News - Prospector's Diary

Any doubts about battery metals dominating the resources sector for the next decade, and beyond, were washed away this week when BHP and Rio Tinto made overdue expansion moves into nickel and lithium.

Both mining giants have been tinkering around the edges of batteries and energy transition, but they showed their hands when BHP lobbed a bid for control of a Canadian nickel discovery and Rio Tinto giving the go ahead to the Jadar lithium project in Serbia. Fat profits from mining iron ore, and selling coal and oil assets, are funding the shift into energy metals with more to come in the next few weeks with BHP expected to take a bolder step into “green” commodities with a commitment to finish building its Jansen potash project also in Canada.

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Deals displaced discovery and development news in the Australian resources industry this week

Deals displaced discovery and development news in the Australian resources industry this week, led by hints of mega-billion-dollar mergers at the top end of the oil sector, followed by asset shuffling among gold and rare earth players, and a flow of production news. Reports of an attempt to merge Santos and Oil Search, followed by rumours of Woodside acquiring BHP’s oil division, put petroleum back in the news after years on the sidelines as investors switched out of fossil fuels into renewables.

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Investors caught a glimpse of the elephant in the room this week as inflation in the U.S. bolted to a 13-year high in June, triggering a predictable response from gold which rose to a six-week high and looked poised to keep going.

The return of gold to a price above $US1825 an ounce followed news on Tuesday that inflation in the U.S. hit an annualised 5.4% last month, triggering a debate about whether the increase was temporary or the start of a significant upward trend. The only answer to the inflation question, at this stage, is that the jury of professional opinion is out. Jay Powell, head of the U.S. central bank, reckons the June number was a blip, but if he’s wrong then gold could take off, as it does whenever there’s an inflation scare and fear of a collapse in the value of money.

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Gold reclaimed the high ground this week as U.S. interest rates slipped on fears that the global economy is not recovering as quickly as hoped, or that a significant correction is brewing – or both.

Look anywhere in markets today and there are warnings flashing and value disconnections caused by the inflationary effect of cheap money which has created a hothouse economic effect and asset bubbles. A good example of contradictory pricing is that while lower interest rates and slower growth might have helped gold move back above $US1800 an ounce (before easing) it is a lot harder to explain copper, nickel and iron ore rising at the same time.

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Iron ore last year, nickel and titanium minerals this year (so far) with the connection being commodity price increases caused by supply disruption – with shortages and “outages” an investment theme likely to be as significant as demand.

Iluka Resources was the major beneficiary in Australia from this week’s big event, the closure of the world-class Richards Bay titanium minerals processing centre on South Africa’s east coast. The loss of supply from Richards Bay drove Iluka shares to a 10-year high of $9.27 before the stock settled at $8.89, up 73c (9%) over the week.

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Iron ore, coal and oil ore will be the commodity winners when the financial is ruled off next Wednesday. Gold, however, will end flat when looked at over the full 12-months, while copper and other battery metals continue to shape as next year’s winners.

In a nutshell, that’s where we have been in financial year 2020/21 and where we appear to be headed as financial markets say goodbye to a roller-coaster ride dominated by the Covid-19 pandemic and government spending designed to stave off a depression. By this time next year, a different picture will emerge, probably one dominated by the struggle to reel in the excess cash created in reaction to the pandemic which means inflation and interest rates will be one of big issues to watch, with energy transition another.

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Exploration and discovery news will become more important than ever for investors in Australian resources after this week’s intervention by China in commodity markets followed by another warning from the U.S. that higher interest rates are on the way.

The Chinese plan to sell surplus material from government stockpiles of critical metals such as copper and nickel has had a dampening effect on prices, while the U.S. central bank’s interest rate signal mean that gold faces a tough time. Both of those events at the top of the investment food chain had been widely expected as markets rattled by the Covid-19 pandemic start to normalise, radiating out ripples of uncertainty.

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It gave the world Covid-19 and now it looks like China is giving the world inflation and while some people might not see the connection between Covid and inflation, they are both a threat and an opportunity for investors.

To understand the significance of an inflationary outbreak, you only have to look back 18 months to see how a disease can turn financial markets upside down. Heavy losses at the start and fat profits later. Inflation, if allowed to rise too far, is an equally dangerous infection which destroys the value of certain types of investment (especially cash), but the flipside is that it improves the performance of hard physical assets such as property, gold and other commodities.

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