Twiggy’s intervention in Western Areas play puts Mincor, Poseidon in crosshairs

Red ink ruled the stock market this week, as every investor knows, but there was a solitary flash of green which could be a pointer to what comes after the volatile shake-out underway across all financial sectors as central banks crank up interest rates.
28th January 2022
Tim Treadgold

Western Areas, a WA-focused nickel miner, added 11.5c to $3.55 thanks to the intervention of iron ore billionaire Andrew Forrest in what looked like a seamless and friendly merger with fellow nickel producer, IGO.

Forrest, who is keen to rebuild his nickel credentials after the failure of Anaconda Nickel 20 years ago, demonstrated his willingness to pay a high price for nickel assets when late last year he outbid BHP in a battle for Canadian nickel hopeful Noront Resources.

It is possible that he will play the same game with Western Areas, forcing IGO to lift its offer or acquire the target himself as he did in Canada, before proceeding to consolidate a number of other small nickel stocks which are riding high on a strong nickel price.

In theory, that puts Poseidon, Mincor and Panoramic in play if Forrest continues to splash his surplus iron ore cash on small nickels to create a business of international significance.

But behind the developing battle for Western Areas can be found two bigger themes which are starting to unfold.

  • Firstly, that corporate action including M&A (mergers and acquisitions) is likely to become a much more important market mover as the asset-value shake-out gathers pace and,
  • Secondly, that the CLANC thematic (copper, lithium, aluminium, nickel and cobalt) has a long way to run at a time of energy transition, displacing the hot sector of the past few years, iron ore.

Overall, what happened on the Australian stock market this week was flagged in the previous edition of Prospector’s Diary when it was pointed out that the most important event on global markets was the shift in Germany’s 10-year bond rate from negative to positive for the first time in three years.

This week it was the turn of the Australian 10-year bond to make waves, rising above 2% for the first time in three years.

There’s a lot more to come with interest rate news as central banks, especially the U.S. Federal Reserve, launch a full-bodied attack on inflation, which they encouraged in the early stages of the Covid-19 pandemic but are now being forced to hose down.

Different sectors are feeling varying levels of pain with UBS, an investment bank, calculating on Wednesday that the technology sector since January 4 has been hammered down by 20%, a drop which qualifies as a crash.

Real estate and property development companies were down 11%, and banks have fallen by 6%. The broad materials sector index, which includes most miners and oil producers, declined by a less painful 3%, ahead of energy which was down 5% even as oil briefly topped the $US90 per barrel mark.

Perhaps more significant than the sell-off itself is the volatility unleashed by multiple negative forces pounding assets values.

Thursday’s market action in Australia was a re-run of the unpredictable U.S. market which rose and fell as some investors headed for the exits and others went bargain hunting in the hope of making quick trades.

After the all-ordinaries index opened on Thursday with a 1.5% rise which buoyed hopes among the bulls of a lasting recovery from days of heavy selling, the bears took over, driving the index down by 2.4% before bargain hunters returned, leaving the index down 2.2% on the day and down 7% for the week.

As if rising interest rates are not doing enough damage, there is the lingering threat of war in Ukraine, a slowdown in China as its adopts hard lockdowns as a pandemic treatment and an energy crisis which has seen oil broach the $US90 a barrel mark, almost certainly on its way to $US100/bbl.

Locally, there is the damage being inflicted on the Australian economy by WA’s persistence with a border closure that is playing a major role in driving up costs, which are eating into the profits of the country’s biggest export industry, iron ore.

Fortescue Metals reported record first iron ore shipments totalling 93.1 million tonnes, but also warned of rising costs and a quality squeeze on margins which spooked investors, who rubbed $1.20 (5.7%) off the stock as it fell to $19.50.

Other iron ore stocks were hit by the same sell-off, led by Mineral Resources, which plunged by $11.49 (17.8%) over a week interrupted by the Australian Day holiday to close at $53.33. Fenix, one of the smaller iron producers lost 7.5c (25%) to 22c.

Gold, always an interest-rate sensitive asset, finally succumbed to the threat of the U.S. central bank launching a year-long round of rate increases that could start in March. After resisting previous periods of speculation about the rate moves, gold slumped by $US38 an ounce (2%) to $US1815 in the 36 hours from mid-Tuesday.

The effect of the gold-price slump on top of already-weak sentiment saw heavy falls across the Australian gold sector led by Evolution Mining, which dropped by 66c (16.2%) to $3.45 with investment banks adding to the gloom by highlighting problems in the company’s high-profile Canadian operation, Red Lake.

Other gold moves, all down, included:

  • Regis, down 34c (16%) to $1.74 with the impact of  the gold price fall amplified by a pit wall slip at the company’s Duketon mine in WA.
  • Musgrave, down 4.2c (12%) to 28c despite reporting high grade drill results from its West Island prospect, with a best hit of 4.26 metres at 41.5 grams a tonne from 160.7 metres, and
  • Silver Lake, down 37c (19.8%) to $1.48 despite reporting record December quarter gold production and success in acquiring Harte Gold in Canada.

The lithium-price “up crash” which has propelled miners of the battery metal to unprecedented peaks faded during the week despite the prospect of strong demand for the rest of the year.

Allkem, the merged Orocobre and Galaxy, was pounded down by $2.09 (19.5%) to $8.72. Pilbara Minerals lost 64c (17%) to $3.11 and Liontown shed 36c (21%) to $1.33.

Other news and market moving events, included:

  • Westgold Resources reporting record gold production of 66,688oz in the December quarter only to be marked down by 14c to $1.85.
  • Centaurus said it was expanding the drilling fleet at its Brazilian flagship, the Jaguar nickel development, to 14 rigs but incurred a 13c share price fall to $1.13,
  • Group 6 Metals lost 2c to 14c after reporting a start on construction at its King Island tungsten project.
  • Lucapa Diamond reported record full year revenue from diamond sales of $A135 million and a pre-tax profit of up to $23 million, only to have its shares slip 1.6c lower to 7.6c
  • Lotus Resources lost 5c to 25c after reporting that recent drilling had expanded the mineralised footprint at its Kayelekera uranium project in Malawi. Other uranium stocks met a similar fate with Paladin down 16c to 68c and Vimy, down 5.8c to 17c.
  • Nickel Mines reported first production from its Angel nickel project in Indonesia, as well as a final dividend of 2c a share (making 4c for the year). Its shares fell by 15c to $1.45.
  • Iluka Resources lost 76c to $10.08 despite strong demand for its range for titanium minerals while other “sand” miners also fell, Base Resources by 1.5c to 31c and Strandline by 5c to 30c.
  • OZ Minerals led a weaker copper sector, dropping a hefty $2.98 to $25.40 after releasing a poorly received December quarter report. Sandfire was another copper stock sold down, shedding 52c to $6.64, and
  • As a final thought (warning) the Financial Times newspaper reported that hedge funds in London are starting to short-sell sustainable energy stocks because of a theory that as interest rates rise investors will be “less forgiving” of companies which might have strong environmental credentials but weak earnings. In times like these, cash really is king.

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