Santa rally takes a break but recovery remains on track

The Santa rally paused towards the end of the week as investors assessed the speed at which the recovery is moving, with the most telling comment from a Goldman Sachs analyst who said: “there are no bears left”.

By Tim Treadgold.

Train Tracks

Scott Rubner’s remark was a warning that a 10% rise in U.S. share prices over the past four weeks was a case of too far, too fast, sparked by investors rushing to buy a seat at the table ahead of what is expected to be a strong recovery next year.

Driving investors back into equities is a growing belief that the interest rate cycle has rolled over, especially in the U.S., where a competition has started guessing how many rate cuts there will be next year, despite warnings from the chairman of the Federal Reserve, Jay Powell, that it’s premature to start talking about cuts.

Hosing down enthusiasm might spoil the fun but it’s also an encouraging sign that the worst of the downturn which started 18 months ago has run its course, in the U.S.

It might not be so simple in Australia, with the Reserve Bank hinting that there might be another round of rate rises if inflation stays high, a possibility as the primary cause today is government spending, which shows few signs of being reined in.

Gold, as is often the case when the economic background changes, was a star early this week before it also ran out of puff. An all-time peak price of US$2132 an ounce (A$3188/oz) faded to US$2029/oz and A$3107/oz, rubbing the gloss off local miners.

Despite the late correction, interest in gold continues to build with exchange-traded funds (EFs) reporting their strongest inflow of investor cash in 20-months while central banks snapped up another 42 tonnes of the metal in November, down on September’s purchases of 72 tones but well ahead of the January to September average, according to the World Gold Council.

Citi, an investment bank, dusted off its commodity price tips for the year ahead with gold getting a boost from an earlier forecast of US$1975/oz to a new tip of US$2045/oz.

Notable share price moves this week included Evolution dropping by 44c to $3.61 after announcing a $525 million capital raising to help fund the purchase of an 80% stake in the Northparkes copper and gold mine in NSW. Institutional investors rushed for a slice of the offer priced at $3.80 thanks to the positive outlook for both copper and gold.

Most gold stocks rallied hard on Monday but faded as the metal’s price pulled back. Northern Star rose to $13.08 before sliding back to $12.14 on Wednesday and then edging up to $12.58 to be down 5c over a hectic week.

De Grey followed a similar path, up with a rush to $1.44 before falling back to $1.34 and then a slow recovery to around $1.36.

Other gold moves included S2 Resources up 2.5c to 21c after announcing a new copper/gold exploration target at Warraweena in NSW. Nova Minerals, up 4c to 30c after reporting encouraging surface samples at its Muddy Creek project in Alaska, and Westgold Resources up 1c to 27c after reporting high grade drill results at its Starlight mine in WA, including 10 metres at 443 grams a tonne.

Other commodities on the Citi price tipping list were more interesting with iron ore marked up by the bank from US$101 a tonne to US$118/t with coking coal up from US$226/t to US$276/t. Both iron ore and coking coal are pointers to an expected recovery in Chinese steel demand which is a proxy for overall demand in the world’s second biggest economy and Australia’s biggest trading partner.

Lithium, which has been devilishly difficult to tip, was marked down by Citi to US$17,250 a tonne in its carbonate form for next year though that forecast is up significantly on latest sales in China at US$14,600/t.

UBS and Goldman Sachs see ever lower prices ahead with one of the ores of lithium, spodumene, potentially falling below US$800/t – it traded above US$7000/t last year.

Despite gloomy outlook signs of a possible recovery could be seen in a number of stocks which have been heavily sold, including Pilbara Minerals which started to climb out of its hole on Tuesday, rising by 23c to $3.53.

IGO, however, was the more interesting lithium recovery story with a number of banks telling clients that the stock is close to a bottom with a recovery starting to kick in. That might have also started on Tuesday when IGO reached a 12-month low of $7.43 before climbing back to $7.86, perhaps on its way to Citi’s new price target of $9.50.

Liontown, over the week, was down another 6c to $1.30 but that price can also be seen as an 8c recovery from the mid-week low point of $1.24 with the focus now on building the Kathleen Valley project. UBS reckons Liontown will bounce back to $1.50 even if the lithium price drifts lower.

Chile’s state-owner mining business Enami reported mid-week that the lithium price plunge had not dampened interest in the metal. Enami is one of Chile’s two new companies designed to work as a public-private investment model.

Other lithium moves included: Allkem up 3c to $8.56. Azure, down 43c to $3.54. Core, down 1.5c to 26c. Patriot, down 4.3c to $1.03. Global, down 5c to $1.22, and Galan, down 1c to 55c.

Uranium, the other energy metal, continued its strong price recovery as it attracted positive comments at the ongoing climate conference in Dubai with the price rising over the past week by US$4.50 a pound to US$81.45/lb.

Locally, most interest was in Boss Energy which is expanding into the U.S. just as production starts at its Honeymoon mine in South Australia.

The new asset for Boss is a 30% stake in a Texas in-situ recovery project, being acquired for US$60 million and funded via a $205 million capital raising at $3.95 a share. On the market, Boss slipped 36c lower to $3.91.

Other uranium news included:

  • Devex adding 1c to 25c after reporting high grade drill results at the U40 project in the Alligator River province of the Northern Territory with a best hit of 4.6m at 0.43% uranium from a depth of 257.3m
  • Bell Potter, a stockbroker, telling clients that the Dubai conference has “added fuel to the uranium fire” thanks to 22 countries agreeing to triple nuclear capacity by 2050, and
  • Boss, Paladin, Deep Yellow and Alligator Energy named by Bell Potter as the best uranium investment entry points.

Iron ore saw developments at the top and bottom of the sector as well as a US$1.50/t recovery in the price to US133.50/t.

Rio Tinto said it would spend $500 million on studies into how best to develop the world class but long delayed Rhodes Ridge mine in WA, as well as lifting its cost estimate for the partly owned Simandou mine in Guinea.

At the smaller end of iron ore, Fortescue reported the first shipment from a trial mine in the African country of Gabon, news which helped the stock add 36c to $25.34.

The rare earths sector had a busy week with Lynas reporting the start of trial processing at its new Kalgoorlie facility which helped the stock bounce back from a mid-week share price low of $6.23 to trade around $6.44, still down 6.5c.

St George Mining added 0.5c to 3.7c after announcing a promising rare earth discovery near the historic WA goldmining centre of Coolgardie while Arafura slipped 1c lower to 20c despite announcing progress with funding for its Nolans project in the Northen Territory. Bell Potter reckons the stock is heading up to 44c.

Other news and market moves of interest this week included:

  • Chalice staged a strong recovery with a share price bounce of 20c (13%) to $1.70 after announcing receipt of approvals to expand exploration across the broader Julimar polymetallic complex near Perth.
  • Lunnon Metals slipped 2c lower to 65c despite announcing an “in-ground” nickel endowment of more than 100,000 tonnes of metal. Weighing on investor interest is a weak nickel price.
  • Carnaby Resources added 7c to 75c after reporting its was in talks with Glencore about possible processing of ore from its Greater Duchess project at Glencore’s Mt Isa facility in central Queensland, and
  • Australian Potash collapsed into the hands of administrators after failing to orchestrate a rescue package for its Lake Wells project in WA.

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