s the score on the first of two mega-issues which drove markets lower this week with virus gloom magnified by the uncertainty ahead of Tuesday’s U.S. Presidential election.
30th October 2020
Tim Treadgold

Virus 1. Rest of the World 0.

That’s the score on the first of two mega-issues which drove markets lower this week with virus gloom magnified by the uncertainty ahead of Tuesday’s U.S. Presidential election.

Australia, which has largely dodged the latest outbreak of Covid-19 that is restricting mobility in Europe and the U.S., did not evade the effects of international market turmoil, but the sell-off here was less severe and more of a correction than a crash.

Despite the Australian market overall (as measured by the all ordinaries index) losing 3% over the course of the week, the fall was less than half the 6.5% drop in the Dow Jones Industrial Average on the New York Stock Exchange.

Australian mining and gold stocks were hit harder than the overall market because of their exposure to international markets. The all minerals index lost 4.6%, as did the gold index as the bullion price was sideswiped by traders raising quick cash to cover losses elsewhere.

Leading local gold producers performed relatively well despite a $US22 an ounce fall in the gold price over the week to $US1881/oz. Evolution, which released a solid September quarter production report, eased back by 9c to $5.54 while Northern Star was 96c weaker at $14.86.

Encouragingly, amid a sea of red ink, there were pockets of green, not many, but enough to show that some, less panicked investors used the correction to top up their portfolios.

Good exploration news was a key factor in the stocks which made headway but there also seemed to be recognition in Australia that the two big negatives, the virus and the U.S. election, have built-in “worst by” dates – the virus will eventually be contained (one way or the other) and the election result should be known next week, barring unforeseen events.

Meanwhile, in China and the rest of Asia, business remains relatively unaffected and while that might not fully compensate for the bad news out of Europe and the U.S., it is a reason to see the latest setback on financial and commodity markets as a temporary.

Interesting developments which might influence stock-market activity next week include a promising report by Citi, an investment bank, on zinc which it regards as the metal most likely to do best next year, outperforming copper in the short term.

Morgan Stanley echoed Citi’s optimism about ongoing strong Chinese demand for minerals and metals, driven by the world’s best economic growth rates which will underpin demand for basic raw materials, with copper Morgan Stanley’s preference despite the effect of Covid-19.

“Our economists’ forecast of a V-shaped recovery is intact, and a weakening U.S. dollar and inflation expectations will continue to feed into buoyant commodity markets through 2021,” Morgan Stanley said.

Companies exposed to battery metals held up well despite the collapse of Altura Lithium, which had struggled all year with a heavy debt load.

A deal to sell Altura’s assets to its neighbour, Pilbara Minerals, seems the logical outcome of the situation given the close proximity of assets, a view seemingly shared by investors given the modest 1c fall in Pilbara’s share price to 39c over the week.

Galaxy, another local lithium producer riding out a tough market, slipped 4c lower to $1.31.

Iron ore miners were hit by profit takers concerned about the prospect of a price correction when Chinese steel production slows during the northern winter, though Macquarie Bank reckons profit margins in the overall iron and steel complex (miners plus mills) will remain elevated.

Macquarie retains buy recommendations on all Australian iron ore producers with Fortescue expected to shrug off its recent slide to around $16.40 with a bounce back to $19.40.

Fortescue’s quarterly production report, one of several hundred filed at the ASX this week, seemed to justify Macquarie’s optimism, with production up 5% at a record 44.3 million tonnes for the three months to the end of September with costs down 2% to $US12.74 a tonne.

Citi’s optimistic view of the zinc market was echoed in the latest deal by copper miner Sandfire, which reported that it negotiated a deal to buy 100% of the Endeavour zinc mine near Cobar in NSW.

The prospective addition of zinc to Sandfire’s portfolio couldn’t save the stock from being caught up in the overall market decline. It shed 23c (5%) to $4.28 but was showing signs of a strong recovery in Thursday’s trade.

Best market reaction to exploration and project development work came from:

  • E2 Metals, which rocketed 52c (225%) to 75c after reporting spectacular gold assays from drilling at the Mia prospect in Argentina with a best hit of 18 metres at 47 grams a tonne from a depth of 66m.
  • Closer to home, Dampier Gold reported a 24m intersection grading 6.4g/t from a depth of 28m at its Paradigm East project north of Kalgoorlie in WA. On the market, Dampier added 1c to 7c.
  • Wiluna Mining rose by 5c to $1.76 after reporting encouraging gold assays from the latest drilling as its namesake project in WA with a best intersection of 10.84m at 29.39g/t. At one stage before the market corrected Wiluna shares were trading at $1.85, and
  • Adriatic Metals reported that it had negotiated a $US28 million financing package for ongoing work at its Vares polymetallic project in Bosnia, a move which helped list the company’s share price by 7c to $2.14.

New listings were another feature of this week’s market, with most holding up well given the negative background noise.

Megado, which is exploring in Ethiopia, opened at 26c for a modest gain on the new shares issue price of 20c, before slipping to 23c. Coda, which is exploring for copper in South Australia, saw its 30c shares start trading at 44c before fading to 42c.

Other newsworthy and market moving events (generally down) this week included:

  • RareX reported high grade niobium and rare earth grades from the latest drilling at its Cummins Range project in WA, including a 70m hit grading 5.35% total rare earth oxides and 0.64% niobium. On the market, the stock slipped 1c lower to 14c.
  • Stavely Minerals lost 6c to 68c despite reporting its biggest hit so far at the Cayley Lode at the Thursday’s Gossan project in Victoria, a whopping 144m sector assaying 1.04% copper starting at 35m.
  • Paladin Energy released an upbeat September quarter report in which it forecast a uranium price recovery next year. On the market, the stock held on to a price of 12c, but Shaw and Partners reckon its heading for 26c.
  • Tietto lost 9c to 46c even though it reported a 40% increase to three million ounces in the gold resource at its Abujar in Ivory Coast, and
  • Kingwest reported high grade assays from shallow drilling at its Menzies gold project in WA with a best hit of 107g/t over 1m from a depth of 88m.

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