Yellow and black gold travel in opposite directions while cobalt shows signs of a comeback

Picking winners in a flat market is not easy but over the past week there has been a sector swimming against the tide - small oils.
23rd August 2019
Tim Treadgold

Picking winners in a flat market is not easy but over the past week there has been a sector swimming against the tide - small oils.

Once a favorite among Australian investors, and still quite large when you look beneath the dominance of a handful of mega-oilers such as Woodside and Santos, the small oil sector was almost universally up last week when almost everything else was down.

The comparison with price movements among gold stocks is an interesting example of how fast markets can move, with gold producers sliding back after a stellar (if not overdone) run and small oils passing the gold stocks on their way up.

Much depends on the underlying commodity price (and oil was up last week as gold eased), but clues pointing to buying opportunities can be found elsewhere such as in the flow of personal funds, which is why a $100,000 investment in Strike Energy by Perth-based investment bank, John Poynton, was quite interesting.

Poynton is chairman of Strike, a try-hard explorer which was trading at 5c as recently as late June but is now priced at around 14.5c thanks to its stake in the promising West Erregulla oil and gas discovery near the Dongara gasfield north of Perth and not far from another recent gas discovery, the Waitsia find of Beach Energy and Japan’s Mitsui.

What Poynton’s investment at 15c (made after getting shareholder approval at the company’s annual meeting last week) should tell other investors is that there’s life in the small resources sector if you’re prepared to look beyond the minerals and metals which dominate most resource-focussed portfolios.

Other oil moves over the past week include Beach Energy, which is controlled by media and industrial equipment billionaire Kerry Stokes, up 40c to $2.25. Cooper Energy, which is just bringing online a new gas project in Bass Strait, was up 5c to 57.5c, and Senex Energy, a specialist in South Australia’s Cooper Basin, was up 6c to 35.c – and possibly on its way to 48c, according to the stockbroking firm of Bell Potter.

Those moves, which reflect a rise in the price of Brent-quality crude oil from $US57 a barrel to $US68/bbl over the week, look even better when compared with the gold stocks which have been the resource sector’s leaders for the past six months but have been brought back to earth by a $US20-an-ounce slide in the gold price and heavy-duty sell recommendations by big name investment banks.

Examples of the gold moves include Newcrest, down $1.66 this week to $35.09, a price which is still a country mile higher than the $26 price target set for the stock over the next 12-months by UBS.

St Barbara, which reported a 20% fall in earnings for the year to June 30, lost 42c to $3.32, but could still be on the way to $3, according to Citi, and Regis Resources, which fell by 55c to $5.07, on its way to $4.70, says Citi.

There are for investors two important lessons in the rise of small oils and the fall of gold stocks. The first is in the cyclical nature of commodities (“They don’t call us cyclical for nothing,” a famous quote from former Rio Tinto boss, Leigh Clifford), and the second is in the well-demonstrated nature of markets to over-shoot on the way up and on the way down.

Nickel is another example of the commodity market and the stock market getting out of sync – but in the reverse to what’s happened in gold. Whereas gold producers ran ahead of their commodity, nickel stocks have been lagging.

Macquarie Bank demonstrated the nickel issue in a report titled “share prices lagging the nickel price”, in which it noted that the price of nickel had risen 36% since mid-year in US dollars and by 40% in Australian dollars, but leading nickel stocks had failed to keep up.

Western Areas, one of the top pure-play nickel miners, has risen by 50c to $2.47 since early last month but is heading for $2.80, according to Macquarie. Panoramic, which lost 3c this week to 34.5c (perhaps on news of the planned retirement of its long-serving chief executive, Peter Harold) could reach 46c over the next 12-months, says Macquarie.

The oil v gold lesson is not the only example of equity and commodity markets marching to a different beat and it’s possible to see unloved battery metal stocks moving back into favour over the next six-to-12 months as some proposed mines are mothballed and existing mines closed – with cobalt the metal to watch in the battery space.

The closure of a single (admittedly very big) cobalt mine in Africa by the miner-cum-trader, Glencore, has-ignited the cobalt price, which crashed from $US44 a pound early last year to $US12/lb a few weeks ago.

Today, cobalt is back to $US16/lb in a move which directly reflects what happened in zinc four years ago when over-supply was killing the price until a couple of old mines closed and a glut became a shortage – and is fast becoming a zinc-glut again.

Lithium has been travelling a similar road to cobalt with too much supply chasing a market which is not growing as fast as hoped, which is why leading producers such as Orocobre have been cut in half since late last year with a fall from $5 to $2.40, much the same as Pilbara Minerals, down from 93c to 42c.

The important lesson in the cobalt and lithium situations is that the underlying story of a battery-powered transport revolution has not gone. It’s just that miners got ahead of their commodity – a situation which will flip in the same way gold and oil have flipped.

Other newsworthy events and market moves (of which there were very few) during the week included:

  • Cazaly Resources rose to a 12-month high of 4.8c after selling its Parker Range iron ore prospect in WA to Mineral Resources for $20 million plus a future royalty. The stock later eased to 4.5c for a 2c gain over the week.
  • Minotaur Exploration added 1c to 5.5c after drilling at the Jericho copper project in Queensland in which it has a 20% stake (OZ Minerals holds the other 80%) returned high-grade assays of up to 4.4% copper over 8.9m, plus 1.5g/t of gold.
  • Galileo Mining became the latest example of why it’s worth following exploration and drilling news when it added 2c to 15c purely on the strength of a report that it has started drilling its Subzero copper prospect near Norseman in WA. First assays are expected next month.
  • Aeris Resources reported a series of high-grade copper intersections at its Murrawombie underground mine in NSW with best hits of 4.64% copper over 6.5 metres and 2.52% copper over 20.2m. On the market, the stock added 1c to 7c.
  • Bardoc delivered a fresh round of encouraging drill results from its Zoroastrian gold prospect including 6m at 9.34g/t and 11.2m at 1.84g/t. The stock traded at a steady 9c but was at 5c two months ago.
  • Lithium Australia moved up by 0.2c to 5.1c after reporting high-grade drilling results from its Youanmi lithium project in WA with a best hit of 1m at 4.14% lithium oxide and consistent assays above 1.5% lithium over intersections of 3m-to-6m, and
  • Venture Minerals added half a cent to 2c after announcing that it is committed to re-starting iron ore mining at its small Riley project in Tasmania with a two-year campaign expected to yield pre-tax cash of $31 million, a handy boost for a stock valued on the market at $16 million.

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