Signs of peak rates fuel investor confidence and hunger for metals

Another 0.25% increase in the U.S. benchmark interest rate to a 22-year high of 5.5% was the biggest event in an exceptionally busy few days on financial markets this week with all eyes now on the Reserve Bank of Australia to see if it follows.

By Tim Treadgold. 

Global Market 3

Hopes were high midweek that the RBA would sit out the current round of rate rises with the bank board tipped to hit the pause button when it meets next week, preferring to wait for a clearer picture of the underlying economy.

Westpac Bank reckons that inflation in Australia is falling faster than anticipated which could be a pointer to an RBA pause, though with the consumer price index still rising at an uncomfortable 6% on an annual basis there will be pressure to persevere with high rates for longer.

It was growing confidence that rate rises had come to an end, or were close to the end, which helped the Australian stock market post a 2.2% gain this week, taking its recovery over the last month to 5.2%.

Interest rates were one issue keeping investors on their toes as reporting season started to pick up speed, along with the latest round of confessions to follow IGO’s admission that it had spectacularly overpaid last year for nickel miner Western Areas.

South32 won this week’s prize for the biggest management blooper, booking a US$1.3 billion hit to its books after writing down the value of its Hermosa zinc and silver project in the U.S.

More write-offs by companies which have paid too much for assets can be expected over the next few weeks as annual and half-year reports flood the market, along with earnings downgrades.

Wilsons, a local finance group, warned clients on Wednesday that reporting season “could be a catalyst for broader market downgrades”, continuing a trend it had been tracking for the past three months.

The worst performing sector on the Wilsons survey is for stocks exposed to real estate where rising rates have caused havoc with 21 earnings downgrades, partially offset by two upgrades. Energy stocks have been the second hardest hit with eight earnings downgrades and one upgrade.

“One of the major concerns lies in the softening with cyclical sectors,” Wilsons said in a reported headlined “Risk remains to the downside for cyclical earnings”.

“The economy still faces several headwinds including high interest rates, elevated inflation and mounting cost of living pressures. We expect to see evidence of a significant downward shift in consumer behaviour in this reporting season.”

Mining stocks, lumped into the materials sector, have had a mixed three months, according to Wilsons, with 21 downgrades and 19 upgrades.

Rio Tinto was the first of the big miners to report this week with its half year result to June 30 enough to paint a picture of what to expect from fellow miners with profit down 43% to US$5.2 billion thanks to lower prices for iron ore, copper and aluminium and after a US$800 million charge against its Australian aluminium assets.

The other big iron ore miners, BHP and Fortescue, file their full year results next month, along with Mineral Resources, a company better known for its lithium assets and a fabulously outspoken chief executive in Chris Ellison.

The target this week of an Ellison spray were analysts who criticised his decision to withdraw from a stake in two Chinese lithium processing facilities under a deal with its U.S.-partner, Albemarle.

“The geopolitical risk is too much for us,” he said, adding that some comments about the MinRes lithium strategy were “horseshit” – a comment which helped earn the company a $1.77 share price rise this week to $74.03.

Iron ore, the Australian star of the past 10 years, is expected to come under increasing pressure thanks to two Chinese-related developments. The first is a lacklustre response of the Chinese Government to the country’s sluggish growth rate and the second is the approaching start-up of the big Simandou mine in Africa.

Morgan Stanley is the latest investment bank to warn that the glory days of iron ore are approaching a peak or already there, with the biggest problem being a cutback in China’s annual steel output, with an iron ore price of US$90 a tonne tipped by the end of the year, down 23% on the latest price of US$117/t.

What investors need to watch out for is that the effect of any price fall will be magnified by rising local costs with FMG’s latest quarterly report showing an increase to US$17.57/t with US$18/t-to-US$19/t pencilled in for the current financial year. It’s only two years ago that FMG’s cash cost was less than US$13/t so the latest forecasts represent a 40% cost increase.

Other companies have also been influenced by speculation about Chinese economic stimulus which, so far, has been on the stingy side with hope of more to come if the country’s economy fails to bounce back soon.

Copper, one of the best measures of industrial activity, had a solid week with a rise of US20c to US$3.92 a pound, boosting local copper favorites such as Sandfire, which added 53c to $6.50 after releasing a well-received June quarter report.

But with copper the most interesting news was contained in a Citi research report which highlighted the growing importance of decarbonisation industries in the use of the metal with electric vehicles, batteries and solar power generation accounting for an estimated 15.8% of copper use by 2025, up from 9.3% last year but more importantly rising to 22.5% in 2030.

With global mine supply only creeping up by an estimated 1.9% a year between now and 2030, the case for a copper-price explosion gets stronger, which is why Citi is factoring in a price of more than US$6/lb.

Nickel, another metal with two faces, one of old industrial uses and the other modern energy storage, had a mixed week with a price recovery quickly snuffed out, rubbing the gloss off most nickel exposed stocks.

An exception to the weaker tone was Chalice Mining which is developing the promising Gonneville polymetallic deposit on the outskirts of Perth. With a round of investment talks reported to be underway, which could see a partner introduced to the project, Chalice added 31c this week to $6.10 just as Macquarie Bank boosted its price forecast to $9.20.

Panoramic was the big nickel loser of the week, shedding 3.8c (42%) to 5.6c after a $40 million capital raising at a weighty 48.2% discounted price of 5c.

Other nickel moves included Centaurus, down 2.5c to 83c. Nimy, down 1.5c to 15c, and Aston Minerals, down 0.2c to 5.7c after raising $11 million at 6c.

Lithium stocks had a mixed week after Pilbara Minerals quarterly report which noted a 33% fall in the price of spodumene to US$3256 a tonne, a drop which still left Pilbara hugely profitable with the company’s cash balance up 24% to an eye-watering $3.3 billion. On the market Pilbara’s share price eased back by 2.5c to $5.07.

Global Lithium was one of the better lithium performers with a rise of 3.5c to $1.73 after reporting a 24.1% increase in the resource at its Manna project near Kalgoorlie in WA. Shaw and Partners see Global rising to $3.50.

Gold had a mixed week, initially falling as traders worried about the U.S. interest rates decision and then rising as confidence grew that the end of the increases could be in sight with the result that the price ended up pretty much where it started at US$1977 an ounce.

Regis was the worst performer of the bigger gold stocks, shedding 25c (12%) to $1.87 after delivering a surprisingly downbeat outlook report of lower production and higher costs. Gascoyne was one of the best, up 7c to 27c after a significant resource upgrade at its Dalgaranga project courtesy of the Never Never discovery.

Other news and market moves this week included:

  • Gold 50 added 10c (55%) to 30c after reporting thick and rich Germanium assays from drilling at the historic Golconda zinc mine in Arizona with a best hit of 109 metres at 40.5 grams a tonne of the high-tech metal from a depth of 129m.
  • Paladin Energy rose by 1.5c to 76c after releasing a well-received June quarter report focused on the restart of the Langer Heinrich uranium mine in Namibia. Shaw and Partners has set a target price for the stock of $1.15.
  • Citi added its name to the gathering of uranium bulls with a research report tipping a uranium price of up to US$63 a pound by the end of the year and up to US$76/lb by the end of next year, and
  • Gold Hydrogen slipped 1c lower to 30c as it prepares to drill on South Australia’s Yorke Peninsula in the hunt for naturally occurring hydrogen, an unceasingly popular exploration target.

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