Talk of commodities super-cycle flows into share prices, with copper and nickel buzz of the bourse

Copper up. Gold down. Those seemingly disconnected events are really part of the same trend that can be traced to accelerating global growth (more copper, please) which is helping lift official interest rates (less gold, thank you).
19th February 2021
Tim Treadgold

Copper up. Gold down. Those seemingly disconnected events are really part of the same trend that can be traced to accelerating global growth (more copper, please) which is helping lift official interest rates (less gold, thank you).

Whether what happened on financial and commodity markets this week can continue for the rest of 2021 is the question for investors to consider because if it does, then portfolio adjustments are required, if it hasn’t already happened.

Citi, a leading investment bank, is in no doubt that the rush into copper and other industrial metals such as nickel, will accelerate. It reckons copper is heading for $US10,000 a tonne ($US4.54 a pound) “sooner rather than later”.

If correct, and Citi has been singing the praises of copper for the past 12-months, then the metal could rise by another 18% from its latest $US8426/t, which is already an eight-year high and up 87% from the $US4510/t low of 10 months ago.

But there is something more important about copper reaching that magical $US10,000/t because at that price copper would be bumping against its all-time high of $US9800/t reached in the boom year of 2011.

In other words, the rise of copper is a powerful signal that a commodity supercycle has started and probably has a few years to run as governments continue to stimulate their economies after the Covid-19 pandemic and ultra-low interest rate settings are maintained.

Nickel too is heading back into record territory, though not as quickly as copper. Citi’s tip is for nickel to move above $US20,000/t later this year, before another surge of production from Indonesia knocks the price back to roughly where it is today at $US18,770/t.

On the stock market, the rising copper price could be seen in equity values with OZ Minerals up $2.43 (13%) to $21.91 and Sandfire Resources up 33c (6.5%) to $5.32.

The rising copper price is also starting to be reflected in support for the big two of Australian mining, BHP and Rio Tinto, which reported record half and full-year earnings early in the week thanks to the high iron ore price, but with analysts noting the increasingly positive impact of copper profits.

The high iron ore price was also reflected in a record half year for Fortescue Metals Group, though its performance was tarnished by a cost blow out at its Iron Bridge magnetite mine, which saw the stock post a relatively modest 92c share price rise to $24.96.

Fortescue was forced into the unusual position of having to explain the problems at the new project which cost a number of senior executives their jobs. Analysts saw the issue as a minor distraction, but RBC Capital Markets said it had doubts about the latest capital cost estimates. Macquarie Bank sees Fortescue recovering with the share price moving back up to $26.50.

Gold, as mentioned, was the odd man out in a commodity complex which continues to march higher thanks to hints of the U.S. possibly matching China for growth-rate champion in 2021.

The problem for gold, which fell this week by $US43 an ounce to an eight-month low of $US1783/oz, was the lure for investors of rising official U.S. interest rates, which saw the 10-year note rising to a 12-month high of 1.3% before easy fractionally and with the 30-year bond rising to 2.09%.

The falling gold price had the effect of an anesthetic on local gold leaders. Newcrest shares fall by $1.50 to $24.13. Evolution lost 39c to $4.23, and Northern Star dropped by $1.52 to $10.56.

Other significant events in a busy week included:

  • A rally in the rare earth sector after China played the embargo card, again. While it is only words so far, the threat of a Chinese ban on exports of rare earths, a trick it played a decade ago during a dispute with Japan, sent prices sharply higher. Local leader Lynas added $1.01 to an eight-year high of $6.04, down slightly on a peak of $6.16 reached on Wednesday.
  • Tin became the latest commodity to suffer a supply shortfall, perhaps setting the tone for other metals in 2021 as the supercycle strengthens. The price hit a nine-year high of $24,485 a ton on the London Metal Exchange but the more important number was 710 tonnes, Tuesday’s historically low reading of the LME tin stockpile, which points to a possible shortage of the important metal this year as demand rises for electronic circuit boards, where tin is used as a lead-free solder.
  • Lithium prices continue to move up, but so does supply as plans to re-open mothballed mines gather steam and a proposed new entrant, the Wesfarmers/SQM joint venture made a formal commitment to develop the Mt Holland mine in WA and its associated hydroxide processing plant near Perth. Pilbara Minerals continued its recovery, adding 11c to $1.07, though it did weaken after the Wesfarmers/SQM news.
  • Uranium had a mixed week with the price continuing to fall (down US25c to $US28.55/lb) but there are enough true believers in the nuclear fuel to see one of the more promising future producers, Deep Yellow, successfully raise $40.8 million in a share issue to fund ongoing work on its Tumas project in Namibia. The stock fell 14c to 72c but was still above the 65c issue price of the new shares.
  • Oil, a commodity slipping into the “almost forgotten” category occupied by coal, had a good week as the northern hemisphere (especially the U.S.) plunged back into the deep freeze (tell me again about global warming?). Brent-quality crude added $US2.50 a barrel, taking the price to a 12-month high of $US65.39/bbl. Woodside Petroleum led the local oil sector, adding 63c to $25.33. Santos put on 28c to $7.04.

Overall, the Australian market moved up by a modest 1.2% as measured by the all-ordinaries index. Mining stocks did better thanks to rising commodity prices with the metals and mining index up 5%, heavily influenced by BHP and Rio Tinto. The gold index, unsurprisingly, fell 7.8%.

Other newsworthy or market-moving developments included:

  • Cyprium, the ambitious miner which has become the latest owner of the ill-fated Nifty copper project in WA, added 5c to 27c after its executive director, Barry Cahill, told a conference in Fremantle that he was targeting annual production of 20,000 tonnes of copper for the next 20 years.
  • Infinity Lithium raised $15 million through a share issue priced at 19c to fund work on its San Jose project in Spain. On the market, the stock lost 5c to 20c.
  • Gascoyne almost swam against an outgoing gold tide with its price clinging to 52c thanks to solid exploration results from its Tanqueray prospect near the Dalgaranga processing plant. The best assay was 9 metres at 7 grams a tonne from a depth of 138m.
  • Bellevue Gold reported strong profit potential from stage one of its namesake gold project in WA with an initial planned mine life of 7.4 years and life of mine production of 151,000oz at $1079/oz. On the market, the stock lost 24c to 76c.
  • Northern Minerals and Ionic Rare Earths cashed in on the revitalised interest in rare earths with capital raisings of $20 million and $12 million respectively. Both stocks held their ground at 5.3c and 4.8c.
  • Centaurus Metals added 6c to 86c as interest grows in what is expected to be a positive scoping study into its Jaguar nickel project in Brazil.
  • Silver Mines attracted strong investor support with a $30 million capital raising priced at 22c a share with funds earmarked for work on its Bowdens silver project in NSW. On the market the stock lost 1c to 25c, and
  • Stellar Resources enjoyed a modest share price bump of 0.3c to 3c after announcing a restart of exploration at the high-grade Heemskirk project in Tasmania.

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