Gold could be one of the winners in ’23 with central banks hinting that the pace of interest rate increases will slow. Some investors, including the central banks themselves, are building exposure to the two-faced metal which doubles as a currency and commodity.
Until a late sell off yesterday dragged gold back to US$1793 an ounce, it was mimicking the ASX all-ordinaries index with its own 10% rise from US$1634 an ounce in mid-September to a mid-week peak of US$1821/oz — followed by the fall, a perfect demonstration of the volatility to expect next year.
That jump by gold early this week coincided with speculation that the U.S. central bank would start to taper its rate increases, which it duly did with a rise of 0.5%, ending a string of bruising increases of 0.75%.
The sting in the tail is that rates could stay higher for longer as inflation is drained from the global economy.
A second reason for keeping an eye on gold, if you’re not already, is the promise of a pickup in corporate activity in the wake of the successful merger of St Barbara and Genesis Minerals with the promise of share price upticks to come as the deal settles.
The merger, which has been months in planning, is a nil-premium scheme of arrangement which will consolidate the historic WA mining centre of Leonora and create a new business with the awful name of Hoover House – playing on the fact that Herbert Hoover, 31st U.S. President, once worked as a mining engineer in WA – that some people will imagine the new business sells vacuum cleaners.
St Barbara rose by 7c (12%) to 71c over the week. Genesis was up 10c (8.5%) to $1.29 but with investment banks tipping much higher prices to come over the next 12 months. Credit Suisse is forecasting a share price of $1.25 for St Barbara while Shaw and Partners pushed the boat out to $1.80.
Other gold stocks had a mixed week. Sector leaders Evolution, Newcrest and Northern Star were essentially flat while emerging producer De Grey slipped 1c and Bellevue lost 2c to 1.12 even as Macquarie Bank updated a research note with a buy tip and price target of $1.40.
West African Resources led exploration news with a 25-metre intersection at 90 grams a tonne from deep drilling at its Sanbrado project in Burkina Faso, followed by a 6.5c share price increase to $1.19.
ANZ Bank jumped aboard the gold wagon late yesterday with a research note that pointed to the metal’s traditionally strong performance during recessionary periods thanks to its role as a safe haven investment. The bank sees gold closing next year at US$1900/oz.
Big picture news and research comments this week were as mixed as the market with UBS and J.P. Morgan releasing negative reports on Australia’s biggest miners, saying the entire sector has risen too far, too quickly.
UBS reckons that price rallies of up 40% by the big miners over the last two months (BHP is up 28%, Rio Tinto is up 31% and Fortescue Metals is up 41%) are not justifiable given the weak underlying economic fundamentals.
J.P. Morgan not only agrees but explained why it had a negative view of the outlook. “Economic reopening fatigue is setting in”, the bank said, which essentially means the post-Covid lockdown recovery has gone as far as it can with next year, bringing a dose of reality.
“Many stocks have overshot on the upside, and the market could pivot back to a global recession concern in early 2023,” J.P. Morgan said.
Easing inflationary pressure seen in midweek readings in the U.S. and Britain were welcomed by investors, though the latest expert opinion is that next year’s recovery process could take longer and be more tedious than many investors expect.
BlackRock, the world’s biggest fund manager, told institutional clients midweek that a period of time it called “the great moderation” of relatively stable economic activity and inflation “is behind us”.
“The new regime of greater macro and market volatility is playing out,” BlackRock said in its “reported titled: “2023 Global Outlook — a new investment playbook.”
“A recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation,” BlackRock said.
“We expect to be more positive on risk assets at some point in ’23, but we are not there yet, and when we get there, we don’t see the sustained bull markets of the past.”
Another big time U.S. fund manager Howard Marks from Oaktree Capital said during the week that higher interest rates would last longer and there was a great “sea change” coming with most of the profits made over the last 40 years a result of falling interest rates.
“I consider it nearly impossible to overstate the influence of declining interest rates over the last four decades” – and by inference it will be a lot harder to make money as the new era of higher rates for longer is ushered in,” he said.
Citi, another investment bank, took a similar sobering look at commodity prices for ’23 with winners expected to be manganese, alumina, aluminium, and oil, while some of the recent stars face a bumpy rise, led by lithium, which is tipped to fall by 30% next year, with nickel not far behind as the battery metals sector is repriced.
Locally, the battery leaders had a rough ride this week with Pilbara Minerals down by 43c (9.5%) to $4.03 even after reporting another high priced (but low volume) sale of spodumene on the BMX website which fetched US$8299 a tonne.
Citi said that while the BMX auction prices might have peaked, the profit margins being earned by Pilbara were still “sky high”, noting that on-site costs were just US$770/t. The bank stuck with a target share price for Pilbara of $4.60.
Other lithium news included:
- Rio Tinto revving up its hunt for lithium investment opportunities with Canadian focussed Sayona said to be in the cross hairs because it is already supplying test ore to Rio Tinto in Canada.
- Patriot Battery Metals, the star of early December, came back to earth with a 52c (38%) fall to 83c, and
- Red Dirt Metals announced a deal for future possible lithium sales from its Mt Ida project with Macquarie updating a buy tip with a new price target of 85c, roughly double last sales at 42c.
Most other sectors of the market traded listlessly this week as pre-Christmas lethargy started to take hold, best measured by a microscopic fall in the all-ordinaries index of 0.05%.
Capital raising was, however, in full cry as smaller companies topped up their bank balances ahead of the annual slow down with a long list of share issues that included Anova Metals ($9 million). New World Resources ($8 million). Highfield Resources ($13 million). Kincora Copper ($2.4 million). Genmin ($7.9 million). Investigator ($4.2 million). Lefroy Exploration ($3.5 million). Flynn Gold ($6.1 million). Asra Minerals ($2.5 million), and Classic Minerals $20.1 million).
Other news events and market moves of interest this week included:
- Chalice Mining suffered a short-term sell-down to $5.71 when it announced a delay to the scoping study on its Gonneville nickel and palladium but bounced back to $6.27 for a fall of 4.5c, but also received an upgraded buy tip from J.P. Morgan which sees the stock rising to $7.30 by the middle of next year.
- Mincor Resources put on 5c to $1.50 as the market digested the recent $60 million capital raising which will be invested in increased nickel production. Bell Potter refreshed a buy tip but lowered its target price from $1.90 to $1.85.
- Sandfire slipped 9c lower to $5.49 after its recent capital raising which Macquarie Bank likes because it has de-risked the company’s balance sheet and set it up for a period of growth. The bank maintained its buy tip and a target price of $6.50.
- Galileo slipped 4.5c lower to 88c despite reporting high grade nickel intercepts from the latest drilling at its Callisto project in WA with a best hit of 1m at 1.58% nickel 0.93% copper and 3.32g/t of 3E (combined gold, platinum and palladium).
- WA Resources fell by 63c (33%) to $1.25 despite reporting high grade niobium and tantalum from drilling a weathered, enriched, zone at its West Arunta project in WA, and
- CZR Resources slipped 2.5c lower to 24c after reporting a 20% increase to 45 million tonnes of iron ore in its small but high-grade Robe Mesa iron ore project in WA.
That’s it for Prospector’s Dairy this year. Merry Christmas and a Prosperous New Year to all.
