While it is easy to read too much into the copper/gold ratio – driven recently by a rising copper price and a falling gold price – the current movement points to next year being better than this year, especially for mining stocks, where takeover action has emerged as a price driver.
Yesterday’s announcement by Lynas Rare Earths that it is buying Brazil-focused Meteoric Resources in a share swap transaction follows a cash-and-share swap bid by South Africa’s Gold Fields for local gold leader Northern Star Resources.
The Gold Fields move on Northern Star is simply a case of a bidder taking advantage of a stock heavily sold down after a series of management mistakes, whereas the Lynas/Meteoric deal is an example of optimism in future metals demand, which fits the copper/gold theory.
Once a popular, but not precise, tool for measuring the overall health of the economy, the copper/gold ratio is a number derived by dividing the price of copper (per tonne) by the price of gold (per ounce).
Since hitting a low of 2.2 earlier this year, when copper was trading at US$11,800 a tonne and gold was selling for US$5400 an ounce, the ratio has risen to around 3.5, with copper at US$14,400/t and gold at US$4154/oz.
Leading investment bank Citi revived interest in the copper/gold ratio in a midweek research note, which said the long-term reading of the ratio was 5.7 and should be seen as a measure of risk appetite. It’s also a measure of demand for industrial commodities versus precious metals.
“Historically, the ratio has had a positive relationship with the performance of mining equities,” Citi said.
“If we take this as a guide, then we believe that miners’ overall performance is likely to remain strong in the near term.”
The rush to build artificial intelligence (AI) data centres is a critical element in the high price of copper, while other technology-exposed metals are benefiting from developments such as electric vehicles (EVs) and drones which have revolutionised war.
Gold, which has retreated from an all-time high earlier this year, has developed a “sideways” trend which seasoned investment analyst Sean Russo sees as a natural period of “rest and recuperation” after its stellar upward run.
Rising interest rates are hurting the gold price, especially the U.S. 10-year bond which hit 5.3% this week and the 30-year bond which rose to 5.6%, a 24-year high as investors continued to sell government paper in which they have lost trust.
Oil, which affects the price of almost everything, slipped back below US$100 a barrel on the international market (Brent quality) and below US$90/bbl in the U.S.
The oil decline was not expected, but appears to have been driven by the surprise success of Saudi Arabia and other Gulf states running the gauntlet of Iranian threats, with their oil shipments through the Gulf of Hormuz back to 80% of pre-war levels.
Falling oil also sits comfortably in the copper/gold theory of an improving global economic outlook.
Locally, the Australian market had a flat week, held down by the latest Reserve Bank interest rate rise and concern about another rise before Christmas, while the mining sector was buoyed initially by Northern Star’s rise to $25 before it dropped back to $24, down 22c for the week.
The poor performance by Northern Star in the face of a takeover offer can be seen as a comment about Australian investors not being interested in the paper of a South African-based company, and as a warning about the outlook for gold as funds are rotated back into higher risk assets (the copper/gold ratio at work, again).
Other gold sector news and price moves this week included:
- Capricorn Metals, down 96c to $14.41 despite completion of the Karlawinda expansion project, and a buy tip from Bell Potter complete with a 5c increase in the broker’s price target to $18.10.
- Ballard Mining, up 2.5c to 81c after announcing a 56% increase to 1.84 million ounces in the gold resource at the company’s Mt Ida project in WA.
- Golden Horse Minerals, down 5c to 58c despite reporting visible gold from drilling at the Hopes Hill project near Southern Cross in WA. Shaw and Partners is forecasting a future share price of $1.25, and
- Minerals 260, down 5c to 86c despite an updated buy tip from Bell Potter which has a target price on the stock of $1.45.
Copper stocks trended down even as the metal price held above US$6.50 a pound and a fresh threat to supply emerged in Chile, where two mining companies face union strike threats.
Sandfire Resources slipped 86c lower to $21.50 while another investor favourite, FireFly Metals, was down 6c at $1.65.
Develop Global, which is emerging as a true polymetallic miner with lithium soon to be added to its portfolio of copper and zinc, was 13c weaker at $4.37, possibly weighed down by a Bell Potter cut to its price target from $6.50 to $5.80.
Other copper moves included Capstone Copper, down 43c to $14.04. Hot Chili, down 8c to $1.55 and True North Copper, down 2.5c to 34c even though Morgans told clients that the stock would rise to $1.31.
Iron ore, which has faded from the radar screens of most investors, might be worth a fresh look next year if investment bank UBS has made a correct analysis for what can be called the post-Simandou era.
According to UBS, iron ore cost support is stronger than expected thanks to strict mine expansion discipline (not a lot new coming online), China’s pivot away from construction to manufacturing and export, as well as steel demand from “the global south’s three billion people”.
UBS upgraded its long-term iron ore price forecast from US$85/t to US$93/t, with Canadian-focused Champion Iron expected to be the best performer – the bank initiated coverage of the stock with a price target of $4.15, up $1.15 on last sales at $3.
Most local iron ore stocks lost ground this week. Fortescue shed 21c to $16.25. Killi Resources was down 3c at 29c and Fenix Resources was 1c weaker at 24c.
Other news and market moves in a week dominated by interest rates, Middle East war, and oil news included:
- Deterra Royalties, a specialist royalty investor, rose by 1c in a falling market to $4.06 after announcing plans to add a copper royalty to its existing iron ore cash stream. UBS upgraded its price forecast for Deterra from $4.50 to $4.80.
- Whitehaven was the best of the coal stocks, also with a 1c increase to $7.35 thanks to a Morgan Stanley report which said coal prices were expected to “stay hot” as demand builds ahead of the northern winter.
- Boss Energy was the best of the uranium pack, even with a 3c fall to $1.50. Deep Yellow was down 11c at $1.17 and Paladin lost 34c to $9.20, and
Critica crept 0.4c higher to 2.8c after releasing a scoping study on its Mt Lindsay tin and tungsten project in Tasmania.
