Resources stocks caught in tug of war between financial crises and commodities demand

Australian financial markets were surprisingly resilient this week as the world’s central banks entered the final stage of their confidence-crushing round of interest rate increases which finally killed the ailing Credit Suisse.

TugofWar

The death of the 167 year-old Swiss financial institution was a remarkably timid affair best summed up the words of T.S. Eliot’s 1925 poem The Hollow Men: “this is the way the world ends, not with a bang but a whimper”.

What lasting effects there might be given that billions of dollars of investor wealth tied up in Credit Suisse bonds has been wiped out remains to be seen. But it’s a fair bet that capital and debt raising for high-risk ventures, such as those in mining and oil, will struggle get support until the dust settles.

Other banks, including First Republic in the U.S., were on the edge of insolvency as the week drew to a close and everyone headed home to try and work out exactly what happened and what comes next because financial crises do not last a few days, they run for months.

The late Robert Holmes a Court famously said in the 1980s that people and companies were sometimes insolvent long before they knew it. Holmes a Court was himself a victim of a bank shake-out when he had funding pulled at the last minute after an agreement had been reached on a bid for the oil producer Texaco. It was, in hindsight, the beginning of the end for Hacca.

Somewhere out there in the financial jungle other failures like Credit Suisse and Silicon Valley Bank are on their last legs, especially after the latest 0.25% increase in U.S. interest rates and the likelihood that there will be more to come before the end of the year.

While investors watch and wait for the next phase of the valiant (but probably doomed) attempt by the central banks to drive inflation down to a target range of 2%-to-3% (it’s still 10% in Britain) they are placing bets on Chinese demand delivering a boost to the commodities which are the Australian economy’s lifeblood.

Overall, this tug of war between gloom and a hoped for Chinese-led boom, produced a strangely benign Australian market with the all ordinaires index as flat as a pancake (down 0.35% over the week if you must ask) while the mining index fell by 3.4% and the gold index rose by 4%, taking its gain over the past month to 10%.

The outlook is clouded to say the least but some of the smartest people in the room see better times ahead, led by perpetual optimist Jeff Currie, global head of commodities at Goldman Sachs.

Currie, speaking at a commodities conference in Switzerland, said the outlook for copper was “extraordinarily positive” with the lowest observable inventories ever recorded at 125,000 tonnes and with peak supply expected next year.

“Near term we put the copper price at US$10,500 a tonne (US$4.77 a pound) and longer term our price target is US$15,000/t (US$6.80/lb), Currie said. Trafigura, a big commodities dealer, agrees with Currie’s price forecasts.

On metal markets this week, copper rose to US$9000/t (US$4.09/lb) with local copper stocks gaining ground as other sectors weakened. Sandfire added 21c to $5.78 while Aeris eased back by 3.5c to 54c but was earlier trading up (at 57c) after reporting solid exploration results from its Bentley mine in WA.

Gold, as was to be expected, performed well against a tricky financial background, briefly rising above US$2000 an ounce on Monday before easing as the heat came out of the Credit Suisse collapse, closing the week at US$1977/oz, down US$12/oz, but still up US$155/oz on the price of two weeks ago.

Most local gold stocks gained ground, led by Breaker Resources, which copped a share-swap merger proposal from Ramelius, with Breaker gaining 10c (38%) to 38c while Ramelius rose by 3.5c to $1.13.

Other gold moves included Bellevue, up 5c to $1.17. Northern Star, up 41c to $11.34. Kairos up 0.3c to 2c but only after fielding a speeding inquiry from exchange regulators after the stock rose to 2.2c on Tuesday, and Besra up 1.1c to 10c after announcing a funding deal to develop its Bau gold project in Malaysia.

Battery metals had a busy week with rare earths and nickel leading the way up and lithium continuing to weaken as a glut in China weighed on sentiment.

Azure seems to have been the only winner among the lithium stocks with a rise of 1.2c to 28c after releasing more high-grade assays from drilling at its Andover project in WA with a best hit of 4.67% lithium.

Other lithium moves included Cygnus, down 6.5c to 21c despite reporting high grade assays from drilling at its James Bay project in Canada. Askari slipping 1.5c lower to 47c after announcing a joint venture with China’s Huayou Cobalt, and Winsome Resources fell by 17c to $1.39 after reporting what looked to be encouraging drill results from work at its Adina project in Canada.

The heavy sell-off in lithium stocks was the focus of a battery metals conference in Perth early this week with a commodities expert, Jesline Tang from S&P Global forecasting a continued price slide before stabilising in the next few months.

News from cobalt explorers produced one outstanding result and a solid share price rise with Norwegian-focussed Kuniko gaining 9c to 49c after reporting several rich intersections from drilling at its Skuterud project with field observations (hand held X-ray fluorescence) of between 1% and 2% cobalt.

Rare earth stocks outperformed the general market though most rises were modest and one fall was quite big as WA1 Resources dropped by 9c to $1.16 after announcing a restart on drilling at its high profile West Arunta project in WA.

Other rare earth moves included: RareX, up 0.5c to 5c after reporting that test work had shown the potential to produce fertilisers from direct shopping ore at its Cummins Range project in WA.

Narryer Metals added 1c to 9c after reporting the discovery of carbonatite at its Rocky Gully project in the south of WA and Marmota gained 0.2c to 3.9c after reporting exploration success at its delightfully-named Muckanippie project in South Australia.

Other news and market moves in what’s been a difficult week included:

  • Galileo Mining rising by 10c to 65c after another highly encouraging result from drilling at its Callisto palladium and nickel project in the south of WA where an impressive hit of 72 metres at 1.16% 3E (palladium, platinum and gold) was encountered from a depth of 503m.
  • Magnetite Mines was the best performing iron ore stock with a rise of 4c to 61c after reporting progress with optimising its Razorback project in South Australia. Mt Gibson Iron also gained ground with a rise of 1.5c to 51c after reporting that it would accelerate shipments of high grade ore from its Koolan Island project off the coast of WA.
  • Most other iron ore stocks fell. Fortescue was down 77c to $20.61 and Champion Iron was 26c weaker at $6.93.
  • NickelSearch added 0.2c to 8c after announcing that it would soon start drilling a one kilometre anomaly within its Carlingup nickel project in the south of WA, and
  • Cobalt Blue said a definitive feasibility study into its Broken Hill cobalt project in NSW remained on track for completion in the September quarter. On the market the stock slipped 0.7c lower to 34c.

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