Rising Greenback joins rising rates in taking toll on commodity prices

Interest rates are not alone in reaching for the sky. The mighty U.S. dollar is also rocketing up and when it comes to commodity prices the combination of higher rates and a higher dollar can be lethal, as seen in the sliding gold price.

Global Market

Always an Australian favorite, gold is being buffeted by toxic events on financial markets with the price poised perilously close to the US$1700 an ounce market yesterday, and at US$1703/oz it is down U$60/oz over the past seven days.

Only a handful of gold miners defied the price plunge which has seen gold shed US$300/oz since early March, dragging the ASX gold index down 24% since the start of the year even with the biggest European war since 1945 raging in Ukraine, a crisis which might normally nave boosted gold.

Locally, the biggest gold losers included St Barbara, down 5.7c to 90c. Northern Star, down 9.5c to $7.51. Perseus, down 18c to $1.42 despite a handsome $280 million profit. Silver Lake, down 9.3c to $1.27 even as Macquarie Bank said buy with a price tip $1.80.

Tesoro Gold was a rare riser, just, with a gain of 0.2c to 4c after reporting a whopping drill hit of 434.6 metres at 1.22 grams a tonne from a depth of 15.4m at the El Zorro project in Chile.

Gold, as a commodity and a currency, can often play a role as the canary warning of tougher times for the broader commodity complex. It could rebound, as it has in the past, especially if the Ukraine war boils over but the currency and rates combination is not encouraging.

The problem with rising interest rates is easy to understand because they are an obvious cost to most businesses and this week saw the all-important U.S. 10-year bond move back up to 3.2% while the two-year bond hit 3.5%, the highest since 2007.

The problem with a rising dollar, and it is up 15% against a basket of rival currencies since the start of the year, means it is trading close to a 20-year high and since most commodities are traded in U.S. dollars the rise means the price of commodities in other currencies also rises, limiting the purchasing power of many customers.

For Australia the rates/dollar squeeze will have been a factor in a poor week on the local market with the all-ordinaries down 3% (and knocking on the door of the 7000-point mark), while the metals and mining index was down 6.4%, thanks in part to BHP going ex-dividend, while the gold index dropped by 7.6%.

The rates/dollar issue is a significant problem given the heavy exposure to commodity exports but there is a business saving the Australian dollar from falling further than its relatively modest US3c (4%) decline since the start of the year and that’s fossil fuels.

Coal, oil and gas, industries which some people want to close, have propped up the Aussie dollar and will probably keep doing that given the global energy crisis which has seen coal soar from US$50 a tonne to US$414/t over the past two years, oil rise from US$20 a barrel to US$95/bbl, and gas rocket from €25/MWh (euros per megawatt hours) to €240/MWh.

Energy, as has been said many times in this column, is the mega-trend of the future and while fossil fuels should eventually give way to renewables no-one can tell you when which is coal, oil and gas remain a top investment with weakness in some stocks this week probably a buy signal rather than the start of a significant downturn.

Uranium too is a re-emerging player in the energy race with an impressive US$4 a pound rise this week to US$53/lb on the short-term market, boosted by a South Korean move to expand its fleet of nuclear reactors. Deep Yellow was the best of the local  U-stocks with a 19c rise to $1.08.

The next test for local investors will be another 0.5% increase in the Reserve Bank cash rate to 2.35% which Westpac expects to be delivered on Tuesday, continuing a rising trend which is expected to peak early next year when the cash rate hits 3.35%.

Battery metals, a winner from the electrification of everything, had a solid week with two leading players upping the debate around local value-added processing.

Mineral Resources and OZ Minerals played the battery hand for their own purposes. MinRes to talk up its lithium assets (and talk down naysayers). OZ for its copper and [potential nickel as a defence against BHP’s takeover bid. Both stocks lost ground over the week. MinRes down 37c to $64.25) and OZ, down $1.01 to $25.17, though both are well ahead on prices of a month ago.

Pilbara Minerals continued its lithium-powered run, adding another 13c to $3.66 taking its rise over the past month to 85c (30%). Allkem rose by 25c to $13.96 ($2.16 for the month). Liontown put on 3c this week to $1.17 and Global Lithium was up 10c to $1.83 taking its one month rise to 38c (25%), with Macquarie saying buy Global because it’s heading to $2.50.

UBS was the latest investment bank to ratchet up its lithium outlook, describing Pilbara as the Fortescue Metals of lithium, but could go all the way with a sell tip on the stock because it has run hard all year with the bank seeing a price target for Pilbara of $2.60.

Fortescue, best known for its fabulous iron ore profits, continued to make diversionary moves with a punt on Canadian rare earths as analysts grew wary of its exposure to a single commodity (and the uncertainties associated with its green energy drive).

The iron ore price this week dipped below US$100 a tonne, rubbing $1.22 off Fortescue’s share price which fell to $18.10. Champion Iron was down 20c to $5.19 and Fenix Resources lost 5.3c to 28c.

The weakening iron ore price (it’s down US$48/t or 32% over the last three months) did not deter MinRes from announcing the go ahead of the long-delayed $3 billion Ashburton iron ore project which has been renamed the Onslow project.

With a consortium of partners, MinRes proposes to develop a project shipping out up to 30 million tonnes of iron ore a year, but more importantly the transport systems it will install could unlock value in a number of small fry such as CZR Resources which is sitting on a potentially valuable resource in a portion of the Robe Mesa making it a stock to watch.

Copper, a leading member of the battery metals family and a commodity with a reputation for predicting future economic trends, eased back by around US15 cents a pound to US$3.49/lb taking most local copper stocks with it, including 29Metals which lost 8c to $1.89 and Sandfire which was down 62c to $4.28 despite a strong profit and the release of plans to expand the Motheo project in Botswana.

American West was the copper sector outlier with a rise of 10c (75%) to 24c after reporting a thick and rich drill hit at its Storm project on Somerset Island in the far north of Canada with the best assay being 41m at 4.2% copper from a depth of 38c with a 10m zone inside that intersection grading 10% copper.

 

Other news and market moves included:

  • Hastings Technology Metals added 68c to $5.30 after winning the backing of iron ore billionaire Andrew Forrest for an investment in Canadian rare earth magnet producer Neo Performance Metals. Forrest’s Wyloo Metals provided hasting with $150 million via a convertible note.
  • Peak Rare Earths went the other way with a fall of 5.5c to 48c after releasing an update on its negotiations with the government of Tanzania over the proposed Ngualla project.
  •  Strandline Resources added 5c to 48c after reporting that it was preparing for first ore from the wet concentrator at its Coburn project in WA.
  • Australian Pacific Coal roared back into the news after years on the sidelines with a spectacular share price rise of 26c (230%) to 37c after reporting a plan to joint venture with M Resources on the Dartbrook coal mine in NSW.
  • OM Holdings added 3c to 68c after reporting a 231% profit increase to US$60 million from its manganese mines and trading operations.
  • Galileo Mining reported encouraging reports from drilling at its Callisto palladium discovery in WA including the presence of massive sulphides (which simple means clumps of sulphur rich minerals). The stock added 14c to $1.13, and
  • IGO cemented its star status with an profit of $331 million from its nickel and lithium interests for the year to June 30. On the market, the stock added 23c to $12.16.

Upcoming Events

17th February 2022
Investor Webinar: Gateway Mining
Gateway Mining (ASX: GML) Managing Director Mark Cossom will discuss recennt highlights from the Company's Gedgee Gold Project in Western Australia and its exploration strategy for 2022.