Soaring moly price may be sign of things to come as metal shortage hits

China’s rush to reboot its slowing economy is underpinning confidence in the Australian stock market, but the Chinese shift has been so sudden that signs of dislocation are emerging, such as evidence of a copper short squeeze along with wide differences in company valuations.

GlobalMarkets

Demand for copper, a metal widely seen as a key measure of global business activity, has seen the price rise by 12.5% (US47 cents a pound) in just 20-days since the start of the year to around US$4.20 a pound, up 32% on the June low of US$3.20/lb.

Some well-placed market observers don’t believe what they’re seeing, especially given the background noise of a European recession, the worsening Ukraine war, and major U.S. companies preparing for a significant downturn, including Microsoft this week laying off 10,000 workers.

Citi, a leading investment bank, warned midweek in a note to clients that the copper price was being aided by what looked like a US$3.5 billion short squeeze which, as it is resolved, could see a sharp copper price correction.

“We estimate that a copper short position of around 400,000 tonnes was built … during the middle part of 2002,” Citi said, adding that it appeared to have been done at prices ranging from US$3.90/lb to US$3.54/lb.

If Citi is right, then closing out the short position will not only be costly for someone but also brings back memories of the spectacular short squeeze in nickel 12-months ago which saw the price rocket from US$11/lb to US$23/lb before the London Metal Exchange closed the market, followed by a price crash to US$9.50/lb.

The nickel experience will probably not repeat with copper but the fact that some investors placed bets on a copper price fall only to see the metal rise sharply as China changed tack on multiple issues, including a return to the Australian coal market, is one of many issues making investment decisions harder than normal.

On the stock market the best example of what might be called “value dislocation” can be seen in future price estimates for Rio Tinto, a leading miner with deep iron ore and copper exposure, two commodities riding high on the China revival story.

Goldman Sachs, another top investment bank, likes the outlook for Rio Tinto and other Australian miners. It reckons the stock is a buy and poised to keep rising, perhaps by another 7% to $134.40, up 52% on Rio Tinto’s early November low of $88.20.

UBS, a rival bank, sees Rio Tinto in a different light even as its analysts digested the same data as Goldman Sachs in this week’s December quarter report dominated by higher iron ore shipments. UBS told clients Rio Tinto is a sell with a price expected to fall by 24% to $95.

Banks often disagree on stock values but rarely to the extent seen in those Rio Tinto future share price estimates which serve one useful purpose, they show the complete lack of certainty in the overall economic outlook as China performs a 180 degree twist, Russia gets nastier, Europe struggles and the U.S. turns more inward, as it routinely does.

For Australia, and local investors, there is one key reason for maintaining an optimistic outlook, and that’s the increasing likelihood that even if demand for the country’s commodity exports is affected by a global slowdown, profits should remain strong thanks to supply shortages.

An example of what’s happening in the tight market for most industrial metals can be found in molybdenum (or moly for short), a material used to harden steel, which exploded this week with a rise of US$27 a kilogram (58%) to a 15-year high of US$73.50/kg.

Argus, a commodity tracking service, said that some clients in Europe were so desperate for supplies that they flew a cargo of moly from China.

More importantly, because it goes to the theme of the world being short of some commodities thanks to a lack of new mine development and tough environment, social and governance (ESG) rules, a European moly trader told Argus that: “There is zero availability”.

What becomes really interesting for Australian mining companies is the question as to whether moly is an early example of the world running out of basic industrial metals as China stimulates its Covid-shocked economy and starts to hunt for supplies which don’t exist with other moly-like price explosions to come.

Overall, the Australian stock market as measured by the all-ordinaries index gained another 1.3% this week, taking its rise since the start of the year to a remarkable 7.2%, a measure of investors optimism about the new and friendly face of China (if you can believe a leopard changes its spots) and confidence in the prospect of an end to the U.S. interest rate hiking cycle.

The mining index, which is plugged directly into the Chinese economy, also moved higher with a rise of 1.7%, taking its year-to-date increase tof 9.3%. Gold stocks eased moderately this week but the index is still up 9.6% for the year.

Lithium and nickel, two of the battery metals family, were the major news generators in a week which saw the start of the next reporting season.

Nickel Industries, the Indonesian-focused nickel producer, fell 9c to $1.03 after announcing a US$471 million capital raising to expand its investments in nickel smelting activity. Citi reckons the stock is on the way back up $1.25 and a position as one of the world’s top five nickel producers.

Other nickel news and market moves included:

  • Mincor adding 3.2c to $1.68 after reporting high-grade drill results from its northern operations at the WA mining centre of Kambalda with a best hit of 1.9 metres at 12.4% nickel.
  • Larvotto said it had identified a strong nickel anomaly at its Eyre project, 70km east of the WA goldmining town or Norseman. On the market, Larvotto added 2.5c to 19c.
  • NiCo Resources slipped 2c lower to 66c after announcing that it could start its big Wingellina nickel and cobalt project with production for the first 10 years from high grade pits, and
  • Nordic Nickel added 1c to 28c after reporting that it was one of seven explorers selected to be part of BHP’s Xplor program.

ioneer ran out of steam on the market after reporting that it had been offered a loan of up to US$700 million by the U.S. Government to help pay for the development of its Rhyolite Ridge lithium and boron project in Nevada. The stock slipped 3.5c to 51c, still well ahead of its late December low of 36c.

Other lithium news included:

  • Galan Lithium fell by 3.5c to $1.17 after reporting continued success with pumping at its Hombre Muerto West brine project in Argentina. CG Capital Markets reckons Galan will bounce back to a high of $3.40.
  • Allkem reported record lithium production from its Olaroz project, also in Argentina but lower production from Mt Cattlin in WA. On the market, Allkem lost 14c to $12.61 but CG sees $20.40 as the price target while Bell Potter reckons the stock will rise to $19.36, and
  • Patriot Battery Metals rocketed 28.5c (34%) to $1.13 after reporting a world-class drill hit of 156.9m assaying 2.12% lithium from work at its CV5 Pegmatite in Quebec, with a core of 25m grading 5.04% lithium.

Gold, always a useful measure of underlying sentiment, went flat this week after a strong start to the year, perhaps another sign that the New Year burst of optimism could be ahead of economic realities.

The metal itself eased back about US$10 an ounce over the week to remain above US$1900/oz but that needs to be seen against an ANZ Bank assessment that it could fall back to US$1730/oz whereas CG sees a push back above US$2000/oz by the end of the year.

Other news and market moved from the gold sector an elsewhere this week included:

  • Tietto pouring the first gold at its Abujar project in Côte d’Ivoire only to be sold down by 3c to 80c.
  • Black Cat Syndicate upgrading the resource in its high grade Coyote project to 645,000oz followed by the share price adding 2.5c to 41c.
  • Calidus rising by 3c to 41c after reporting the discovery of a high-grade zone in the Felix structure of its Blue Spec mine in WA.
  • Imdex, a mining technology company, added 13c to $2.47 after confirming that it would spend $300 million to buy the Norwegian services provider Devico, and
  • Hastings Technology Metals fell 13c to $3.83 despite announcing an increase in government funding for its Yangibana rare earth project.

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.