News - Prospector's Diary

Lethargy ruled on the Australian stock market this week as investors started to pack up for the Christmas trading break, though not before placing fresh bets on a handful of battery metal stocks while casting a wary eye over gold miners as higher official

Lithium led the way in the battery sector, though this time with a relatively new player, Kalamazoo Resources, doing best with a rise of 3.5c to 38c after announcing an exploration deal with Chile’s lithium champion SQM over an exploration project in WA’s Pilbara region. Though only a grass roots undertaking, the Kalamazoo deal near the historic gold mining centre of Marble Bar is significant because of SQM’s reputation as a major producer of the metal and its 50% stake in the rapidly developing Covalent joint venture in the south of WA with Australian conglomerate, Wesfarmers.

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Iron ore staged a handy bounce above $US100 a tonne this week but most investor interest remained focussed on battery metals and the broader issue of energy transition, the two themes which will dominate markets in 2022.

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A virus and a banker were a toxic combination on financial markets this week as the latest Covid strain rattled investor confidence and Jerome Powell, head of the U.S. central bank, warned that the punch bowl of free money could be removed sooner rather than later. The net result was red ink across most sectors with gold equities hit hardest as measured by a 5.5% fall in the ASX gold index, a drop significantly higher than what turned out to be a modest $US15 an ounce slide in the gold price over the week.

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Gold took another warning shot as interest rates edged higher, but iron ore staged a useful China-driven recovery while zinc, tin and copper benefited from outages and political interference.

New Zealand’s central bank punched well above its weight with a second 0.25 percentage point increase in its cash rate to 0.75%, effectively laying the foundation for other countries to follow, though Australia’s Reserve Bank says it will stay on the sidelines for at least another 12-months.

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Gold edged back towards $US1,900 an ounce this week, but the more important development was cost inflation and a timely warning from a leading investment bank that some Australian iron ore producers are sailing into stormy weather.

Morgan Stanley, in its weekly Data Dig report, singled out Mineral Resources and Fortescue Metals as iron ore miners with cost and quality challenges which could affect their profitability and dividend-paying potential. According to the bank, the mines of Mineral Resources are currently unprofitable based on an iron ore price of $US90-a-tonne for high-grade ore and then applying a discount for the company’s low-grade material, which indicates implied costs for the company of $US101/t.

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Gold, Gonneville, and Glasgow dominated news flow this week but hovering over everything was the inflation genie who burst out of her bottle to send a shudder through global financial markets.

The gold price, which is a distillation of multiple events, rose to a six-month high of $US1862 an ounce before slipping back to around $US1846/oz. A surprise 13.5% increase in official Chinese producer prices for the month of October was the spark for the inflation alert, which is expected to bring forward central bank interest rate increases and an end to the era of super-cheap money.

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Energy, as expected, was the big news on financial markets this week as the Glasgow climate change conference dragged on, but there was another event which kept investors on their toes - a fresh indication that official U.S. interest rates will be heading higher next year. A $US20 an ounce fall in the gold price on Wednesday was the most obvious reaction to the unveiling of a plan by the U.S. central bank to phasing down its bond buying, which has been pumping cash into the economy.

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Energy (ancient and modern) dominated news flow this week in the lead up to next week’s climate change gabfest in Glasgow, and while important from a long-range perspective, it was another whiff of rising interest rates which affected short-term trading.

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