Value emerging as brokers talk of an over-sold market

Economic uncertainty, especially the prospect of rising, rather than falling, interest rates, returned to haunt stock markets this week, but with the sell-off have come opportunities which top investment banks have been quick to spot.

By Tim Treadgold.

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The best example of this “phoenix theory” of value rising from the ashes is Evolution Mining, which was trashed after a releasing a poor quarterly report on Wednesday but enjoyed a burst of buy tips yesterday (Thursday).

Evolution’s 18% share price fall to $3.14 was offset by Citi flipping from neutral to buy with a target price of $3.95. Goldman Sachs chimed in with a price target of $3.70 and Macquarie has an outperform rating and price tip of $3.80. Morgan Stanley was more cautious, sticking with hold and a price forecast of $3.45.

Oversold, is the best description of Evolution’s position and while Citi acknowledged a difficult outlook, it added that “value now beckons”.

That view could be true for the rest of the market, which threw a hissy fit when the promise of early rate cuts was withdrawn, a condition which looks more like a case of timing rather than an end to the process.

Christine Lagarde, president of the European Central Bank, summed up the situation by forecasting that rates would fall in the northern summer rather than spring, which is undoubtedly a delay, but for a few months, not years.

What caused most worry among central bankers is that inflation is down, but not defeated, as shown in a modest increase in the British inflation rate this week, the first move up in 10-months.

There were exceptions to the gloomy mood, especially uranium, which continued its record-breaking run, and oil, which enjoyed a boost from the spreading Gaza war, but just about everything else lost ground as the pre-Christmas Santa rally came to an end.

Gold, which traded up to an all-time high of US$2075 an ounce immediately after Christmas, dropped back to US$2010/oz, a victim of interest rate speculation which saw the U.S. 10-year bond rate move back over 4%, dragging the Australian 10-year up with it to 4.27%.

Gateway Mining was a rare gold stock to post a rise this week, up 0.5c to 2.4c after reporting encouraging assays of up to 5 grams a tonne over 18 metres in what appears to be a new style of mineralisation at its Montague project in WA.

Ausgold did almost as well, standing still at 2.7c after announcing that a definitive feasibility study into its 3.04 million ounce Katanning gold project in WA was on track for release in the June quarter.

The lower gold price has not deterred the world’s gold bulls from seeing higher prices later in the year, with John Hathaway, managing director of Canada’s Sprott group, saying gold is heading towards a “break-out” with most top stocks “excessively discounted”.

Sprott sees gold heading up into a range of US$2500-to-U$3000/oz which is an encouraging view given that overall the gold sector this week suffered a 6% fall, worse than the 4% decline in the broader mining market and 1.6% fall in the all ordinaries index.

Uranium, as mentioned, was again the top performing metal with a price around the US$100 a pound mark and with the potential for more to come, according to Morgan Stanley, which told clients that the “risk/reward assessment was still skewed to the upside from here”.

“A perfect storm of rising utility contract buying, spot and ETF purchases, and supporting uranium demand,” the bank said, “with a low likelihood of price-related demand destruction.”

News flow from the uranium sector, and associated share-price moves included:

  • Toro Energy returning to its roots at the Lake Maitland project in WA after dabbling in other commodities during the uranium sell-off. Toro added 6.5c to 60c.
  • Basin Energy rose by 5.5c to 19c after reporting the start of exploration on permits in Canada’s prolific Athabasca Basin.
  • Haranga Resources said it had discovered multiple new uranium anomalies at its Manankoly project in the West African country of Senegal, news with lifted the stock by 4c to 25c.
  • Global Uranium and Enrichment added 3.5c to 17c after announcing receipt of final permits to explore its Tallahassee uranium project in Colorado, and
  • Terra Uranium rose by 4.5c to 18c after reporting the acquisition of tenements in the Cable Bay Sheer Zone of the Athabasca Basin.

Price moves by the usual uranium suspects included: Boss, up 47c to $5.46. Paladin, down 13c to $1.23 and Deep Yellow, up 21c at $1.52.

Iron ore, Australia’s most valuable export, dropped back to US$130 a tonne, down 10% from the US$145/t reached in the early days of the new year.

The three major iron ore stocks weakened with the ore price and relatively poor production reports. BHP lost $1.48 to $46.01. Rio Tinto was down $2.87 to $126.73, while Fortescue was 14c weaker at $26.97.

UBS, an investment bank, warned that the background economic news might be indicating that the fundamental forces underpinning iron ore and coal could be starting to weaken with the iron ore price heading down to US$120/t.

Lithium and nickel had another tough week with Albemarle leading the lithium sector lower and BHP warning that it might join the rest of the nickel sector by slashing costs and production at its ageing Nickel West business.

New York-listed Albemarle warned that the sharply lower lithium price would trigger deep cuts to its Australian operations and started a process of selling its 4% stake in takeover target Liontown. In New York, Albemarle shares fell by 8% this week, taking their 12-month loss to 51%.

The lithium price crash, which now stands at exactly 80% for the past 12-months, could have further to go with warnings from analysts that big asset-value write-downs could be on the way which could further bruise investor interest in the sector.

As would be expected, most lithium stocks lost ground this week led by Global, down 21c (26%) to 58c, Patriot, down 13c (14%) to 77c, and Pilbara down 30c at $3.49.

Pioneer Lithium was almost an exception, slipping just 1c to 18c after reporting high grade channel samples assaying up to 4.61% from its Benham project in Canada, perhaps a sign that strong exploration results can still arouse investors’ interest.

Graphite stocks followed the lithium lead with most losing substantial ground, with one exception, Metal Australia, which added 0.1c to 3.5c after reporting high grade flake graphite recoveries from its Lac Rainy’s project in Canada.

Other graphite moves included Talga, down 10c to 60c and Syrah, down 14c to 44c despite an optimistic buy tip and price target from Shaw and Partners of $1.30.

Other news and market moves in a generally down week included:

  • Azure Minerals said that the latest results from drilling at its Area 3 target at the greater Andover lithium project in WA’s Pilbara had confirmed a major discovery. The stock held its ground at $3.68 – almost as good as a rise in a down week.
  • Metals Acquisition Corp, the unlisted cash box which acquired the CSA copper mine early last year, is heading towards a listing, possibly as soon as the end of January.
  • Rex Minerals was another emerging copper-exposed stock to attract interest with a $29.8 million capital raising for work on its Hillside project in South Australia. The stock slipped 2c lower to 17c.
  • Firefly Metals lost 2c to 53c despite reporting a high grade copper assay of 4.6% over 46m at its Green Bay project in Canada, and

 

  • WA1 dropped $1.08 to $10.90 after announcing a $40 million placement at $10 a share. On this day last year the stock was trading at $1.41.

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