Shock US credit downgrade masks trigger for the next boom

A promising stock market recovery early this week was snuffed out by the deeply significant downgrading of U.S. Government debt by Fitch Ratings, just as an event that will trigger the next boom – a cash mountain – moved into sight.

By Tim Treadgold.

Global Market 3

The shock of cutting the U.S. credit rating from Triple A to Double A reverberated around the world, forcing investors to reconsider the structure of their portfolios, triggering a sell-off in most asset classes, including commodities.

Gold fell by US$20 an ounce to US$1936/oz as the benchmark 10-year U.S. Treasury note rose to its highest level this year at 4.1%. Locally, the Australian gold price edged towards A$3000/oz thanks to a US1 cent fall in the exchange rate to US65.4 cents.

More aftershocks can be expected from the Fitch downgrade of the world’s biggest economy, with the primary concern being that it means higher interest rates for longer.

But, in the background, evidence is growing of a cash pile waiting for a buy signal, with an estimated US$3.5 trillion said to be sitting on the sidelines in the U.S. alone because high interest rates on deposits outweigh the potential rewards of the stock market.

One midweek calculation pointed to the gap between yields on leading U.S. companies and the yield on 10-year bonds falling to 1.1%, the lowest in 20 years, negating the possible reward for buying shares and adding to the appeal of leaving cash in the bank.

Parking money until conditions improve is a popular investor tactic, and the longer interest rates stay high the bigger the pot of cash which will eventually flow back into the market, sparking a future surge in share prices.

The problem is knowing when the turn might come, because right now investors are getting the best yield on bank and term deposits in more than a decade.

Westpac Bank in its latest comments on interest rates said it doesn’t expect the first cut until September next year.

Overall, the Australian market lost 1.5% this week to be back to where it was three weeks ago. Mining stock did worse, down 4% while gold stocks were 3.5% weaker.

Lithium, as it has been all year, was the dominant asset as discovery and development news continued to flow, led this week by Pilbara Minerals announcing the go-ahead for a mid-stream lithium enriched product in partnership with technology developer Calix.

The electric kiln technology developed by Calix promises to reduce hard rock processing and carbon intensity if powered by renewable energy.

Pilbara got a small boost from the deal but was hit by the global asset sell-off, slipping 1c lower to $4.91. Calix did better, rising by 13c to $4.36 with the potential to go much further if stockbrokers who follow the stock are right.

Shaw and Partner reckon Calix is heading up to $6, a possible increase of 37.6%. Bell Potter is even more enthusiastic, tipping a future share price of $8.70, a potential increase of 99.5% because the technology to be used with Pilbara has global decarbonisation applications.

Other lithium news and share price moves included:

  • RFC Ambrian, a London-based investment bank, said in a report released yesterday that the short-term outlook for lithium demand remained strong but there were two risks emerging: increasing supply and the end of (or watering down of) government subsidies to electric vehicles. It expects the spodumene price to fall from around US$3900 a tonne this year to US$1292/t from 2028.
  • Liontown slipping 3.5c lower to $2.74 even as it moves forward with a proposal to generate quick cash flow by selling direct shipping ore ahead of first concentrate production at its Kathleen Valley project in WA.
  • Albemarle using its balance sheet firepower and lithium market knowledge to snatch a 6.4% stake in Canada’s emerging lithium star (with close Australian connections) Patriot Battery Metals, which rose by 5.5c to $1.61. The investment from Albemarle came one day after Patriot announced an initial resource estimate for its Corvette deposit, which immediately elevated Corvette to being the “largest lithium pegmatite resource in the Americas”.
  • Sayona Mining rose by 0.8c to 15c after reporting the first shipment of spodumene from its operations in Canada.
  • Rio Tinto took another small step for a big company into the lithium business through a joint venture with Aterian, a London-listed mining company with lithium assets in Rwanda, one of Africa’s most complex countries, and
  • IGO said its part-owned Greenbushes lithium mine in the south of WA enjoyed a strong quarter which will provide management with a useful talking point at next week’s Diggers and Dealers mining conference in Kalgoorlie. On the market, IGO lost 42c this week to $13.81 while UBS reckons the stock will rise to $16.50.

Gold stocks had a mixed week as the underlying price of their metal moved down in U.S. dollars and up in Australian dollars.

Central banks, which had been leading the way in gold with a concerted buying spree that started last year, were less active in the June quarter according to a mid-week report from the World Gold Council.

In place of the banks came a surge of interest from high-net-worth investors (rich people) who shifted into gold as a hedge against the sort of devaluations threatened by the Fitch downgrade of the U.S.

John Reade from the WGC said that a third of the 355 tonnes of gold sold over-the-counter in June went to Turkish millionaires who have been badly stung by that country’s high rate of inflation.

Local gold stock moves and news included:

  • Bellevue adding 9c to $1.50 after reporting exceptionally high infill drilling results at its namesake mine in WA, with a best hit of 10 metres at 61 grams of gold a tonne.
  • De Grey Mining scoring a buy tip from RBC Capital Markets in a report initiating coverage with a price forecast of $1.80, up 33% on last sales at $1.35.
  • Sector leaders Evolution and Northern Star firmed slightly. Evolution added 10c to $3.69 and Northern Star rose by 5c to $11.33, and
  • Silver Lake hit by a sell-off after reporting a set back at its Sugar Zone project in Canada. The stock ended the week down 15c at 93c.

Uranium continued to edge higher thanks this time to a coup in the central African country of Niger, which is a major supplier of the nuclear fuel to France.

Boss and Paladin, which are both scheduled to deliver updates at next week’s Diggers and Dealers mining conference in Kalgoorlie, moved higher. Boss added 4c to $2.90 and Paladin was up 3c to 77c.

Copper, which briefly cleared the US$4/lb mark last week fell back to US$3.83/lb taking most copper exposed stocks with it.

An exception to the copper slide was American West Metals which rose by 5.5c to 25c after reporting what appears to be a major discovery at its Storm project in Canada.

Other news and market moves of interest this week included:

  • Chalice Mining added 1c to $5.87 after reporting exceptional results from drilling at its Gonneville polymetallic nickel and palladium project on the outskirts of Perth. The latest results include 54.2m at 3.6 grams a tonne of 3E (palladium, platinum and gold) plus 0.21% nickel and 0.39% copper.
  • Lunnon Metals added 4c to 96c after reporting high palladium values of up to 6.61g/t in nickel concentrate at its Kambalda nickel project.
  • Lynas Rare Earths said in its strong June quarter production report that it was withholding metal from the market after a plunge in rare earth prices. On the market, Lynas added 22c to $6.72 while UBS said the stock was heading for $8.30.
  • Burgundy Diamond Mines slipped 0.5c lower to 25c after reporting strong June quarter production by the previous owner at the recently acquired Ekati mine in Canada, and
  • Fortescue Metals Group fell by 91c to $21.27 after a report by arch-rival Rio Tinto that Chinese steel production has peaked.

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