Andrew Forrest and Gina Rinehart, a pair of Perth billies, provided the best guidance for other investors about where they think money will be made in the future with Forrest diving deeper into renewable energy and Rinehart showing a preference for old energy with a couple of side bets on rare earths.
Both Forrest and Rinehart will stick with iron ore because it’s a fabulous cash generator, but with China’s economy slowing they are looking for new growth opportunities and energy is a clear winner, whether old (fossil fuels) or new (wind and solar).
Forrest’s $4 billion acquisition of CWP Renewables makes him Australia’s biggest producer of wind power while Rinehart’s $350 million offer to buy Warrego Energy, an emerging west coast gas producer, will expand her gas interests after last year’s acquisition of a 50% stake in east coast gas specialist Senex Energy.
While the two billies are playing energy in different ways, they are examples of how energy transition has become one of the great investment themes of the 21st century, winning from the uncertainty and opportunities being created.
Demand for clean energy is what’s got Forrest motivated with his interest in green hydrogen being trumped by his new love for wind turbines.
Supply shortage is driving Rinehart’s preference for old energy with global consumption of oil and gas showing few signs of fading which should mean that prices may stay higher for longer, especially for gas, the fuel seen as a halfway house on the road to a renewables future.
Another measure of the energy crisis is the remarkable rise-and-rise of coal which environmentalists have been trying to kill for years by pressuring governments to ban new mines.
The perverse reaction to a lack of mine development is a global shortage with the price of thermal coal this week moving back over US$400 a tonne (it was US$50/t two years ago) – boosted by Glencore announcing that it would not proceed with the $2 billion Valeria project in Queensland.
How a proposed price cap of $125/t for Australian coal works is anybody’s guess with the export market more than three-times what the government reckons is a fair price for consumers.
Energy was not the only story in a surprisingly hectic week of contradictory economic and financial markets news that started with another Reserve Bank interest rate increase which preceded confirmation that the economy grew at an annualised (and highly inflationary) 5.9% in the September quarter.
More rate rises are certain in the new year, though investment banks can see the start of the inevitable economic slowdown which the central bank is trying to orchestrate.
Morgan Stanley said the September quarter data revealed “an economy slowing from a solid backdrop, something that should continue into ’23.”
Just how overheated the Australian economy has become can be demonstrated in the lowest unemployment reading in 50 years (3.4% nationally and 3.1% in WA), a spectacular surge in household discretionary spending, a high level of inflation, and the fact that the national economy is already 6% bigger than it was at the start of the Covid pandemic.
For investors, the current mix of competing economic indicators is confusing because on one hand there is obviously a global shortage of key commodities, especially copper and oil, while on the other hand there is a relentless interest rate squeeze which will probably cause a global recession next year.
ANZ Bank noted in its latest research note that global oil inventories have collapsed from 72 days of consumption 20 years ago to 37 days while copper stocks have fallen from 130 days of consumption 10 years ago to just 10 days today. “Thin inventories compared with other recessions are likely to limit price declines,” ANZ said.
The copper shortage was seized on by Glencore boss Gary Nagle who said “the world just doesn’t seem to get it” when speaking at the company’s investor day where he outlined a significant future shortfall in supply even as demand soared to cope with energy transition.
Gold, always a good measure of the overall financial market mood, managed a modest US$20 an ounce rise to US$1786/oz, perhaps aided by news that China has returned to the gold market, reporting an increase in its official reserves for the first time in three years, adding slightly more than 1Moz to 63.67Moz.
Local gold stocks failed to react to the higher price, and news of China buying, with widespread price falls over the week, led by the leaders with Northern Star down 23c to $10.95 and Evolution down 2.5c to $2.92.
The small end of the gold market was also under pressure with the most closely watched gold game, the consolidation of the Leonora region in WA, failing to produce a winner this week with Genesis Mining down 8.5c to $1.18 and St Barbara down 2.5c to 64c.
Battery metals, an important part of the energy thematic, had a mixed week with nickel leading the way as the price rocketed US$3000 a tonne to US$31,281/t, the highest since a Chinese speculator was caught earlier this year in a short squeeze.
Chalice, which is as much a nickel stock as a palladium and gold play, rose by 50c (8%) to $6.32 after a fresh round of encouraging exploration results from the Hooley prospect, 5km north of the flagship Gonneville project.
Other nickel news included Lunnon Metals adding16c to 96c after updating the resource in the Baker project with Macquarie Bank tipping a future price for the stock of $1.30.
Lithium stocks had a mixed week with freshly listed Canadian-focused Patriot Battery Metals a stock market star when it started trading on the ASX at $1.15 before rising to a mid-week peak of $1.56 and then sliding to $1.42.
Most other lithium stocks weakened, possibly from the pressure exerted by the latest Goldman Sachs warning that the Australian lithium industry has run too far too fast, from a collective market value of $15 billion two years ago to $60 billion today.
Goldman’s preferred lithium stocks is Allkem, though it joined in the sell-off this week with a fall of 73c to $13.44, well below Goldman’s target price of $15.20, and even further below the Macquarie target of $21.
Other lithium sector news and price moves this week included:
- IGO reporting that the first processing unit at its part-owned Kwinana hydroxide plant had achieved commercial production, though the stock was sold off after news that its Nova nickel mine had been knocked out of action by a fire. On the market, IGO lost $1.47 over the week to $14.89 but retains a Macquarie price tip of $21.
- Widgie Nickel joined the lithium rush with high grade drill results from its Faraday project in WA with a best hit of 3m at 1.49% lithium from a depth of 29m – good as that result was, it was not enough to the save the stock from a 15c fall to 41c.
- Corazon added 1c to 2.6c after reporting spodumene bearing pegmatites in its Miriam nickel project in WA, and
- Pure Resources added 3c to 35c after reporting that its lithium exploration tenements near those of Patriot Battery Metals in Quebec had expanded to 270sqkm.
Rare earth stocks, despite Rinehart tipping $60 million into Arafura Resources, had a lacklustre week with sector leader Lynas Rare Earths losing 32c to $8.52, while Hastings Technology Metals was down 16c at $3.67.
Dreadnought lost 2c to 9c despite optimism that a maiden resource on its Yin rare earth project might be released before the end of the year. CG Capital Markets is a Dreadnought fan, tipping a price for the stock of 24c.
Other news and market moves of interest included:
- Lion Selection Group’s carefully watched “mining clock” which tracks the mood of the small end of the market, reached 12, the equivalent of midnight, which signals the unofficial end of the boom.
- Citi reckons the iron ore price could move back to US$120 a tonne over the next three months as China re-opens, a tip which helped Fortescue Metals add 84c to $20.92. Commonwealth Bank and Morgans say the price of iron ore is moving ahead of the fundamentals and will soon fall.
- Bannerman Energy lost 18c to $1.62 after reporting that the latest analysis of its Etango uranium project in Namibia was based on a price for the nuclear fuel of US$65 a pound, well ahead of the current spot market at US$48/15/lb, and
- Highfield Resources became the latest potash hopeful to be heavily sold down, losing 15c to 69c, enough to earn a price fall query from the ASX.
