Rare earths stocks jump as China threatens to kick another own goal with latest export ban

China giveth and China taketh away. Perhaps without anyone noticing, that was the theme of the first week of the new financial year with China sparking a rare earths rush before dulling confidence in a broader economic recovery.

By Tim Treadgold.

Global Markets _3

Threats by China to limit the exports of two minor but essential technology metals, gallium and germanium, sparked memories of the famous rare earth ban of 2010 which launched Australia’s entry into the industry via Lynas Rare Earths.

Until that early example of China weaponising trade, Lynas had struggled to survive, eventually rescued by a Japanese lifeline in the form of funding for the development of its Mt Weld mine in WA plus a long-term offtake deal.

What followed was a boom to remember as Lynas exploded with a share price rise of more than 2000% from 99c to $24, before China dropped its threats and opted to flood the market with rare earths to kill any competitors in a business it dominates. That tactic also failed.

With the threat of history repeating, and the gallium/germanium ban possibly spilling over into a rare earths re-run, Hastings Technology Metals led a local revival of the sector with a rise over the week of 25c to $1.58. Investor interest was also boosted by a well-received presentation last week at a Macquarie Bank critical metals conference.

Other rare earths stocks rode the China threat to higher share prices including Lynas up 34c to $7.14. Arafura, up 3.5c to 36c, Australian Rare Earths up 6c to 33c and Dreadnought 0.5c (9.5%) to 5.8c.

And, on cue, the ultra-small end of the market produced its first potential “nearology” gallium player in the form of perpetual try-hard Mt Burgess Mining which said its Kihabe copper project in Botswana was also a “significant gallium exploration target”. The stock remained stuck at 0.04c.

Of greater interest to investors with a taste for rare earths was a cautious sector update from Goldman Sachs, an investment bank, which reckons the market for the most valuable rare earths, neodymium and praseodymium (sold as NdPr), is “well supplied” thanks to Chinese production increases.

The bank’s supply and demand analysis sees a basket of NdPr rising from its currently depressed US$69 a kilogram to US$80 by the end of the year, up but well short of the US$124/kg at the end of last year.

While rare earths and other technology and critical metals were making headlines, the overall market was mixed, torn between relief that the Reserve Bank hit the pause button on interest rates, and concern that there will be more rate rises later in the year.

Layered on top is uncertainty about the strength of the Chinese economy which is dragging on prices for Australia’s commodity exports.

The next six months could see more of the same in what’s shaping as a classic battle of bulls and bears with the bulls reacting sharply to any sniff of good news while the bears are happy to sit on the sidelines counting their cash until there’s hard evidence of a sustainable revival.

Bears are also worried about being caught in one of the increasing number of corporate collapses with high interest rates doing to small miners what they’re doing to builders – squeezing the life out of them.

This week it was the turn of unlisted copper and zinc Aurora Metals and gold producer X64 to bite the dust. Aurora has been mining assets once the property of a high-flyer from the 1990s, Kagara Zinc. X64, formerly Medusa Mining, has been mining the Co-0 mine in the Philippines.

China’s role in what’s happening can be measured in the lacklustre performance of Dr Copper, the bellwether metal which often acts as a guide to overall economic activity.

For the past month, copper has gone nowhere, effectively flat at US$3.75 a pound, though from a six-month view it is down 10% and if the latest comments from Citi are a guide, it could slip further, down to US$3.60/lb, thanks to soft manufacturing indications.

Citi warned that investors had been building positions in copper in the belief of fresh Chinese Government economic stimulus after the July politburo meeting.

“We think broad-based stimulus is unlikely and this optimism is misplaced,” Citi said in a note which also warned that the iron ore price would be under pressure as the global economy remained stuck in neutral, or even went into reverse, with the price slipping back to around U$100 a tonne, down US$12/t on last trades.

Lithium, which remains the share traders’ star attraction, was also subject of a bank attack with Goldman Sachs adding the key battery metal to its cautionary list, telling clients that it was watching for a build-up in spodumene inventory.

