Hedley Widdup, a fund manager with Lion Selection, warned that a developing cash squeeze would test mining and oil companies with a market value of less than $200 million – a category that features a surprisingly large group of 664 ASX-listed stocks.
Widdup told the annual Resources Rising Stars conference on the Gold Coast that most small stocks had lost ground on the market over the past 12-months and that his closely followed market “clock” which tracks the mood of the resources sector was close to midnight, a point which signals the start of a crash.
That stark warning was reflected in the performance of the 51 companies presenting at the conference held over two days at the Royal Pines resort with most losing ground on the market.
Offsetting the down trend was a handful of exceptions, led by Develop, the hybrid explorer and mine developer headed by former Northern Star boss, Bill Beament.
Drill success at the historic Woodlawn mine near Canberra gave Develop shares a 26c boost over the week to $3.36 at the close of the conference, a gold medal performance challenged only by Canadian lithium explorer Patriot Metals which added 21c over the week to $1.84 –also thanks to encouraging drill news.
The Woodlawn assay which caught the attention of the market was a 75-metre intersection grading 2.1% copper and 3.1% zinc with a bonus of 8.9 grams a tonne of silver, a result which Beament described on the sidelines of RRS as “an absolute stonker”.
Patriot’s market-moving drill hit came at the CV5 discovery on the company’s Corvette project in Canada with a 122m section assaying 1.89% lithium.
On the market, gold led an overall retreat, sliding back through the US$2000 an ounce mark to trade around US$1982/oz, dragging most gold stocks with it.
Local gold leaders Northern Star and Evolution lost ground. Northern Star was down 35c at the close of RRS to $13.62. Evolution was 6.5c weaker at $3.80.
The weaker market at the top end of gold could be just what Barrick Mines, the world's second biggest goldminer is waiting for as it prepares to chase its great rival, Newmont, which is bedding down its acquisition of Australia’s Newcrest.
Barrick boss, the outspoken Mark Bristow, has confirmed that he is on the hunt for takeover targets, adding that he has the luxury of “picking and choosing his opportunities”, while playing down a desire to catch up with Newmont in the race for the title of world’s biggest.
Overall, the Australian market as measured by the all-ordinaries index was down a modest 1% this week with the gold sector down 2% as the underlying price of the metal retreated while the broader metals and mining index slumped by 4%, reflecting weakness in most base (industrial) metals, including zinc and nickel.
Morgan Stanley, an investment bank, summed up the base metals market in two words: “weakness abounds”, a comment based on an assessment of demand for commodities in China where an earlier economic recovery is showing signs of slowing.
“Zinc has been the worst performer, down 14% (in a month), followed by copper, nickel and aluminium, down 8%, 7% and 6% respectively,” the bank said, though those comments were made before the copper bounce yesterday on reports of a deal to settle the U.S. budget debate.
Morgan Stanley said its major ongoing concerns were China and the weakening of the U.S. economy where President Biden has been forced to say that his government will not default on its debts because of a budget stand-off with his Republican rivals.
Lithium, as mentioned earlier, was a bright spot in an otherwise gloomy week thanks to a surge in sales of electric vehicles (EVs) in China which were reported to have totalled 607,000 units in April, a surprise 116% higher than in April last year, taking overall EV sales in China for the first four months of the year to 2.11 million, up 43% on the same time last year.
Rising EV sales are underpinning the lithium recovery which seen the price of the metal rise by 30% over the past few weeks, though that rise needs to be seen against a 70% fall from late last year.
At around US$28,000 a tonne lithium in its carbonate or hydroxide form is reflecting a return to the market by Chinese converters and battery makers.
Citi, an investment bank, reckons the lithium price will keep rising for the rest of the year, perhaps by another 40% when it could be back close to US$40,000/t, close to double the low point of US$22,000/t reached last month – but half the boom-time peak of last year.
“Lithium carbonate prices in China are no longer in free fall and appear to have bottomed out,” Citi said.
“Demand from downstream players remains tepid but buying interest has improved and restocking in the supply chain in the second half of the year should drive prices higher.”
Local lithium leaders had a mixed week on the market with Pilbara Minerals slipping 9c lower to $4.74 at the end of the RRS conference, a mild correction after a 78c (20%) rise over the previous four weeks.
Core added 3.5c this week to $1.10 while Delta Lithium, the comeback vehicle of David Flanagan, who made his name in iron ore 20 years ago, was steady at 58c, a pause which followed a 16c (38%) rise over the previous four weeks.
M&A activity in lithium is tipped to accelerate in the wake of the Allkem + Livent merger with Rio Tinto increasingly seen as a big miner which needs to make move if it is serious about owning a lithium business.
UBS, in veiled criticism of Rio Tinto, said the big miner was stuck “between a rock and a hard place” when it came to lithium because its two internal projects, Jadar in Serbia, and Rincon in Argentina, were both small and risky.
“In our opinion, these organic growth options remain relatively high risk, and as a result we see the potential for Rio Tinto to look to grow in lithium through M&A,” UBS said.
Of the other battery metals, it was copper which made a small wave at RRS and a bigger wave overseas.
Locally, it was Talisman Mining which led copper stocks higher with a rise of 1c to 19c after the presentation of a well-received paper at RRS and a personal marketing effort by the company chairman, Kerry Harmanis.
Best known as a big winner from the nickel boom of 2007 when he cashed out in the $3 billion takeover of Jubilee Mines by Xstrata (now Glencore) Harmanis is now a true believer in copper as the metal of the future.
That view is shared at the top end of mining with the chief executive of BHP, Mike Henry, pushing the case for copper at a rival event to RRS, the Bank of America Global Metals Conference in Spain.
Using language straight from Beament’s handbook, which might see “stonker” added to the Joint Ore Reserves Committee definitions of drilling results, Henry said the level of investment required to meet future copper demand was “freakishly large”.
In all, it hasn’t been a flash week but one which will be remembered for a “stonker” of a drill result and a copper market facing a “freakishly” large investment challenge.