Lithium the only light as China casts dark shadow over resources stocks

Delta Lithium led the way up with a 15c (21%) rise to 85c after aggressive lithium and iron ore miner Mineral Resources outed itself as the buyer of a 14% stake. Delta has now doubled from 45c just six months ago.

Azure Minerals, another emerging lithium star, was also boosted by corporate activity, adding 11c to $2.67 after its management rejected a merger proposal from Chile’s lithium giant SQM priced at $2.30.

A third lithium deal was not so well received, with Core Lithium’s $120 million fund raising knocking the stock down 16c (28%) to 42c, taking Core’s fall over the past month to 53c (55%) with worse to come if Citi is right with its sell tip and 40c price target for Core.

Lithium activity was the highlight of a tough week which saw the overall market, as measured by the all-ordinaries index, lose almost 2.5% to be back to where it was 12-months ago, a measure of the struggle to shake off the effects of the Covid crisis and the steep increase in interest rates.

The mining index, thanks to lithium stocks and a surprisingly steady iron ore price, is just ahead of where it was 12-months ago, but was hit this week by the China blues, shedding 6%, a bit worse than the gold index which lost 5% to remain 17% up on 12-months ago.

Events which rattled confidence across financial markets this week started with news from China that its biggest apartment developer, Country Garden, had missed payments on bonds, followed by a classic government trick of trying to dodge bad news by simply suppressing it.

Youth unemployment in China had reached an embarrassing 21.3% in June but when economic data for July was released this week the youth unemployment number was omitted, a sign that the Chinese Government is worried about the prospect of social unrest, Beijing’s worst nightmare.

China’s wobbles, which have profound implications for Australia, have started a debate about whether we have seen “peak China” which appears to be replicating the boom/bust history of Japan and Germany which enjoyed periods of rapid growth only to hit a wall when a tight-knit relationship between business and government unravelled leading to “lost decades”.

As if China’s problems were not enough to scare the market, the U.S. chimed in with its own dose of bad news in the form of the 10-year Treasury note hitting a 15-year high at 4.25%, followed by speculation that the central bank will soon deliver another round of official interest rate increases.

On commodity markets it was copper which led the way with its own comment on deteriorating economic conditions, falling 5% to US$3.63 a pound, the same price as the start of the year, wiping out all of the early gain which took it to within a few cents of an all-time high of US$5/lb in February.

The 26% fall in the copper price over the first seven months of the year can be seen, in hindsight, as a perfect example of copper doing its job as a predictor of economic trends and the effects of brutal interest rate increases.

Gold, another metal with forecasting qualities, joined the copper sell-off, dropping by US$34 an ounce to US$1893/oz with the sell-off linked to the threat/promise of more official U.S. interest rate increase to follow this week’s rise bond yields.

Lithium, as mentioned, was the best performing sub-sector of the mining market but it also has problems, which are reflected in a number of ways, starting with heavy discounting of electric vehicles (EVs) in China, including Tesla knocking US$9600 off the price of its Model S and Model X in the second round of price cuts in a matter of weeks.

Morgans, a local stockbroking firm, warned clients about a weakening lithium market which has “softened faster than our expectations” though it was still at levels which should ensure to strong profits for producers such as Pilbara, which has retained a Morgans buy tip and target price of $5.80.

Other lithium news and share price moves this week included:

• Cygnus Metals reporting a maiden resource of 10.1 million tonnes of 1.04% lithium at its Pontax project in Quebec with mineralisation open in all directions. The stock went into a trading halt yesterday after slipping 3.5c to 26c.
• Lake Resources clawed back a little of the ground lost during heavy selling for much of the year over doubts about its Kachi lithium brine project in Argentina. The stock added 1.5c this week to 22c but remains down $1.05 (83%) since the start of the year. Bell Potter is hopeful. It has Lake as a buy with a target price of 36c, and
• Vulcan Energy dropped 54c (14%) to $3.27 after announcing that commissioning had started on its German brine project. The one-time boom stock has shed $5.41 (62%) since the start of the year.

Gold stocks were universally sold off thanks to China’s struggle to squeeze a semi-capitalist economy into a wholly communist system, a painful process supercharged by U.S. interest rate increases which are hurting the world in the name of fighting inflation.

ANZ Bank described the problem as trying to deal with a “Goldilocks” scenario in the U.S. where the economy remains strong, able to tolerate another round of interest rate increases, which will pile pressure on gold.

The bank forecast a fall in the gold price through the US$1900/oz mark before it happened with a secondary warning that a drop below that level could trigger a fresh sell-off.

Gold stocks had a rough week with sector leaders Evolution down 39c to $3.36, Northern Star, down 62c to $10.27, and Bellevue down 7c to $1.50 despite reporting first gold from toll treating, a start on scoping and plant commissioning.

Sunstone was an exception to the falls with a modest rise of 0.1c to 2.5c after reporting encouraging assays from the latest drilling at its Limon gold discovery in southern Ecuador with a best hit of 42 metres at 3.9 grams of gold per tonne from a depth of 152m.

A deal in the wings to watch could be the sale by Newcrest (as it is absorbed by Newmont) of its one-time Telfer flagship gold mine in WA.

Rare earth stocks were not immune to selling though discovery news was better received than anywhere else.

Metals Grove added 2.5c to 13c after reporting encouraging grades of up to 0.7% total rare earths from drilling at its Arunta project in the Northern Territory, and Viridis Mining rose by 2c to 66c after expanding the footprint of its tenement covering the Colossus project in Brazil.

Other news and price moves of interest this week included:

• Australian Pacific Coal added 1.7c to 16c after securing US$50 million in debt funding for the redevelopment of the Dartbrook coal mine in the Hunter Valley of NSW.
• Sheffield Resources did well by standing still at 51c after announcing that commissioning is underway at its Thunderbird mineral sands project in WA.
• Australian Vanadium slipped 0.2c lower to 3c after announcing that construction of a vanadium electrolyte manufacturing facility was underway in Perth.
• Boss Energy lost 9c to $3.22 despite reporting encouraging drilling results at its Honeymoon uranium project in South Australia with the drilling aimed at increasing the company’s reserves, and
• Kingsland Minerals fell by 5.5c to 21c after reporting wide and high-grade graphite intersections from the latest drilling at its Leliyn project in the Northern Territory with a best hit of 158m at 10.1% total graphitic carbon from a depth of 16m.