Flashes of green in a red October as sell-off begins to tempt bargain-hunters back to the table

By Tim Treadgold | Markets suffered a bad case of financial flashbacks this week as the reality of interest rates staying higher for longer rocked investor confidence, leaving unanswered a tricky question: is it time to go bargain-hunting?


Not yet, seems to be the common answer, although there are reasons for a degree of confidence that much of the bad news which often floats to the surface in October is starting to be factored into prices.

Two mid-week research notes buoyed the case for optimism.

Citi upgraded two big miners, South32 and Chile’s Antofagasta, on what it calls “attractive valuations”, and Wilsons took a similar line with lithium, saying that price falls have improved the case for buying Allkem and Mineral Resources.

Wilsons’ view on lithium had a 2020 ring to, with the broking firm describing the recent correction in the price of the key battery metal as “cyclical not structural”. It was three years ago – when the lithium market was at its last low point – that a strong recovery kicked in.

“The fall in the lithium price has been primarily driven by cyclical concerns about the pace of China’s electric vehicle uptake,” Wilsons said. “However, the structural drivers are still intact and the current sell-off appears overdone”.

UBS echoed that view in a note to clients which described the lithium market as suffering “a kink in the chain”.

The UBS view is that a short-term correction will give way to a long-term recovery, although the bank also concedes that “there is still much to understand about the still opaque China-dominated supply chain”.

Other exceptions to the negative view which dominated market sentiment this week could be found in a handful of gold stocks, which can normally be expected to swim against an outgoing tide, led by De Grey which managed a rise of 2c to $1.08 while UBS refreshed a buy tip and price target of $1.50. Bell Potter went a step further, forecasting a future De Grey price of $1.80.

There were also encouraging moves in the iron ore, graphite and oil sectors, where a select few moved up while most stocks were falling.

Two small iron ore companies caught the eye of investors thanks largely to the price of the steel-making material hanging onto US$120-a-tonne which, on conversion to a weakening Australian dollar (US63.3c), means local miners are getting close to a handsome A$190/t.

CZR, which owns the small but perfectly formed Mesa project in WA’s Pilbara region, added 1.5c to 14c after announcing progress on finding a port to ship out its high-grade ore, and Fenix rose by 1c to 23c after announcing a deal to acquire a high-grade ore deposit in the Weld Range of WA.

Iron ore leaders such as Fortescue eased slightly with negative sentiment countered by the confidence of banks such as Morgan Stanley, which said there was unlikely to be a wholesale sell-off in bulk commodities because the outlook for China is not as bad as it appeared three months ago.

“Iron ore is holding at US$120/t with robust China steel output, strong blast furnace utilisation, falling port inventories and weaker Chinese domestic iron ore output,” Morgan Stanley said.

The iron ore price could fade to around US$105/t before Christmas, the bank said: “However, we could see a rebound into the first quarter of next year to US$120/t as China’s steel output rises and an El Nino weather event brings supply risks from Australia and Brazil.”

Discovery, development and upbeat market analysis helped a number of other stocks gain ground in a week when the overall market lost 1.7% as measured by the all-ordinaries index, while the mining index slipped 1% – which was better than expected – and the gold index clawed back lost ground to end with a decline of 3%.

Graphite, the sometimes forgotten “other half” of a rechargeable battery, got a boost when UBS described it as “the comeback kid”, powered by changing battery chemistry, which requires a higher graphite content.

Talga and Syrah were top of the UBS graphite stocks list, but others did better, led by Ecograf which added 1.5c to 12c and Sovereign Metals, up 1c to 40c. Talga bounced early to $1.26 but faded to $1.17 to be down 3c over the week. Syrah did much the same, rushing up to 58c before drifting back to 49c for a 1c gain.

Strike was the pick of an oil and gas sector bounced around by legal wrangles and an oil price which boomed early in the week and crashed later.

What drove Strike higher was highly encouraging exploration news from its South Erregulla well near Dongara in WA, with a trial gas test boosting confidence in the area and helping the stock add 4c to 44c.

All of those mainly modest price increases need to be seen against a troublesome background which includes the U.S. 10-year bond rate hitting a 16-year high of 4.8%, and the Australian dollar dropping to an 11-month low, pressuring the Reserve Bank to consider a pre-Christmas interest rate rise.

With rates storming higher and bond prices cratering, it was not a surprise that contenders emerged for the Nobel Prize in gloomy economics, led by Bill Gross and Albert Edwards.

Gross, co-founder of the giant U.S. fund manager, Pacific Investments (Pimco), said stocks were clearly over-valued and would only move back into view when bond yields fell.

Edwards, one of the financial world’s permanent bears, went a step further, equating current conditions as having an “echo of 1987”, which saw rising bond yields eventually crush confidence in equities with the crunch point coming on October 19 in the U.S. and October 20 in Australia.

The glum views of Gross and Edwards was complemented by heavy trading in New York of the Vix volatility index, also known as Wall Street’s “fear gauge” with a near-record number of Vix options traded this week as investors moved to protect themselves from a sudden fall in markets.

Nickel, which has suffered like graphite as an almost forgotten battery metal, produced one significant winner in Nimy Resources, which added 4c to 25c after reporting highly encouraging nickel-copper sulphide minerals in the first hole at the Block 2 prospect in its broader Mons project in WA.

Other news and market moves of interest in a roller-coaster week included:

  • Genesis Minerals bounced back from a sell-off early in the week which saw it fall to $1.32, closing yesterday at $1.37 for a 4c loss over the week. Macquarie Bank stuck with a buy tip and price target of $1.90 after Genesis reported better-than-expected production results and future plans.
  • Uranium stocks were sold off after a strong showing over the last three months. Boss Energy fell by 42c to $4.53, a price which still represents a 123% gain on the $2.03 at the start of the year. Deep Yellow lost 13c to $1.22 and Paladin was 11c weaker at $1.03.

  • Variscan Mines rose by 0.2c to 1.6c after reporting encouraging zinc grades from drilling at San Jose project in Spain, while local zinc favorite Rumble Resources was steady at 11c after it encountered encouraging zinc and lead from drilling at the Mato prospect within the broader Earaheedy project in WA.

  • Strandline reported the first sale of zircon from its Coburn project in WA as it continues to fine tune the mineral sands mine. On the market, Strandline slipped 1.4c lower to 9.6c, and

  • Rarely mentioned Norfolk Metals added 4c to 20c after gaining landowner access to conduct reconnaissance drilling at the Orroroo paleochannel uranium project in Tasmania.

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