Supply squeezes and better-than-expected demand provide first green shoots for metal prices

It’s a rare day when the closure, however temporary, of copper mines in Panama and Zambia means anything to Australian investors...
9th April 2020
Tim Treadgold

It’s a rare day when the closure, however temporary, of copper mines in Panama and Zambia means anything to Australian investors, but what happened in those countries this week is the latest example of how a supply cuts are helping support commodity and share prices.

Both closures, the Cobre mine in Panama and Mopani in Zambia, were caused by concern about coronavirus infections as well as the low copper price, adding to a theme of outages and shortages, especially in the uranium sector, explored in this column last week.

The significance of mine closures in keeping supply out of a market being buffeted by a rapid slide in demand was emphasised in the latest research from UBS, an investment bank, which estimates that outages have cut global copper supply by at least 15%, helping prevent a price slide to the 2008 lows reached during the global financial crisis.

More on what UBS had to say later, but first a look at a couple of local stock-market stars: Chalice Gold Mines and Legend Mining, with both doing something not seen for a while, hitting 12-month share-price highs.

Chalice, thanks to fresh drilling news from its Pyramid Hill gold project in Victoria, traded up its 12-month high of 61c on Monday, before easing to 56c. It was 22c at the start of January.

Legend, thanks to growing interest in its Fraser Range copper and nickel project in WA, traded up to 18c on Tuesday, before easing to 16c. It was 8c at the start of January.

It’s too early to be confident that those share-price highs and other green shoots are the start of a sustainable market and economic recovery, but it is encouraging that positive signs are emerging even as protective measures against the coronavirus strangle entire industries.

Transport (especially aviation), tourism, hospitality and banking top the corporate casualty list, just as copper, iron ore and gold show the beneficial effects of better-than-expected demand and a worse-than-expected squeeze on supply.

Dr Copper, the bellwether of commodities and the broader economy, is the best starting point for a look at a short pre-Easter trading week, rising by US10 cents over the past three days to $US2.28 a pound, the highest price since mid-March when coronavirus lockdowns started in earnest.

The latest copper price is also much higher than the low point reached in the 2008 global financial crisis when the metal dived to US$1.30/lb.

Zinc and aluminium are also well above their GFC lows with zinc aided by what UBS estimates to be 20% of supply loss through coronavirus mine closures, similar to the price-boosting production losses seen in iron ore last year.

A taste of growing Chinese commodity demand as it emerges from lockdowns was provided in comments from a senior Rio Tinto executive, Chris Salisbury, who said yesterday that a worrying rise in steel stockpiles in China had started to recede, a trend which should boost demand for iron ore.

Macquarie Bank added to the improving mood by noting that dividends from the big iron ore miners would be protected by the stronger-than-expected price.

ANZ Bank echoed Macquarie’s view in a report which said bulk commodities, such as iron ore, coal and manganese, appeared to be “relatively resilient as China recovers from the coronavirus pandemic and stimulus spending lifts demand”.

Gold, despite erratic price moves this week, continues to trend up, dragging silver, its sister metal, higher.

Of the two leading precious metals, silver has been the star over the past two weeks, rising from a 10-year low of $US12 an ounce in mid-March to reach $US15/oz, up 25% in less than a month, though still short of the $US18/oz earlier this year.

Specialty silver stock, Silver Mines, enjoyed the rising price for its primary metal, adding 1c to 8c after rushing out an update on its Bowdens project in NSW.

The silver price could be one of the more interesting metals to watch over the rest of 2020 because it has moved well beyond its long-term relationship with gold.

Last year, the gold-to-silver ratio was around 85 (85 ounces of silver equated to an ounce of gold). Today, the ratio is 110 – indicating that either the gold price should fall or silver should continue rising, which is the more likely event.

Gold might also start to show the benefits of a widely-anticipated return of inflation as a price driver, potentially reaching an annualised 10% next year as the effects of massive government stimulus programs flow into the broad measure of money.

An academic report co-authored by a leading London economist (and former Bank of England adviser) Charles Goodhart said that a high level of long-running inflation seemed a certainty because the latest burst of stimulus spending is taking the form of direct hand-outs to industry and consumers whereas post-GFC stimulus flowed largely into bank reserves and never hit the real economy.

This time, and you’ve all heard this before, it should be different with the return of inflation (rising real prices) in 2021 expected to mark a significant economic turning point, effectively ending a 40-year period of deflation (falling real prices).

If that theory is correct then gold is poised to deliver several strong years, as it did in the 1970s and early 80s after a painful period of very high inflation flowing off a series of oil-price shocks.

Overall, the short week saw a respectable upward trend, but with signs of confidence fading as the four-day Easter holiday got closer and investors put a padlock on their wallets.

News events and market moves of interest included:

  • Mineral Commodities made a rare appearance in the headlines after reporting that its Tormin titanium sands project in South Africa had the potential to be a world-class resource, a comment which saw the stock add 4c to 24c.


  • Kingston Resources continued to attract attention as work progresses at its Ewatinona pit on the PNG island is Misima with trenching revealing 22 metres at 3.9 grams of gold a tonne, and 44m at 1.18g/t. On the market, Kingston put on 2c to 14c.


  • Swick Mining said its drilling business had not been affected by coronavirus lockdowns which would enable to company to maintain dividend payments while also launching a share buy-back program, moves which lifted the stock by 2c to 12c.


  • Blackstone Minerals added 2c to 14c after reporting the successful raising of $6.8 million via a share placement at 17c with the new funds to be applied to its acquisition of a nickel and platinum group metals project in Vietnam.


  • Lotus Resources was in the news for a second week with an announcement that it had identified high-grade rare earths at its Kayelekera uranium mine in Malawi. On the market, Lotus rose by 1c to 4.6c. It was trading at 2c two weeks ago, and


  • Tribune Resources rose by 50c to $5.47 after the release of an enthusiastic report by RM Research which described the 36%-owned East Kundana gold project in WA as a cash cow. RM reckons the stock has a price target of $12.56.

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