Evidence of peak inflation combines with M&A fever to fuel investor optimism

BHP’s bid for OZ Minerals was the highlight of remarkably upbeat trading on the Australian market this week as fear of future interest rates hikes faded and M&A became the game to play.

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Underpinning the return of optimism was a modest dip in U.S. inflation from an annualised 9.1% to 8.5%, sparking confident comments about the end of the inflation spiral which has rattled investors.

Whether inflation is dead, it is still close to a 40-year high, and will be the hot topic for the rest of the year, as will government determination to kill it with economy-slaying high interest rates.

For now, it looks like the good times are back – if you ignore a small war in Ukraine which could become a large war, and the potential for war in Taiwan.

OZ was one of the top performers on the ASX with a 37% rise over the week to $25.79, comfortably ahead of BHP’s $25 offer and a sign that investors expect more, or even a bidding dual given the strong interest in copper as a future facing metal.

Other copper stocks benefited from the OZ bid with Coda up 4.5c (14.5%) to 36c. Aeris up 11.5c (25%) to 56c, and Sandfire up 40c (8.8%) to $4.87 with Morgan Stanley updating its Sandfire profit estimates and maintaining a buy tip on the stock with a price target of $5.60.

An encouraging US10c a pound rise in the copper price to US$3.64/lb helped stocks exposed to the metal but most interest was in trying to pick the next copper takeover target among stocks exposed to other future facing metals, especially nickel, which rose by US$30 a tonne this week to US$22,423/t.

Best local nickel stock was Centaurus, which added 11c to $1.07, followed by Mincor, also up 11c to $2.02, and Panoramic, up 1.4c to 22c. IGO, which is increasingly seen as a lithium stock, gained 77c to $12.10.

Jefferies, a U.S.-based investment bank, reckons the OZ bid will spark a burst of takeover action across the resources sector. “M&A in mining has finally begun,” Jefferies said.

Overall, the Australian market rose by 1.5% as measured by the all-ordinaries index with the metals index up 3.5% while the gold index delivered a respectable 3.15% increase.

A report from the International Energy Agency was a factor in rekindling investor interest in the future facing and battery metal families with the IEA, best known for its research into oil and gas, warning that there needs to be a massive increase in the supply of critical metals to meet demand in 2030.

The IEA used lithium as an example of the challenge ahead saying that it expects a six-fold increase in supply to 500,000 tonnes by 2030 which could involve the construction of up to 50 average-sized mines.

The challenge of meeting demand was magnified on Wednesday when the U.S. Senate passed new laws which will provide long-term tax credits to wind, solar and battery projects to boost renewable energy production and storage. These will pile pressure on critical metal supply chains.

Australian lithium stocks had a bumper week led by a number of low-profile explorers which delivered strong share prices moves such as:

  • Lithium Plus adding 25.5c (58%) to 68c after reporting a thick (43 metre) pegmatite intersection at its Bynoe project which adjoins the Finniss project of Core Lithium in the Northern Territory. Assays are pending but the new hole appears to be an extension of old drilling which returned material grading 1.43% lithium.
  • Global Lithium reported high grade drilling results from its Manna project near Kalgoorlie in WA with a best hit of 24 metres at 1.03% lithium from a depth of 159m. On the market, Global added 36c (24%) to $1.88.
  • Eastern Resources (formerly Eastern Iron) rose by 0.6c (21%) to 3.4c after reporting significant lithium in soil results at its Trigg Hill project in WA’s Pilbara region, and
  • Mineral Resources added $3.47 (6.2%) to $59.86 after as investment banks boosted the company’s potential profits from toll treating spodumene at its Mount Marion project in WA. Morgan Stanley has a buy tip on the stock with a price target of $64.80.

Local lithium leaders all moved higher. Pilbara added 31c to $3.12. Allkem put on 90c to $12.44, and Liontown rose by 33c to $1.79.

Gold, which has bounced back from its slide through the US$1700 an ounce mark just three weeks ago to trade at US$1787/oz (up US$20/oz over the past five trading days) is attracting interest from long-term investors as central bank buying picks up and a Canadian investment banks tells clients that junior gold stocks are significantly undervalued.

RBC Dominion Securities said that the values of Canadian junior gold stocks had fallen by 35% this year to sit at US$29/oz for gold on their books, a low point last reached in 2015.

At the top end of the gold market is news of central bank buying for the third consecutive month, a sign that the institutions which own the lion’s share of the world’s gold are confident of continuing strong demand for the commodity/currency, but perhaps also as insurance against the threat of a sovereign debt crisis.

Locally, most gold company price moves were modest with a handful of exceptions such as Gascoyne Resources adding 2.5c (10%) to 27c after a series of fresh drill results from drilling at Gilbey’s North with a best hit of 32m at 8.58 grams a tonne.

Peregrine Gold added 10c to 77c after reporting visible gold mineralisation from shallow drilling at its Peninsula project near the WA iron ore centre of Newman.

Meeka Metals was another eye-catching performer with a rise of 1.6c (31%) to 6.7c after reporting a significant discovery at its St Anne’s project in WA’s Murchison districts.

Other gold moves of interest included St Barbara, down 19c to $1.05 after releasing a poorly received production guidance report for the 12-months ahead, while possible merger partner Genesis was also marked down, slipping 9c to $1.37.

Gold leaders were relatively stable. Newcrest added an insignificant 5c to $19.48. Northern Star put on 15c to $8.43 and Evolution was up 2.5c to $2.76.
Uranium stocks continued to attract investor support as the energy crisis in Europe deepened and Asian countries rushed to buy coal, gas and oil as insurance against a worsening in the Ukraine war which has constrained Russian energy exports.

DevEx was the U-star of the week with a rise of 5c to 38c after reporting high-grade assays from drilling at its Nabarlek South project in the Northern Territory with a best hit of 10.7m at 1.2% uranium oxide from a depth of 123.4m, with a 3.2m core grading 3.05% uranium.

Other U-movers included Deep Yellow, up 7c to 82c. Boss Energy, up 2c to $2.47. Paladin down 3c to 75 and Lotus, down 0.2c to 23c despite reporting that its mothballed Kayelekera project in Malawi could be redeveloped quickly as a low-cost operation.

Iron ore miners moved higher but investment bank opinion about the outlook was mixed.

Local leader Fortescue added an impressive $1.28 to $19.13, perhaps thanks to investor optimism that they will be showered with dividend cash at the end of the month. Champion Iron added 29c to $4.95 and Mt Gibson eased up by 0.3c to 51.

Morgan Stanley is the leading iron ore bear seeing “little reason to be bullish into year-end” but with hope for support at the current iron ore price of around US$112 a tonne.

Credit Suisse disagrees. It reckons depleted Chinese iron ore stocks will be the price driver, adding that “we’re confident in our iron ore price tip of US$140/t in the December quarter and US$130/t in the March quarter of next year.”

The other trend evident this week was a continuation of the fund-raising rush as small companies catch the wave of returning optimism.

This week saw shares issues haul in fresh cash for: West Wits ($2.5 million). Bryah Resources ($1.4 million). Cooper Metals ($2.55 million). Odin Metals ($1.5 million), and Evolution Energy Minerals ($13 million).

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