The bank, which has been a long-term lithium bear, sees spodumene (part-processed lithium ore) falling from its March quarter average of US$5600 a tonne to US$3500/t by the end of the year and then down to an average of US$1753/t before a drop to US$800/t in 2025.

That dramatic lithium price collapse seen by Goldman Sachs was much more severe than the latest forecast from the Australian Government’s Department of Industry, which is tipping a spodumene price next year of US$2740/t – still down, but not so far.

On the market, which essentially went nowhere this week, up early down later, the all-ordinaries index slipped a microscopic 0.09% with lithium stocks providing most of the action as the preferred tokens of day traders who drove a number of stocks up sharply, including:

  • Krakatoa Resources rose 1.7c (70%) to 4.1c after reporting extremely high grade (4.3%) lithium from rock chip samples at its King Tamba exploration project near Mt Magnet in WA before asking for a trading suspension.
  • Cygnus Metals added 6.5 to 31c after reporting the presence of “dozens of pegmatite (a lithium host rock) targets” at its Sakami project in Canada. Shaw and Partners sees Cygnus rising to 46c.
  • Oceana Lithium rose 3.5c (10%) to 39c after announcing the acquisition of a lithium exploration tenement in the James Bay area of Canada.
  • Azure Minerals paused after its hectic rise of $1.39 (630%) since the start of the year, slipping 2.5c lower this week to $1.61 even as Bell Potter forecast a target price of $3, and
  • Tambourah Metals rose by 4.5 to 14c after announcing the acquisition of six lithium exploration projects in the Pilbara region of WA.

Nickel, one of the other important battery metals, was in the news for multiple reasons, including completion of the takeover of Mincor Resources by iron ore billionaire Andrew Forrest and a blizzard of international publicity over underwater mining of nickel and manganese nodules from the sea floor.

Forrest’s latest nickel deal takes him back to almost where he started in mining with Anaconda Nickel in the 1990s though this time he is armed with a spare billion dollars (or so) to complete what he started.

The sales pitch this time is that his nickel will be environmentally cleaner than anything produced in Indonesia, or scraped off the bottom of the ocean, a crusade which is likely to replicate his campaign against fossil fuels.

Among the handful of remaining Australian listed nickel stocks, Ardea Resources was the star with a 35c (105%) rise to 68c after it announced a deal with three Japanese trading houses over its long-delayed Kalgoorlie Nickel Project in WA,

Sabre Resources also moved up sharply with its rise of 1.7c (68%) to 4.2c after announcing encouraging drill results from its Sherlock Bay project in WA.

Gold tried but failed to stage a revival, hovering around US$1920 an ounce all week while on the ASX, the last rites were read over the battle for St Barbara.

Silver Lake, despite officially being the losing St Barbara bidder, emerged as a winner on the market with a rise of 12c to $1.09 while Genesis slipped 5c lower to $1.20 and St Barbara itself re-emerged in slimmed down format after a 16c loss to 31c.

Other news and markets moves of interest this week included:

  • MetalsX adding 2c to 29c after reporting high-grade tin assays from drilling at its Renison project in Tasmania with a best hit of 11.5 metres at 1.27% tine from a depth of 73.6m.
  • Coda Minerals said it had defined new copper/cobalt exploration targets at its Emmie Bluff project in South Australia. On the market, Coda added 2.5c to 24c.
  • Group6 Metals added 1c to 14c after announcing the start of commercial tungsten production at its Dolphin mine on King Island off Tasmania.
  • American West Metals rose by 3c to 16c after reporting more high-grade copper assays from drilling at its Storm copper project in Canada with a best intersection of 15.3m at 1.6% copper from a depth of 59.4m.
  • Ausgold rose by 0.2c to 4.5c after announcing an expansion in the size of its proposed Katanning gold project in WA. Argonaut, a stockbroking firm, reckons Ausgold is heading up to 12c, and
  • Perenti Global, a drilling contractor, added 8c to $1.12 after announcing an agreed merger with rival DDH1. Macquarie told clients it had a price target of $1.70 on Perenti.

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