Falling oil price helps mining stocks start new financial year on the up

Uncertainty associated with the Persian Gulf war continues to weigh on investors but if the oil price is a guide the end could be in sight with Brent quality crude back to US$71 a barrel, roughly where it was when the first shots were fired.

Despite flashes of good news, the Australian market started the new year in a funk as investors struggled to make sense of government tax and energy policies which appear to be aimed at redistributing wealth rather than creating more.

The risk is that everyone will feel poorer, and might even be poorer, as property prices fall and major companies accelerate their migration to countries where they feel welcome.

Oil and gas stocks are also under wealth redistribution pressure as the government mulls a forced release of gas earmarked for export into the local market potentially crushing prices until supplies run out. A classic quick fix approach which does nothing for the long-term health of the Australian economy.

South32, the smallest of Australia’s diversified miners, is the latest resource company to signal that it can see better opportunities elsewhere through the sale of its plum asset, the Worsley alumina refinery in WA, to U.S. aluminium giant Alcoa.

What South32 does with the $9.9 billion generated by its exit from aluminium and alumina will be important for Australia because it is likely that the funds will be directed into more South and North American copper and not back into Australia.

Citi, a leading investment bank, likes the South32 deal telling clients that the company is becoming a pure copper and zinc play as well as being a buy up to $6.10, a target which is 45% up on last sales at $4.22.

What’s happening with the exodus of big Australian miners and oil companies is a worrying sign for the country because minerals and energy are Australia’s natural advantage whereas manufacturing, which is what the government wants, means competing with China, something even the U.S. and Europe can’t do.

The major stock market indices best told the story of the first week of the new year with the all ordinaires down 1%, the metals and mining index down 2.5% and the gold index down 6%.

On commodity markets copper was steady at US$6.09 a pound. Gold crept up by 1% to US$4057 an ounce, while short-term uranium edged higher to US$86/lb.

Deal flow showed signs of picking up which should see the creation of investment opportunities. South32/Alcoa was easily the biggest transaction, followed by DGR Global taking a 10% stake in emerging South American gold and copper producer Sunstone as part of a $10 million share issue.

The capital raising was followed by news that the latest drilling by Sunstone at its Bramaderos copper/gold project in southern Ecuador had extended the known mineralisation further beyond the resource of 3.6 million ounces of gold equivalent. On the market, Sunstone added 1c to 19c.

Other copper news included:

• FireFly Metals rising by 9c to $1.78 after reporting a fresh round of high-grade assays from drilling at its Green Bay project in Canada with a best hit of 42 metres at 6.1% copper with a core of material at 16.5% copper.

• AIC Mines rose by 2c to 75c before easing slightly following an investment adviser tour of its Eloise project in Queensland. Bell Potter has a buy tip on the stock and a price target of $1, up on an earlier target of 85c.

• Terra Metals rose by 1c to 26c but did trade as high as 29c after reporting thick copper, platinum group metal (PGM), and nickel assays from drilling at the Dante project in central Australia with a best hit of 34m at 1.3 gram per tonne of PGM, 0.13% copper and 0.1% nickel, and

• Orion Minerals rose by 0.01c to 2.6c after reporting significant new copper assays from its Okiep project in South Africa including 3.96m at 4.64% copper.

Uranium stocks were driven by upbeat bank and broker reports more than by the price of the metal which in short-term trading remains around US$86 a pound.

Canadian bank RBC Capital Markets said it was ignoring the short-term uranium price, preferring to highlight transactions in long-term, fixed price sales at US$100/lb which had encouraged a new long-term price forecast of US$110/lb.

“June quarter (reports) reinforced uranium’s deepening structural tightening, with demand catalysts multiplying across sovereign buyers, big data centre projects and a new large-scale nuclear reactor construction cycle,” RBC said.

The bank upgraded Paladin Energy to an outperform rating with a price target of $13.50 (previously $11). The new price tip implies a share price rise of $3.72 (38%) from last sales at $9.78. Boss Energy, up 10c to $1.15 was also upgraded by RBC from sector perform to outperform with a new price target of $1.30 ($1.10 previously).

Bannerman Energy, up 5c to $3.15, could deliver the best return in the uranium sector if Shaw and Partners is correct with its bullish price tip of $6.50.

Gold, as mentioned earlier, went on a roller coaster ride, down sharply before a late bounce. It bottomed (hopefully) at US$3955/oz on Tuesday before climbing back above US$4000/oz to last trade at US$4057/oz.

The June quarter performance of gold was its worst in 13 years, despite reaching an all-time high of US$5600/oz in January. Since hitting that peak, gold has plunged by 27%, a crash in any language.

The gold sell-off is being blamed largely on the appeal to investors of higher yields on U.S. Treasury bonds which rose this week to 4.48%. The Australian Government’s 10-year paper is yielding 4.81%.

UBS told clients during the week that they should stick with gold despite the risks which included the potential for increasing cost pressure and a weak gold price into next year.

“Gold has come under significant pressure as rising yields and interest rate increase expectations weigh on sentiment,” UBS said.

Despite that warning the bank has upgraded some of its share price forecasts, including Northern Star from $23.75 to $24.35 even as the stock trades at $19.70, up 89c yesterday after announcing the appointment of a new chief executive.

Other gold news and share price moves included:

• Capricorn Metals, up 10c at $12.48 after receiving approval to develop its Mt Gibson gold project in WA. Bell Potter has a price target of $16.70 on the stock. UBS says $17.

• Andean Silver, up 7.5c to $2 after reporting a 230% increase in the Measured and Indicated Resource to 60 million ounces of silver equivalent in its Cerro Bayo project in Argentina.

• Turaco Gold, up 2c to 47c after releasing a positive pre-feasibility study into its Afema project in Ivory Coast.

• Broken Hill Mines, up 3c to 62c after reporting the first truckload of from its silver, lead, and zinc mine in NSW, and

• Waratah Minerals, up 2c to 52c after reporting more high-grade gold assays from its Spur project in NSW with a best hit of 55.9m at 2.63g/t from a depth of 3.1m.

PLS was the pick of a mixed lithium sector, rising by 13c to $5.14, followed by Liontown which added 5c to $1.70.

Develop, better known as a base metals specialist, slipped 15c lower to $6.13 after reporting a plan to book its first lithium sales from the Pioneer Dome project in the December quarter.

Other news and market moves included:

• VHM rose by 9c to 34c after sealing a deal to send all of its Victoria rare earth concentrate to Iluka Resources in WA. Iluka slipped 3c lower to $6.96.

• St George Mining crept up by 0.4c to 9.6c after reporting a 199m intersection of high-grade rare earths at its Araxa project in Brazil, and

• Nickel Industries rose by 3c to 94c after announcing an expanded nickel production agreement in Indonesia. UBS lifted its price target on the stock from 95c to $1.20.