Analysts urge resources investors to ‘stay the course’ to cash-in on strong commodity prices

29th June 2018
Tim Treadgold

Seven words from two investment banks should boost investor confidence in tricky times, with UBS this week advising clients to “stay the course” despite an uncertain international market and Macquarie Bank noting that in the resources sector “the upgrade cycle rolls on”.

Those optimistic views stood out as the Chinese stock market, as measured by the Shanghai composite index, plunged into official bear-market territory: down 20% since the start of the year.

Trade-war fears have rattled Chinese investors more than those in the US but talk of full-blown exchange of tariff increases, which would have a chilling effect on the global economy, are starting to damage confidence everywhere.

Australia, so far, remains relatively immune from the doubts seen almost everywhere else, perhaps because as China closes its borders to some US goods and services it will look to source raw materials elsewhere, especially from Canada and Australia.

Fingers crossed that this cheerful view holds for could be a rocky new financial year.

Most segments of the resources sector are finishing the old year strongly, with the exception of the recent favourite, battery metals, where profits are being peeled off and investors wait for a clearer picture to develop about supply and demand for lithium, graphite and cobalt.

The one battery metal which has sailed through the recent correction is nickel, largely because of a growing awareness that it is being divided into two distinct categories; Class 1 nickel destined for batteries and Class 2 confined to being consumed in the production of stainless steel.

For most Australian nickel projects that division could prove to be the equivalent of winning lotto because the price of Class 1 nickel, mainly derived from hard-rock mines, should rise sharply in future years, with Panoramic Resources a case study with its share price doubling in the past 12-months to 54c as it re-develops the mothballed Savannah mine in WA.

Macquarie’s optimistic view of the wider resources sector is built around a wholesale upgrade of price forecasts for most minerals and metals, including nickel, alumina, iron ore and manganese.

UBS said it was maintaining an overweight position in mining even after a strong June quarter which saw the local mining sector rise by 13.7% as measured by the metals index, comfortably above the all ordinaries, which added 8.4%.

“While cost pressures are set to persist, we still advise an overweight position in mining given (a) the sector’s focus on sound capital management, (b) its ongoing focus on productivity and (c) the supportive commodity-price environment given controlled market supply,” UBS said.

If there is a sector set for an uncertain new financial year it is stocks exposed to the electric vehicle sector because of the: “varying views on supply-demand dynamics and the markets ongoing frustration with over-promising and under-delivering from producers,” UBS said.

With the old year expiring today (Friday) there was less news in the market, and that which emerged was a mixed bag. Noteworthy events and price moves included:

  • Northern Star reaching a fresh 12-month share price high of $7.26 yesterday (before closing at $7.18) as it moved towards securing a bigger stake in the Central Tanami gold project via the exercise of a put option by Tanami Gold, a deal described as an inexpensive portfolio addition.
  • Kalium Lakes became the latest “fertiliser” stock to wake up after a long time on the sidelines. Danakali is another emerging potash producer which has sprung back to life. In the case of Kalium Lakes, it saw a 6c share price increase to 52c after reporting successful drilling and exploration tests at its Lake Carnegie project in WA.
  • Clean TeQ Holdings suffered a sell-off when investors were told that its Sunrise nickel and cobalt project in NSW would have a much higher price tag than originally thought. The 17% hike in the estimated capital cost to $US1.5 billion was met with a 30% share-price fall to 76c – roughly half the $1.50 which Macquarie Bank reckons is Clean TeQ’s 12-month price target.
  • Brockman Mining earned the rare distinction of a “speeding ticket” from stock exchange regulators after its shares reached a 12-month high of 5c, up 1c on the week, but 4c (or 400%) on the 1c price of last March. There was little fresh news from Brockman, which owns a potentially valuable iron ore project in WA, but also has an assortment of Chinese assets, one of which is being sold.
  • Cassini Resources added half-a-cent to 7.3c but did get as high as 8c after reporting the intersection of a 6.2-metre-wide zone rich in massive sulphide mineralisation from drilling at its Yappsu prospect in the West Musgrave region of WA where it is exploring for nickel and copper as part of joint venture with OZ Minerals.
  • AVZ added 2c to 11c after reporting the start of a scoping study into its Manono lithium project in the Democratic Republic of Congo, and the surprise resignation of its high-profile executive chairman, Klaus Eckhof.
  • Dempsey Minerals added 10c to 28c after announcing the completion of the acquisition of lithium assets in Argentina.
  • Aeon Metals was encouraged by fresh drilling results at its closely-followed Walford Creek silver, lead and zinc project in Queensland with a best hit of 17 metres assaying 3.18% lead, 2.91% zinc and 42 grams per tonne of silver from a depth of 350m. The market was unimpressed, rubbing 2c off the stock, which closed yesterday at 34c.
  • Galena Mining said a scoping study into its Abra base metals project in WA had demonstrated outstanding economics. The market was unimpressed. Rubbing 1c off the stock to 16c.
  • Mincor slipped 2c lower to 38c despite announcing that it was on track for a maiden nickel resource at its Cassini project where the latest drilling returned a best intersection of 6.32m at 2.16% nickel from a depth of 94m.
  • Dragon Mining lost 4c to 18c after announcing that it was continuing to advance its Kaapelinkulma gold project in Finland.
  • Bounty Mining added 1c to 38c after announcing the export of its first cargo of coal from the re-developed Cook mine in far north Queensland, and
  • Southern Gold eased back by 1c to 24c despite reporting a drill hit grading an eye-catching 133.7g/t, with the problem being it was over a 1m intersection.

 

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