Festive cheer replaces inflation fear amid growing talk of rate cuts in ‘24

The economic recovery, which is laying the foundations for 2024 to be a bumper year for investors, became a little clearer this week as U.S. growth accelerated, inflation fell in Australia and the OECD said Australian interest rates have peaked.

By Tim Treadgold.

ChristmasInvestor

Gold was the early winner from the latest news, rising to US$2044 an ounce, within touching distance of an all-time high, in what could be a sign of a pre-Christmas “Santa rally” developing for mining companies before the annual holiday slowdown.

The peak rates prediction from the Paris-based Organisation for Economic Cooperation and Development came after one of Australia’s top investors, Paul Taylor, joined a growing group of optimists who see next year as a time to buy quality stocks.

Taylor, who is head of investments in Australia for the giant U.S. fund manager Fidelity International, said a lot of risk was already factored into the market and while headwinds might still be blowing, “this kind of environment is generally a great time to invest”.

Chris Ellison, chief executive of Mineral Resources, weighed into the investment debate with a clear statement of his preference, which is for lithium rather than gold, saying he could trade the gold assets of Delta Lithium for more lithium exploration ground close to its Mt Ida project in WA.

Faster than expected U.S. economic expansion could underpin Ellison’s lithium optimism, with third quarter growth revised up from an annualised 4.9% to 5.2%, a remarkable pace for the world’s biggest economy and another pointer to a stronger global economy next year.

Australia’s big economic news this week was a fall in the annualised inflation rate from 5.6% to 4.9%, adding to confidence that the Reserve Bank is unlikely to raise rates again, unless there’s a surprise New Year inflation outbreak.

Westpac Bank, in a note to clients yesterday, was not totally confident that the Reserve Bank has finished with rate moves, saying that there would not be a pre-Christmas rate increase but the jury was out on whether there might be a rise in February.

For investors with an appetite for mining, one of the most interesting developments is the forecast of an acceleration in merger and acquisition (M&A) activity as asset-rich but cash-poor companies look for partners, or bidders.

Brett Beatty, managing director of Resource Capital Fund in Australia, said cash for explorers and early-stage miners was starting to dry up, which meant junior miners will have to “set egos aside” and consolidate land holdings.

RCF played a role in the consolidation of the Leonora gold district in WA which has led to Genesis Minerals emerging as the dominant miner with a market capitalisation approaching $2 billion and a share price up 23% to $1.79 over the past month.

Most other gold stocks have risen with the price of the metal, which has gained US$220/oz (12%) over the past two months, with winners that include:

  • Kingsgate Consolidated, up 20c to $1.46 as its revival of the Chatree mine in Thailand gathers pace.
  • Perseus Mining, up 15c to $1.92 as it cements a strategic 20% stake in Tanzanian gold project developer Orecorp which fell by 3c this week to 48c.
  • Northern Star and the other sector leader Evolution rising by $1 and 36c respectively to $12.59 and $4.07, and
  • Bellevue adding by 13c to $1.71.

Despite the stronger gold sector, seasoned stock picker Hedley Widdup had a warning for gold and lithium investors through an adjustment to his investment clock which tracks the mining cycle from boom-to-bust and back again.

According to Widdup, his 12-hour Lion Selection clock has moved to 2, a setting which comes after a boom at 12 and reflects a time of declining exploration and precedes a period of M&A, which is also what Beatty from RFC is predicting.

What worries gold investors, according to Widdup, is the risk of raising development capital and budget blow-outs whereas lithium explorers and miners have shrugged off a price correction, though not for much longer.

Lithium stocks, as Widdup warned, had a mixed week, with falls comfortably outnumbering rises, including Pilbara, down 8c to $3.59 and Liontown, down 5c to $1.37.

UBS, an investment bank, warned that it could not yet see light at the end of the lithium tunnel, citing a briefing by its China lithium analyst, Sky Han, who warned of a 150,000-tonne surplus of lithium carbonate next year as local supply rises, pushing the price for carbonate down to US$12,900 a tonne and spodumene down to US$1800/t.

RFC Ambrian, a London stockbroker, chimed in with a warning that while future deficits were still “on the horizon” the pace of supply was picking up.

Like Beatty and Widdup, RFC believes a period of M&A is on the way, led by big producers seeking out better-quality projects, junior explorers welcoming merger offers and the oil and gas industry making its presence felt as it joins the energy transition rush.

Most lithium exploration news was greeted by investor selling, led by one-time star Wildcat Resources, which lost 15c this week to trade at 73c, and Iris Metals, which reported encouraging drill results up to 1.41% lithium over 30 metres from a depth of 52m, only to drop 17c to $1.13.

Core Lithium lost 8c to 27c, sliding past a sell tip from Citi, which had tipped a fall to 29c.

Element 25, a manganese explorer, was a lithium winner after reporting a high-priority pegmatite target at its Lake Johnson project in WA, news which lifted the stock by 4c to 52c.

Copper, which has drifted off investor radar screens, produced one of the top stocks of the week with Cooper Metals rocketing 21c (93%) to 43c after reporting thick and rich drill results from its Brumby Ridge project in Queensland with best hits of 71m at 2.8% copper from 115m, and 24m at 5.4% at the top of the same hole.

Iron ore, despite the threat of a slowdown in Chinese steel production, continued to trade around US$133 a tonne, down US$4/t over the week but still handsomely profitable for all miners of the material, with Fortescue leading the way with a rise of 3c to $25.10.

Morgan Stanley described the iron ore price as “defiant” while Citi warned that China was making progress with a plan to increase self-sufficiency to try and trim the price for its steel industry.

Uranium stocks faded after a powerful run over the last six months. Boss Energy slipped 37c lower to $4.13 despite announcing first production of uranium from pre-flushing of wells at its Honeymoon project in South Australia.

Other news and market moves this week included:

  • Peninsular Energy adding 1c to 10c after reporting that it had secured funding for its Lance uranium project in the U.S., with Shaw stockbroking tipping a price target of 25c.
  • Lynas losing 27c to $6.40 after a tense annual meeting which saw investors ask for greater clarity on the company’s $730 million expansion project in WA.
  • Peak Rare Earths adding 1c to 39c after announcing the completion of a front-end design study for its Ngualla project in Tanzania,
  • Deep Yellow losing 14c to $1.02 despite reporting that its Tumas uranium project in Namibia had grown to a potential life of more than 30 years.
  • Strandline Resources earning an unusual buy tip from Shaw and 57c price target despite trading remaining suspended while the company resolves commissioning problems at its Coburn project in WA which could lead to a fresh capital raising, and
  • TG Metals and Aeris Resources leading a busy week of fund raising with TG pulling in $10 million to advance work at its Lake Johnson lithium discovery in WA while Aeris is raising $30 million for general working capital.

Upcoming Events

17th February 2022
Investor Webinar: Gateway Mining
Gateway Mining (ASX: GML) Managing Director Mark Cossom will discuss recennt highlights from the Company's Gedgee Gold Project in Western Australia and its exploration strategy for 2022.