Iron ore and coal, Australia’s top commodity exports, are the best examples of investors and their high-paid advisers not knowing which way to jump.
In coal, which is the secret sauce in the Australian Government’s remarkable $50 billion budget bonus reported during the week, the share prices of leading producers have surged higher just as sentiment turns against coal.
With a price sitting close to an all-time high of US$441 a tonne for thermal (electricity producing) material the profits of coal companies such as New Hope have blown through the roof, with the business once dubbed No Hope generating a record profit of $1.4 billion and seemingly on track to hit $2.2 billion in the current financial year, according to Citi.
But even with a flood of cash streaming in, Citi has hit the sell button, tipping a 50.5% fall in New Hope’s share price which the bank reckons will drop to $3 when the coal price retreats, which is what Wood Mackenzie, a leading commodity research house, is forecasting for next year when the Russia/Europe energy crisis passes.
Fortescue Metals, a darling of Australian investors thanks to its big and highly profitable iron ore business, is also starting to run out of friends in the banking world as concern grows over Chinese steel demand and Fortescue’s financially opaque adventure in green energy.
Over the past three months, even as it has delivered a bumper dividend to its shareholders, Fortescue has run out of friends, with no buy tips from leading banks and a fresh low-price forecast from Goldman Sachs, which sees the stock dropping to $12.10, down 27% on Wednesday’s closing price of $16.55.
Fortescue’s chairman, Andrew Forrest, again strutted the stage to promote his energy dream only to cop bad reviews as banks such as Morgan Stanley became even more critical of the green energy costs, telling clients that decarbonising the company’s iron ore business would hit profits and could lead to a reduced dividend.
The decline of coal and iron ore as investment winners for Australian investors was a low point on the local stock market in a disjointed week which started with the Queen’s funeral and rolled into today’s curious Thursday public holiday which will, in turn, ensure little business being done until next week after Saturday’s AFL grand final.
Overall, in the short week so far, the Australian market has continued its downward slide, shedding another 2.3% as measured by the all-ordinaries index and despite a flash of optimism on Monday. The ASX has now lost 12.6% since the start of the year.
The mining market, weighed down by a weaker gold price (off US$40 an ounce to US$1664/oz), fell by 5% with the only winning sector being energy with a 1.1% rise in the ASX energy index thanks to that absurdly high coal price and threats of higher oil and gas prices as Russia’s war in Ukraine rumbles on.
While interest rate moves dominate investment planning, there is another issue starting to creep into consideration, the corrosive effects of cost inflation on profits.
Morgan Stanley highlighted the cost question with a report which looked at long-term commodity incentive prices, which are the prices required to justify the development of new projects.
With energy, labour, raw materials and long delays to permitting approvals, the bank raised the incentive prices for all metals and minerals and even noted that after recent price falls some commodities have dropped below incentives prices which could be a drag on investment decisions.
Good news in the markets, and there was a bit, could be found in the ongoing stampede into lithium and rare earth stocks which are, along with copper and nickel, the major beneficiaries of energy transition.
Pilbara Minerals led most lithium stocks higher, adding 19c to $4.91, but after hitting an all-time high of $5.08 thanks to the latest spodumene auction, which attracted a winning bid of US$6998 a tonne for material assaying 5.5% lithium, equivalent to US$7708/t for the 6% material traded in China.
In China, Bloomberg News reported that lithium carbonate had rocketed to a record US$71,315/t thanks to battery makers scrambling for scarce supplies as demand for electric vehicles continued to surge.
Global Lithium, another big winner this year, eased back from last week’s all-time share price high of $2.94, though even at yesterday’s $2.50 the stock is 40% higher than a month ago and could soon test the $3 price target of Macquarie Bank or the $3.10 of Shaw and Partners.
Rare earth stocks made waves with discovery and capital raising news though the overall trend in share prices was down, led by Lynas. which shed 25c to $8.11 and Hastings, which slipped 14c lower to $4.15.
Other rare earth news included:
- Indiana Resources reporting final assays from its Gawler Craton rare earth discovery in South Australia with a best drill hit of 33 metres at 1218 parts per million (0.1218%) rare earths from a depth of 44m, helping the stock add 0.2c to 6.5c.
- Australian Rare Earths rose by 3c to 36c after reporting that metallurgical test work indicated a viable pathway for processing material at its Koppamurra project also in South Australia.
- RareX said an extensive phosphate and rare earth mineral system was emerging at its Cummins Range project in WA with a best drill intersection of 384.4m at 4% phosphate and 0.3% rare earth oxides, and
- Askari Metals said it had identified significant rare earth elements at its Red Peak project in WA, only to be sold down by 8.5c to 34c.
Gold stocks had a difficult week as the weight of central bank interest rate increases dragged them lower.
St Barbara was one of heaviest losers with a fall of 11c to 78c, slightly ahead of the stock’s 12-month low of 75c reached in late June and despite a high-profile appearance of chief executive, Craig Jetson at the Denver gold forum in Colorado Springs.
Genesis Minerals, which is vying with St Barbara for the role of consolidator in WA’s Leonora gold belt was also sold off, shedding 9c to 96.5c.
Sector leaders Evolution and Northern Star dropped 22c and 36c respectively to $1.99 and $7.46 while De Grey, which had been expected to make a splash at the U.S. gold show, was down 12c to $1.01.
Copper stocks were mixed to weaker as investors fretted about the effects of a global slowdown on the most widely used industrial metal, which barely moved all week at US$3.54 a pound.
Rio Tinto boss, Jakob Stausholm, warned that the outlook for copper was “challenged” while Goldman Sachs sees a rebound in demand by 2025 driving prices up to double where they are today.
Copper exploration news included Lefroy Exploration reporting significant mineralisation from drilling at the Lovejoy prospect at its Burns discovery in WA. Assays are pending but Lefroy lost 2c during the week to 31c.
Aeris Resources reported several high-grade copper-rich lenses from drilling at its Murrawombie project in NSW with a best hit of 8m at 2.05% copper plus 0.47 grams of gold a tonne from a depth of 845m. On the market, Aeris slipped 1c lower to 48c.
Other news and markets moves in this shortened week included:
- AIC Mines, the local comeback vehicle for Centamin gold pioneer Joseph El-Raghy, added 0.5c to 50c after unveiling a 33.7c per share takeover bid for adjoining Queensland copper player Demetallica which rose by 10c to 30c.
- OreCorp added 1c to 43c as interest grows in its Nyanzaga gold project in Tanzania but Bell Potter reckons the stocks is heading up to 84c thanks to the quality of the project and OreCorp’s strong management.
- Galileo Mining reported fresh high-grade platinum group metal assays from drilling at its Callisto project in WA including 30m at 2.00g/t of 3E (platinum, palladium, and gold), good enough to lift the stock by 7c to $1.19.
- Elementos added 1.5c to 32c after announcing the awarding of a contract for a processing plant at its Oropesa tin project in Spain, and
- Lucapa Diamond Company reported the recovery of the 29th diamond of more than 100 carats from its jointly owned Lulo project in Angola. On the market the stock slipped 0.4c lower to 5.4c.