BHP, Rio chiefs offer firm evidence on China comeback story; Catalyst acquires Plutonic

Plutonic deal sees De Crespigny-led gold miner emerge with 7Moz and 3Mtpa plant in WA gold belt; Plus, sell-off in lithium stocks doesn’t make sense.

Handshake

There was comforting commentary for the mining sector during the week from sector leaders BHP and Rio Tinto.

Both agreed that the all-important Chinese economy – for the resources sector at least – was on the march after coming out of COVID lockdowns.

They can be accused of talking their own book in the wake of their sharply lower profit reports, the December half for BHP and the full-year for Rio.

Their share prices have been under the pump since the lower profits were announced, due mainly to the paring of their dividends in line with their profit falls.

But commodity price action in the opening months of 2023 does suggest that the uncertainty around Chinese demand that dogged the mining sector in the back half of 2022 is lifting fast.

Iron ore is up 29% from its December half average, and copper has put on 16%.  If the higher levels are maintained, profits and dividends will substantially be higher in the next reporting periods.

Still, the market remains wary on China, leading to share price weakness for the big two of the mining game.

BHP and Rio are forensic on reading the Chinese market, as might be expected given their reliance on its demand levels.

So perhaps the market should be listening to what amounts to the most upbeat assessment on China demand by the pair in recent times.

BHP CEO Mike Henry said on Tuesday that while Europe and the US could see slowing growth, China’s late reopening from COVID is progressing well.

He pointed to “positive social and economic signposts emerging”. “Bank lending, mobility data, new home prices and business surveys are all showing solid signs of improvement in early calendar 2023,” Henry said.

“The pent-up demand being released as China opens back up from the COVID lock-downs, coupled with growth-promoting policies such as the support for the housing market, are expected to drive stronger economic growth and increased demand for the commodities we produce.

“We said in August that we believe that China will be a stabilising force for global growth over the remainder of this year and we now have even greater conviction in this view.”

Rio CEO Jakob Stausholm followed up on Wednesday with the observation that while much uncertainty remained, there are some green shoots emerging.

“Commodity prices have found some support in recent months with global base metal inventories at low levels and Chinese policy pivoting to pro-growth,” Stausholm said.

He finished up with an anecdote involving Rio’s biggest customer, the Chinese state-owned steel group Baowu.

“I spoke to our biggest customer, Baowu, last week and certainly from them, there is a positive way of looking at where the economy is going and there’s a need for steel,” he said. “So, I am quietly optimistic. It’s not going to be wild swings but the market has already steadied itself for good demand from China and that’s what we are seeing happening.”

China acting as a stabilising force to weaker growth in Europe and the US is good news for the entire mining sector.

The question now is when will the market get on board with the thematic that China is back.

Catalyst:

Like father, like son. Robert Champion de Crespigny was the great consolidator of the Aussie gold sector in the 1990s, building his Normandy Mining into a gold powerhouse that Newmont was to acquire in 2002 for $5 billion.

His son James is following in his footsteps, with Catalyst Metals (ASX:CYL) pulling in ownership of ASX-listed Vango (ASX:VAN) and Canadian-listed Superior Gold (TSXV:SGI) to take control of WA’s Plutonic-Marymia gold belt.

Add in Catalyst’s ownership of the high-grade Henty mine in Tassie, and what could come from the exciting Four Eagles gold exploration project in Victoria, and Catalyst is on its way to creating a mid-cap gold producer.

If he has a good dose of his father’s ambitions in the space, James won’t be stopping there.

Catalyst has the backing of Gina Rinehart’s Hancock Prospecting as both a major shareholder and a partner in Four Eagles. Having Hancock’s support is handy as completing the newest of the deals – the scrip takeover of Superior – requires Catalyst to raise $20m.

Superior owns the Plutonic gold mine, acquired from Northern Star in 2015, and Vango (now in the compulsory acquisition phase) owns the Marymia project some 20-40km to the north-east.

The Marymia project has a resource base of about 1m ounces while Superior’s Plutonic operation comes with a 5.9m ounce resource and critically, a 3Mtpa processing capacity which has been under-utilized because of COVID, labour shortages and other factors.

A bigger and better Plutonic-Marymia belt emerges from Catalyst’s consolidation moves. Always a sensible thing to do, it didn’t happen until James came along. Like his father would say, the bigger-and-better Catalyst that emerges from the deal-making will be due for a market rerating for the newly achieved scale of operations and the synergies it can deliver.

LITHIUM:

BHP is not interested in lithium while Rio is building a presence, with its first meaningful production still years off.

More’s the pity for them because the lithium producers have been going gangbusters on the profit front.

Lithium prices took off last year in a major way, with this profit reporting season giving us the first real feel of the earnings capability of the producers.

Pilbara (PLS) reports for the December half today and Macquarie is expecting a result slightly below consensus of $1.21 billion for the half year, and a rollicking $2.74 billion for the June year. The earnings surge is being repeated at all of the other producers.

It is amazing stuff. But the market in the lithium producers, and by extension, the developers and explorers, remains nervous about the lithium price cratering. It shouldn’t matter as all of them are being priced as if lithium has come off in a big way anyway.

There is no doubt that lithium carbonate prices in China are weakening. But lithium hydroxide and its preferred precursor, 6.2% spodumene concentrates produced here in Australia, remain as strong as you like. And demand for both carbonate and hydroxide in non-China markets remains as strong as you like.

Pilbara and others will provide commentary on all that in coming days. Don’t expect any Chicken Little-typed commentary.

That is assumed because Pilbara recently struck an interesting hydroxide tolling deal covering 15,000t of concentrate which implied a price aligned with previous spot sales of around US$8,300/t on Macquarie estimates compared with the circa $US6,300/t available on the spot market.

None of that is to suggest that lithium prices won’t come back to earth as supply (eventually) catches up with demand. But is that 3, 5 or 10 years out? Take your pick. Chris Ellison’s Mineral Resources has done just that, laying down almost $1 billion for a share of two lithium processing plants in China.

As it is, UBS in a research note on February 20 addressed some of the market’s concerns on lithium pricing as 2023 unfolds. But weighing everything up, it reiterated its bullish medium to long-term view of the market.

“We remain structurally bullish (on) lithium, thanks to unprecedented secular growth and ongoing supply challenges,” it said.

“China’s EV sales recovery post Chinese New Year/winter/COVID reopening is the number 1 catalyst we are watching.”

Its share price targets for the main players suggests individual stock upside ranging from 5% to 66%.

So the next time there is a sell-off in lithium stocks triggered by a newswire of no repute out of China suggesting the lithium party is over, it could well pay investors to do some channel checks before deciding on a response.

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