Resource stocks turn bullish on improving commodity outlook and growing M&A fever

Rio Tinto’s blockbuster bid for Arcadium Lithium set the tone for a surge of buying in other lithium stocks while gold rallied further in the expectation of fresh falls in interest rates, though Australia looks like being last to that party.

Regular readers of this column might remember the headline of early last month which said a “bull market was brewing as the bottom nears.”

Since then the ASX all ordinaries index has risen by 5.8%. The metals and mining index is up 16% and the gold index is up 17% – in six weeks!

The share prices of some companies are getting ahead of the underlying commodity, but that’s a common feature when markets turn bullish, pointing to investor concern about being late to the game of FOMO (fear of missing out).

Professional fund managers who have been on the sidelines of the resources sector are returning, as shown in comments by portfolio managers such as Ben Cleary from Tribeca Investment Partners when speaking to the Australian Financial Review newspaper.

“It’s been a long two years in the resources sector,” he said. “Despite cheap valuations and tight supply and demand, positioning has gotten shorter and shorter, leading to derating global financial crisis (GGC) level valuations.

“But it’s always darkest before dawn and the last three times we’ve had pro-growth policy pivots and stimulus in China we’ve had 100% returns over the next 12-months, so we’re incredibly bullish about the outlook”.

E&P Financial (formerly Evans & Partners) pursued a similar theme after Rio Tinto agreed to buy Arcadium at a price 90% above prior sales.

“We are conscious that one more merger or acquisition (M&A) in the lithium sector would light-up equities given the limited options to play this thematic globally,” E&P said.

Wilsons Advisory agreed, telling clients that the lithium sector was consolidating and that the Arcadium takeover was “a vote of confidence in lithium fundamentals”.

Macquarie, normally the bull in the room, was more cautious, warning that small lithium stocks were “trading on M&A hopes” which did not reflect the subdued lithium price.

In effect, Macquarie’s view is that the lithium rally has gone as far as it can, leading to most small lithium stocks being downgraded and only one retaining a buy tip, Patriot Battery Metals, which could rise from 42c to 70c.

Other hints this week of a lithium sector recovery include Pilbara Minerals establishing a $1 billion credit facility to repay early funding, and the big U.S.  car maker General Motors lifting its investment in Canadian company Lithium Americas to US$625 million to help pay for the Thacker Pass mine in Nevada.

Gold set a fresh all-time high of US$2684 an ounce on Wednesday before easing as profit takers moved in.

Swiss gold “permabull” Egon von Greyerz gave his theories a fresh airing with a new target of US$4800/oz by the end of 2030 thanks to a combination of central bank buying and the fact that on an inflation adjusted basis gold is still short of its record price reached in 1980.

Five reasons were listed by von Greyerz for gold to keep rising, the inflation effect, strong demand, falling interest rates, the return of private investors who are yet to be a big factor in the market, and geopolitical tensions.

M&A was also a factor in driving local gold stocks higher, especially as speculation grows about the potential for a flood of deals in the WA goldfields with South Africa’s Gold Fields said to be looking for feedstock to fill its under-utilised St Ives plant.

Vault Minerals, the vehicle which emerged from the merger of Red5 and Silver Lake, added 5c this week to trade at 37c. Westgold Resources which merged with Korora rose by 37c to $2.93.

Other gold (and silver) news and price moves included:

• Genesis, up 15c to $2.25 after reporting strong production in the September quarter.

• Evolution Mining up 44c to $5.01 after releasing its quarterly, which was not well received by RBC, which reckons the stock will fall to $3.40.

• Sun Silver, up 9c to 93c after reporting more encouraging exploration news from its Maverick Springs project in Nevada, including silver grades from XRF readings as good as 332 grams a tonne.

• West African Resources, up 12c to $1.58 after reporting a high-grade drill result of 36 metres at 11.1g/t below existing reserves.

• Black Cat, up 5c to 56c after reporting that mining at its Paulsens project in WA would be accelerated and expanded.

• Ausgold, up 4c to 54c after reporting the granting of a mining lease for its Katanning gold project in WA.

• James Bay, up 3c to 40c after it acquired a high-grade gold project in the U.S., and

• Regis Resources up 47c to $2.62 after a strong September quarter, bullish broker reports, and speculation that a way might be found for its McPhillamys project to beat a government ban.

Copper was another newsmaker this week with deal flow developing in the Cobar Basin of NSW and a timely research paper from Canada’s RBC Dominion Securities which identified 11 projects in the next “copper wave”.

Interest in the Cobar region in the far west of NSW has been building since the ambitious Metals Acquisition snapped up the historic CSA mine, raised a fresh $150 million in capital last week and started looking closely at its neighbours.

Metals Acquisition itself has been marked down because of the capital raising, slipping 30c lower this week to $18.56 but smaller players in the region all advanced, led by Talisman which added 5c to 26c.

Other Cobar movers included Aeris, up 2c to 24c. Aurelia, up 2c to 20c, Kingston Resources, up 0.2c to 8.4c, and Peel Mining, up 1.5c to 13c.

RBC’s report was based on a copper conference it hosted in Toronto last week where the case for new copper projects was explored if copper demand is to be satisfied.

Of the 11 companies detailed by the Canadian investment bank two, Hot Chili and SolGold, have strong Australian connections though their best assets are in South America.

Hot Chili was steady this week at 84c but is up 10c over the past month as it makes progress with its Costa Fuego project in Chile. SolGold, which has BHP and Newmont as its major shareholders, is London listed. It was steady at 9.4 pence.

Cygnus Metals was the best performer among the copper stocks with a rise of 6c to 14c thanks to its proposed merger with Canada’s Dore Copper while most other moves were modest as the copper price eased back to US$4.32 a pound.

Mining industry leaders BHP and Rio Tinto had a poor week after releasing lacklustre September quarter production reports. BHP slipped 88c lower to $42.91 while Rio Tinto lost 84c at $118.49.

Both of the big miners were weighed down by a weaker iron ore price which fell to US$102 a tonne in Singapore, US$8/t below the recent peak of US$110/t.

Other news and market moves included:

• Chalice Mining rose by 13c to $1.65 after announcing that it had received Commonwealth Government major project status for its Gonneville polymetallic project in WA.

• Metro Mining added 1.3c to 5.5c thanks to a global squeeze on bauxite supplies caused by a shortfall in Chinese production of aluminium ore and a customs dispute in Guinea.

• Boss Energy gained 21c to $3.65 after reporting exploration success at the part-owned Mesa project in Texas, and

• Lotus Resources added 2c to 30c after saying it was on track to produce first uranium at its Kayelekera project in Malawi next year. Macquarie reckons the stock will rise to 42c.