Hints of China revival provide partial relief to symptoms of war and rising bond yields

It’s been said before, but Christmas really can’t come fast enough for investors after the latest roller-coaster ride this week caused by war in Gaza, a pointless referendum in Australia, the U.S. 10-year bond yield approaching 5% -- and a hint of better news from China.

By Tim Treadgold

Global Markets 2

The net result was a stock market which bounced around, up one day and down the next, ending the week down 1.3% over the week to be roughly back where it was at the start of the year.

The good news among the not-so-good is that the seeds of next year’s recovery can be seen in China’s slowly improving economy, which boosted the iron ore price this week, and comments from RBC Capital Markets that it can see an upturn in the new year.

The investment bank said in a preview of what to expect in the final three months of the year that a “floor” is developing under commodity prices, though it can’t see a surge in demand as the global economy battles interest rates at a 16-year high.

RBC said that while risks remain for 2024, the outlook is brighter, “and we expect the market will increasingly see through near-term headwinds”.

The two big corporate events of the week were both energy-related, confirming a regular theme of Prospector’s Diary that you can’t go wrong building exposure to energy – old and new.

The old energy example was Whitehaven’s US$3.2 billion purchase of the Daunia and Blackwater coking coal mines from BHP, a well-flagged purchase which met some opposition but which delivered an 11% share price rise for Whitehaven shareholders.

Coal stocks (delicate readers should look away now) were among the best performers as demand for the high-carbon fuel remains strong and is growing thanks to Chinese and emerging market demand.

Matching Whitehaven’s rise was a 2.2c increase by Coronado to $1.70 and a 2c rise by Stanmore to $3.71, followed by a Morgans buy tip and price target for Stanmore of $4.35.

The new energy deal was a less cheery event, the dropping of a $3 per share takeover offer by U.S. lithium giant Albemarle for emerging local lithium star, Liontown, which was down 21c at $2.79 when the bid fell over and will be even less after a fund-raising exercise is completed.

Citi was quick out of the blocks after the Liontown bid collapsed with a sell tip on the stock and price target down from the (failed) bid price of $3 to $2.30.

The fly in the Liontown ointment is Australia’s richest person, iron ore billionaire, Gina Rinehart, who is now in the box seat to dictate the future of Liontown and perhaps the wider Australian lithium sector if she teams up with Chris Ellison from Mineral Resources who appears to be working on a similar sector-domination project.

While Liontown shareholders will have to wait and see what Rinehart wants, it’s a different story with a smaller lithium takeover which this week saw Chile’s State-owned copper company, Codelco, agree to buy ASX-listed Lithium Power International at a price of $385 million, or 57c a share.

Other lithium news and market moves this week included:

  • Patriot Battery Metals adding 1c to $1.26 after reporting a new high-grade lithium zone at its Corvette property in Canada.
  • Cygnus Metals reported a 1.9-kilometre corridor of spodumene-bearing pegmatites grading up to 6.5% lithium at its Auclair project in Canada, helping the stock add 0.5c to 15c.
  • Galan Lithium added 4c to 73c after reporting significant progress with its Hombre Muerto West project in Argentina, followed by an upgraded target price and buy tip from Macquarie which sees the stock rising to $1.40.
  • Green Technology Metals slipped 3c to 43c despite updating the resource at its Root Bay project in Canada. Bell Potter stuck with a buy tip but lowered the target price from $1.46 to $1.15, and
  • Pilbara Minerals was sold off ahead of its September quarter report, shedding 42c to $3.85, a fall preceded by Morgans saying it was “trimming expectations for next year” but sticking with a buy tip and price target of $5.10.

The big picture for investors grew cloudier as the week progressed with a bruising referendum on greater Aboriginal constitutional recognition being rejected, followed by a heavy loss of life in Gaza and threats of the war spreading.

Reserve Bank governor, Michele Bullock, summed up the situation by describing news flow as “shock, after shock, after shock”, a comment which keep interest-rate observers on their toes because she seems poised to ratchet rates up again, perhaps as a Melbourne Cup surprise on November 7.

The case for a November rate hike by the RBA was increased by yesterday’s fall in the unemployment rate from 3.7% to 3.6% with a saving grace being that the slip was more about people who had given up looking.

It’s a similar situation in the U.S. where the politics are going from bad to worse and interest rates are heading higher with the 10-year bond this week hitting 4.95% -- the rate was 0.8% on this day three years ago.

Iron ore, which is heavily dependent on Chinese demand, had a solid week with a US$1 per tonne rise to US$122/t, lifting all Australian stocks exposed to the material, led by BHP, up 43c to $45.11. Rio Tinto gained $1.21 to $115.33, and FMG added 56c to $21.86.

Smaller iron ore stocks joined in the revival. Champion added 8c to $6.30. CZR was up 1c to 19c, while Fenix was steady at 22c.

Gold, as expected when there’s a war in the Middle East, had a good week, adding US$69 an ounce to US$1949/oz, taking most local gold stocks with it.

Northern Star added 67c to $11.95. Evolution was up 10c to $3.62. Bellevue rose by 7.7c to $1.48 and Genesis gained 15c to $1.15. Resolute went the other way with a slip of 1c to 36c even with Macquarie’s buy tip and price target of 56c.

Copper failed to live up to an expectation of a price bounce despite the planned closure of the historic Mt Isa mine in Queensland, China’s slow recovery, war and a new report from Morgan Stanley which forecasts a growing copper deficit for the rest of the decade.

According to the bank, copper slipped into a deficit last year of 100,000 tonnes (which is nothing in a big market) but the shortfall will grow to 600,000t next year when the price should rise to US$4.04 a pound, up US45c on the latest price of US$3.58/lb.

Local copper stocks continued to weaken with Sandfire down 21c at $5.89 while 29Metals slipped 4c lower to 61c.

Other news and market moves included:

  • Boss Energy reclaiming recently lost ground with an 20c rise to $4.43, easily outperforming a lacklustre uranium sector which saw Paladin lose 4c to 95c, perhaps on its way to the 90c (plus sell tip) from Citi/
  • Devex had some good news from the field to report in the form of significant new uranium intersections from drilling at its Nabarlek North project, including 11.2m at 0.33% uranium, only to fall by 4c to 28c.
  • Lunnon Metals led a generally weaker nickel sector with a rise of 2c to 71c after reporting a drill hit of 4.13% nickel over 14.05m from a depth 881m in the Foster South project.
  • Buxton Resources edged up 0.5c to 20c after reporting semi-massive sulphides from the latest drilling at its Dogleg nickel, copper, cobalt project in WA’s West Kimberley. Assays are pending.
  • Felix Gold eased down by 0.5c to 6.5c after reporting high grade assays of up to 28% antimony from drilling at its Tresure Creek project in Alaska, and
  • Tesoro Gold added 0.3c to 1.8c after reporting encouraging surface sampling at its Ternera project in Chile.

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