Bulls and bears to clash in a state of complete confusion at Diggers

2nd August 2018
Tim Treadgold

He won’t be there, but the shadow of Donald Trump will loom over next week’s Diggers and Dealers forum in Kalgoorlie with falling metal prices caused by his trade war with China likely to dampen optimism at the event, as they have on financial markets this week.

Three months ago, it would have been a different story and a different Diggers, with gold trading close to $US1350 an ounce rather than its latest $US1219/oz. Copper was close to $US3.30 a pound rather than its latest at $US2.74/lb and nickel was more than $US7/lb rather than today’s $US6.02/lb.

All the blame for the price corrections can’t be laid at the feet of the US President, but the trade war he started (and China’s response) has rocked confidence in commodity and equity markets, with the potential for worse to come as trade-inhibiting tariffs are ratcheted up.

First speaker at Diggers and Dealers, Jose Manual Barroso, might provide fresh insight into the trade dispute and overall economic outlook thanks to his role as non-executive chairman of the international arm of the US investment bank, Goldman Sachs, or his past roles as Prime Minister of Portugal and president of the European Commission.

But it would be unwise for investors in local mining stocks to expect Barroso to say much to clear the air or dispel the pall of confusion which is puzzling everyone from the highest-paid investment bank analyst to small private investors.

Most of the near-record 2300 delegates at Diggers will try to shrug off the uncertainty that has broken out across the mining market and speak confidently about the future, whereas the reality is somewhat different.

Just how confused markets have become can be judged by considering a few of the latest thoughts from some of the smartest investment-bank analysts, starting with a report from Citi, which said the copper price is set to boom, heading for $US3.60/lb by 2022 and then up to $US4.10/lb by 2028 – real boom-time stuff.

On the flipside of that view is the gloom of RBC Capital Markets, which described conditions for iron ore, Australia’s most valuable export, as “pandemonium” with demand for steel in China declining because of the trade war and the iron ore price tipped to drop from its current $US66/t to $US49/t by Christmas, before recovering to $US63/t next year.

To attach a few numbers to the RBC report, it reckons Rio Tinto, a major iron ore producer, will soon see its share price plunge to around $60, down $A17 on its latest price of $77, a price already down $4 in a week and despite a strong profit result and generous dividend payout.

Copper and iron ore are different materials but it’s highly unlikely that their future prices would diverge to the extent seen in the tips of Citi and RBC.

UBS, another investment bank, pulled out its crystal ball midweek to generate a series of metal price downgrades for 2019, including a cut in its copper price forecast from $US3.20/lb to $US3.05/lb, nickel from $US6.88/lb to $US6.55/lb and zinc from $US1.20/lb to $US1.13/lb.

Before looking at news flow and share price moves over the past week there are two other points worth considering.

Firstly, that there appear to have been more share price downgrades over the past few weeks than upgrades, a tell-tale sign of shifting sentiment.

Examples include Canaccord Genuity trimming its price forecast for Red River Resources, a zinc miner, from 50c to 45c – whereas as the stock is already struggling at 24c, down 1c over the week, and Citi cutting its price target for nickel and goldminer, Independence Group, from $5.20 to $5, which is still well ahead of the latest price of $4.38 – itself a solid fall of 49c over the past five trading days and following an ore reserves downgrade.

The second point, and an important one for investors craving a dose of confidence, the small end of the oil market continues to heat up as energy prices recover from a sharp fall and political conditions in the Middle East deteriorate further (if that’s possible).

Price upgrades reported during the week included Canaccord lifting its price tip for FAR, an African oil specialist, from 18c to 21c (the stock is trading at 12c), with the same bank lifting its price forecast for Senex from 50c to 54c (the stock is trading at 46c).

A third oil and gas stock, Carnarvon, continued its rise as drilling proceeds at its highly-rated Dorado and Phoenix South Wells off the WA coast. The stock touched a 12-month high of 52c on Wednesday before easing to 45c. Three weeks ago it was trading at 17c.

Other news events worth noting, and price movements, up or down, included:

  • Sheffield Resources hit a 12-month high of 94c on Monday thanks to progress on its Thunderbird mineral sands mine in the far north of WA and optimism about the outlook for titanium dioxide and zircon. The stock eased later to 93c for a gain over the week of 8c.
  • Danakali was another stock to swim against an outgoing tide, reaching a 12-month high of 93c on Wednesday, before easing to 85c, off 4c, with the drive coming from its potash project in Eritrea and possibly from interest associated with its listing in London.
  • Alacer Gold enjoyed a strong rise to a fresh high of $3.01 on Monday as interest grows in the sulphide phase of its Copler gold mine in Turkey, only to be weighed down by the weaker gold price to trade around $2.84 for a decline of 6c over the week. UBS reckons Alacer could reach $3.75, a tip which represents a 15c upgrade on the previous forecast of $3.60.
  • Regis Resources, Evolution Mining and Northern Star, three of the leading gold producers, were hit by the falling gold price. Regis shed a hefty 79c to $4.36. Evolution slipped 9c to $2.85 and Northern Star was down 22c to $7.20 despite a strong increase in its gold reserves. Newcrest went again trend, adding 16c to $21.36
  • Gold Road lost 4c to 68c after reporting a small increase in the expected capital cost of its half-owned Gruyere project in WA.
  • Saracen was another gold stock sold down modestly with a 6c decline to $1.95 despite announcing plans for expanded gold production and an increase in gold reserves.
  • Breaker Resources defied the gold sell-off, adding 2c to 26c after reporting fresh drilling success at its Bombora project with a best infill drill hit of 1 metre at 257.33 grams a tonne, and
  • Todd River was also re-rated, adding 1.8c to 10c after reporting high-grade drill hits at its Mt Hardy project in WA with a best intersection of 13.45m at 15.9% zinc, 5.75% lead and 0.9% copper from a depth of 358.55m.

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