News - Prospector's Diary

Any doubts investors might have had about the power of environment, social and governance (ESG) issues to dictate corporate decision making were blown away this week when BHP caved into activist pressure to quit the oil and gas business.

The deal, which will see Woodside Petroleum acquire BHP Petroleum, has not been well received on financial markets, with both companies sold down and some big BHP shareholders indicating they will oppose the transaction when put to a vote next year. But whether BHP and Woodside achieve their desired marriage of convenience is not the big issue for investors. The more important point is that ESG considerations have now been elevated to a company-making (and breaking) level.

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Choppy waters often precede a sea change and that’s certainly the case in financial markets today as investors jockey for position ahead of the inevitable upward shift in U.S. interest rates

Gold’s “flash crash” late last week, which briefly drove the price below $US1700 an ounce, coincided with a seemingly modest uptick in the U.S. 10-year bond yield from 1.2% to 1.3%. But that tiny rise was enough to trigger the dumping of gold worth $US4 billion in a single deal. Someone managing a big investment portfolio appears to have made a judgement call on U.S. interest rates and sold gold in preparation for meaningfully higher rates in the next six-to-12 months.

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The past and the future collided at this week’s Diggers & Dealers mining forum in the outback WA city of Kalgoorlie with of iron ore and gold challenged for top dog status by the fast-growing crop of “green” metals

Three speakers highlighted the story of yesterday’s investment winners, and tomorrow’s likely winners. Bill Beament, a flag-carrier for gold over the past decade, turned critic when he unveiled the new name for his copper and battery metals focused business, Develop, saying that “gold is not green, sorry but it’s not”.

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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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