Santa rally underway early but fears mount over what may follow Auld Lang Syne

Christmas came early this week for investors as interest rate pressure eased, the battery metals rush accelerated, gold bounced and Australia’s soccer team progressed to the final 16 of the World Cup.

iStock852073350

Comments about the pace of interest rate increases from Jerome Powell, chairman of the U.S. central bank, was the key to a global relief rally which boosted every major stock market, led by Wall Street, which rose by 2%, taking the Dow Jones average to a six-month high.

“The time for moderating the pace of interest rate increases may come as soon as the December meeting,” Powell said, a pointer to the next increase in U.S. rates being 0.5% after four successive increases of 0.75%.

Not said, but implied, was the likelihood that while the pace of rate rises might be slowing, their duration could continue deep into next year given central bank determination to crush inflation.

The tenor of the economic debate will now switch from one of “how high can rates go” to one of how long will the process continue, perhaps grinding the global economy into the recession, which Deutsche Bank warns about in its latest World Outlook report.

Coming from a bank deeply embedded in the European energy crisis and the confidence-sapping potential for the Ukraine war to drag on for years, Deutsche Bank’s warning was hardly a surprise with the German economy tipped to shrink by 1% next year and the U.S. growing by an anemic 0.8%.

Australia, true to its Lucky Country tag (even if that description is meant to be ironic), could be a star performer, growing at 2.2% according to Deutsche Bank.

For investors, the key to Australia’s faster-than-average growth remains its status as a major exporter of raw materials, led by iron ore, coal and gas, but with a rapid increase in critical metals which took on added significance this week with plans to restrict the involvement of China in some industries. Allies such as the U.S. and Japan will get priority access to Australia’s critical metals.

Important as Powell’s interest rate comments might be, there are two more major events scheduled for the next few days which could tip financial markets either way.

Sunday sees the start of a series of crucial oil industry meetings with OPEC, the Arab-led cartel, meeting to decide whether to further adjust production quotas after a month of erratic oil-price moves which are being heavily influenced by Russia’s war in Ukraine, followed by an attempt to put a price cap on Russian oil, while on Tuesday China’s politburo standing committee meets to consider charges to the country’s economy-wrecking zero Covid policy.

Overall, the Australian market as measured by the all ordinaries, rose by 1.3% this week though the euphoria was fading towards the close of trading yesterday (Thursday).

Mining stocks did best with the metals index up 4%. Gold stocks joined the rally with the gold index up 3% thanks to a US$25 and ounce rise in the gold price to three-month high of US$1775/oz thanks to gold being a direct beneficiary of lower interest rates.

Bellevue was the pick of the emerging producers, adding 19c to $1.16 after the release of an upbeat presentation. De Grey, another emerging producer, added 4c to $1.31 while local leaders Northern Star and Evolution firmed by 59c and 15c respectively to $11.15 and $2.86.

Important as gold is to many investors it is starting to play second fiddle to the battery metals family, which this week saw a string of news events and market moves that included:

  • Patriot Battery Metals, the Canadian comeback vehicle for Ken Brinsden, rose by 10% on the Toronto venture capital market to C$7.49, taking its gain over the past six months 180% as interest grows in its Corvette lithium project in Quebec.
  • Pilbara Minerals, the Australian lithium miner Brinsden built before his shift in focus to Canada, add 2.5c to $4.76 after announcing a potential breakthrough in lithium processing through a joint venture with technology specialist Calix.
  • Red Dirt Metals, the company chosen by David Flanagan for his return to corporate life, slipped 6c lower to 52c, perhaps affected by reports of a $50 million capital raise and despite a Bell Potter buy tip and target price of 90c.
  • Vulcan Energy added 3c to $7.34 after releasing an update on progress at its zero carbon project in Germany.
  • Cygnus Gold rose by 2c to 52c after reporting a promising depth extension of its James Bay lithium project in Canada, and
  • Atlantic Lithium lost 6.5c to 80c despite reports of high grade material assaying up to 6.78% lithium during infill drilling at its Ewoyaa project in Ghana.

Lithium was not the only battery metal in the news. Nickel and graphite made promising returns to investor radar screens with graphite stocks getting a boost from positive research reports released by Fastmarkets and Benchmark Minerals Intelligence.

The eye-catching comment about graphite came from Benchmark which said in a presentation at a minerals conference in Los Angeles that graphite, after three years in the sin bin, could be on the cusp of “doing a lithium” thanks to demand starting to overwhelm supply.

Syrah was the best of the graphite stocks with a rise of 19c to $2.57, taking its gain over the last six months to 93c (55%). Magnis added 0.5c to 38c despite speculation of a $300 million capital raise for its U.S. battery project.

Poseidon was the nickel newsmaker this week with a $9 million capital raising to help fund the restart of the Black Swan mine and while the stock slipped half-a-cent lower to 3.8c Morgans, a stockbroking firm, sees it as a buy with a price target of 11c.

Mincor was the best performer among local nickel miners putting on 7c to $1.62 after reporting the completion of first stopes in the Cassini mine.

Iron ore, the Australian economy’s engine room, fired up during the week as speculation grew about an end to China’s zero-Covid campaign which has sparked civil unrest in a country which fears nothing more.

A price for high-grade iron ore of US$103 a tonne helped Fortescue Metals add 63c to $19.90 even though all leading banks see the stock as significantly overpriced, led by Macquarie which reckons Fortescue is only worth $14.50.

The rest of the iron ore sector gained ground including Champion, which rose by 63c to $6.69 and Deterra Royalties, up 22c to $4.73.

Interesting as the price moves were the important iron ore news this week was a comment from Rio Tinto that its operations are feeling the heat of higher energy and labour costs which could lift the company’s overall cost of production by 10% next year, a trend likely to be felt across the sector.

Other news events and market moves this week included:

  • Australian mineral explorers spent a record $1.07 billion in the September quarter on the hunt for new deposits, according to the accounting firm BDO.
  • DevEx led the uranium sector higher with a rise of 5.5c (18%) to 35c after reporting a high grade drill intersection of 10.1 metres at 1.1% uranium from a depth of 124m at its Nabarlek project in the Northern Territory. Boss Energy chimed in with a rise of 9c (3%) to $2.49.
  • Hot Chili added 7.5c to 97c after reporting the execution of an option to acquire a major extension to its Cortadera copper project in Chile.
  • Adriatic Metals reported that its Vares silver project in Bosnia had passed the 50% construction mark, news which lifted the stock by 19c to $3.16.
  • SolGold remained a focus of corporate action as speculation grew of a showdown between its major shareholders, which could pit BHP and Newcrest against China’s Jiangxi Copper. On the London stock exchange, SolGold rose by 1 pence (5%) to 18p, and
  • New World Resources rose by 0.7c to 4c after reporting a 48% increase in the copper resource at its Antler project in the U.S.

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.