Energy stocks surge with signs of more to come, fueling inflation and rate fears

Lithium, uranium and oil were the winners on financial markets this week with that “all things energy” theme likely to be a winner for the rest of the year, and beyond.

By Tim Treadgold.


Gina Rinehart’s raid on emerging lithium producer Liontown was a prime example of the energy rush underway as governments try to force fossil fuels out of the economy without having sufficient replacement power in place.

While good news for investors with energy exposure, the adverse effect of higher prices for petrol, diesel and batteries is that inflation could stay high for longer delaying a decline in interest rates.

Gold is paying a price for this “long inflation, long rates” view, losing US$12 an ounce to US$1909/oz, a fall which could dampen some of the enthusiasm at next week’s big U.S. gold conference in Colorado, which is always a magnet for Australian miners.

Oil, the ultimate price setter for everything, added US$2 a barrel this week to US$92.37/bbl, up 10% over the past month as Saudi Arabia and Russia extend production cuts.

Mining companies will be finding the decline in oil supply from Saudi Arabia and Russia particularly troublesome because their heavy crudes are critical in the production of diesel which has seen a much steeper price rise than petrol (gasoline) since mid-year.

Uranium, which is finally being recognised as a critical provider of emissions-free, base-load electricity, traded up to US$62 a pound, the highest since Russia invaded Ukraine, with more to come as power utilities enter a market dominated until now by speculative commodity traders.

Boss, one of the emerging uranium stars, had another excellent week, adding 43c (11%) to $4.39. Paladin, another big winner (so far) from the uranium revival, managed a 2c rise to 94c, while Deep Yellow rose by 8c to $1.05 after reporting the completion of an infill drilling program at its Tumas project in Namibia.

Overall, the Australian market this week was rattled by uncertainty over the prospect of another round of interest rate rises, tightening union control of business, the potential for a government loss in next month’s “voice” referendum and the astonishing reputational damage Qantas has inflicted on itself.

That package of negatives, when combined with a worsening geopolitical outlook, weighed heavily on sentiment, resulting in a “go nowhere” market which oscillated between a few points up and a few points down to finish up with an infinitesimal gain for the week of 0.4% as measured by the all-ordinaries index.

Mining did worse with a fall of 3.7% despite a rebound by the big iron ore producers such as Fortescue, which rose by 3.7% to cruise back through the $20 mark thanks to the iron ore price rising to US$122 a tonne, up U$9/t over the week.

Rinehart, who will also be riding high on iron ore cash, could have made her $400 million investment for a 7.7% stake in Liontown from her petty cash tin.

That stake in Liontown deals Rinehart into a grand lithium consolidation play which could also involve Chris Ellison, boss of Mineral Resources, who this week moved to snatch control of Delta Lithium.

Another key player on the fast-moving WA lithium sector is Albemarle, the U.S. chemical processing specialist, which has a $6 billion bid on the table at $3 per Liontown share – with some traders expecting a bit more to seal the deal.

Rinehart and Ellison are very comfortable with Albemarle and its chemistry skills as well as the soaring demand for critical metals in the U.S. which is starting to pick up the slack left by a slowing China.

Morgan Stanley, an investment bank, said in a major research report this week that “we see potential for a U.S. mining boom after decades of underinvestment: -- but before the U.S. boom kicks in critical metals will be sourced from trusted trading partners such as Australia.

Ellison’s move on Delta, which helped lift the stock by 10c to 82c, will almost certainly not be the last to stir the lithium sector, which is top of a list poised for a burst of corporate action.

Not all lithium news was good news. Goldman Sachs tipped another bucket of cold water on the sector with a commodity market analysis which forecast steep falls in the price of the metal with spodumene (upgraded ore) tipped to fall to US$1763 a tonne next year and then down to US$800/t in 2025.

That downbeat outlook from a big-name bank which has been a lithium bear for two years might have been a factor in Pilbara Minerals losing 14c to $4.41, Allkem dropping by 73c to $12.69 and Core slipping 1.2c lower to 38c.

Macquarie Bank was also wary of the lithium price outlook, trimming its spot prices while maintaining a “buy the sector” stance with an “outperform” tip on every stock it follows, except Liontown, which has hit its Albemarle takeover price of $3.

BDO, an accounting and corporate advisory firm, said in a midweek note to clients that conditions today were ideal for consolidation of the Australian mineral exploration sector with tight capital markets and strong commodity prices.

“Many explorers are now inclined to advance their projects through consolidation, choosing that route over running the gauntlet with uncertain and volatile capital markets,” BDO said.

For investors who have been focused on commodity prices as the key driver behind share prices, the BDO comments could signal a new way to play the market – buying for takeover action, a high-risk strategy but also one to deliver fat and fast profits.

Gold is likely to be the headline maker next week as news from the Denver Gold Forum hits media outlets, which could explain the stronger stock market performance of leading producers this week even as gold lost ground.

Northern Star, for example, clawed back 21c to $11.25, wiping out a fall incurred last week. Evolution added 19c to $3.75, and De Grey rose by 2c to $1.32.

UBS said the eventual U.S. interest rate easing cycle will help gold which is why it is sticking to a price target of US$2065/oz, adding that it is on the same page as BDO when it comes to corporate action, telling clients that “we expected merger and acquisition (M&A) activity to be a feature of the next phase of the gold sector”.

ANZ echoed that sentiment, up to a point, saying that gold was holding its own in the face of rising U.S. bond yields with “investors increasing exposure to exchange traded gold funds as the U.S. nears the end of its rate rising cycle”.

Other news and market moves of interest this week included:

  • Develop added 24c to $2.93 after reporting encouraging financial results from an updated plan to restart mining at the Woodlawn copper and zinc project near Canberra.
  • Talga earned a “best in class” report from Bell Potter after clearing major environmental hurdles for its Nunasvaara South graphite project in Sweden, helping the stock add 3.5c to $1.36 with the broker tipping a future price of $2.50.
  • Genesis Minerals rose by 10c to $1.65 after reporting fresh high grade drill results from the Gwalia mine in WA. CG Capital Markets said the news results demonstrated that the plan for Gwalia was “coming to life”, forecasting a future share price of $2.30.
  • Flynn Gold rose by 1.2c to 8.1c after reporting high grade gold assays from drilling at its Trafalgar project in Tasmania with a best hit of 4 metres at 23.7 grams a tonne from a depth of 23m.
  • Anax gained 0.2c to 4.9c after saying that a heap leach scoping study had revealed substantially greater free cash flow from its Whim Creek copper and zinc project in WA.
  • Burgundy Diamond Mines slipped 1c lower to 17c despite reporting a conceptual enhancement program for its recently acquired Ekati diamond mine in Canada, and
  • American Rare Earths added 1c to 13c after reporting high grade assays from its Beaver Creek rare earths project in the U.S. State of Wyoming.

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