Copper treatment charges plunge in key sign that red metal prices are set to rise

Oil, gold and copper have emerged from the fog of the China v US trade war as clear leaders in a “beauty parade” of commodities most likely to succeed over the next 12-months, and perhaps longer.
20th September 2019
Tim Treadgold

Oil, gold and copper have emerged from the fog of the China v US trade war as clear leaders in a “beauty parade” of commodities most likely to succeed over the next 12-months, and perhaps longer.

The case for gold, which is well understood by most investors, was strengthened by the same issue which pushed oil higher this week; global economic and political uncertainty, with a whiff of cordite in the air as the Middle East stumbled into a fresh crisis.

Copper is the surprise third leader but deserves close attention for the same reason as oil – growing indications of a price-driving shortage.

The copper situation, which is yet to be reflected in the price of Australian copper miners, was detected by analysts at Morgan Stanley, an investment bank, in a survey of an obscure part of the metals trading business; treatment charges and refining charges, commonly called TCs and RCs.

Those charges are paid by miners to smelt and refine copper concentrate. Falling TC/RCs are a sign of tight supplies of freshly mined copper as smelters cut their charges in a bid to secure the raw material they need with falling charges seen as a signal of a future rise in the price of the metal.

Last week, TCs hit a six-year low as competition for concentrate heated up thanks to stronger-than-expected copper demand in China, which is busily stimulating its economy as a trade-war defence move.

Citi reckons copper, which was selling for around $US2.60 a pound yesterday, is heading to $US3/lb with Sandfire Resources and OZ Minerals its favourite Australian producers of the metal – even as both stocks drifted slightly lower during the week.

Oil, as has been well reported, rocketed higher after the attack on oil refining infrastructure in Saudi Arabia and while the price has retreated from its mid-week high of $US68 a barrel to around $US63/bbl (it was below $US60/bbl at this time last week), it would be unwise to imagine that investors have heard the last of the oil-supply threatening Middle East conflict.

Interestingly, Australia’s oil producers have not reacted as vigorously as might have been expected. Santos added 40c over the course of the week to $7.71. Woodside put on 90c to $32.11 and Beach gained 7c to $2.58.

Smaller oil stocks barely moved, perhaps because of fund-raising activity. Carnarvon gained 3c to 43c but Strike and Warrego, the partners in a significant Perth Basin gas discovery, both slipped 2c lower to 25c and 31c respectively.

Gold’s big event during the week was the Denver Gold Forum, perhaps the world’s leading gold conference and a magnet for all the major gold producers and a lot of juniors.

The reason Denver is important is Australian stocks presenting there this week enjoyed an immediate boost to their share prices as US investors “discovered” Aussie offerings.

Newcrest, after a well-received talk by its chief executive, Sandeep Biswas, which focussed on the company’s Havieron discovery in WA, put on $1.74 (5.2%) to $35.31, even as the gold price eased from an opening on Monday of $US1510/oz to $US1494/oz.

Northern Star was another Denver winner with a rise of 83c to $11.04 as US investors warmed to its outlook at the Pogo mine in Alaska and Alkane added 11c to 69c thanks to news of its promising Boda discovery in NSW. At one stage, Alkane traded at a 12-month high of 74c.

The rest of the Australian gold sector moved higher, helped by a higher Australian gold price as the currency slipped against the US dollar. Saracen added 16c to $3.44 and Evolution was up 20c at $4.66.

Comments of interest from investment banks with representatives at Denver included:

  • RBC Capital Markets saying that global investors are more convinced than those in Australia that “the bull market for gold is upon us” and that the chorus against hedging (forward selling to lock in a gold price) is growing louder.
  • UBS noted that industry reserves and gold production are declining while the major goldminers are using very conservative long-term gold prices. The Russian miner, Polyus, is using $US1050/oz. Barrick is using $US1200/oz and Oceana is using $US1300/oz.
  • Wells Fargo Bank is not a gold bull. It reckons “gold is quite expensive at $US1500/oz”. For the price to move higher there needs to be a fresh round of concern about interest rates, global economic growth and trade dispute – occurring together!

On the negative side of the coin there were two “float flops” of significance and while one was in the global property sector (WeWork pulling its prospectus), the other was in mining (Sirius Minerals abandoning a bond issue for its British potash project) – with the common thread being investor caution about the economic outlook.

Other news events which moved the market up or down included:

  • Dacian Gold continued its remarkable rally after a spectacular price fall earlier in the year. This week’s 22c rise to $1.40 was attributed to investors reacting to the company’s stronger-than-expected profit of $3 million in the year to June 30. Macquarie Bank had been expecting a loss of $22 million. The bank has raised its price target for Dacian to $1.56 – four-times higher than the 38c low point reached in early June.
  • OreCorp moved up another 2c to 46c after reporting that it had received approvals from the government of Tanzania to complete its 100% acquisition of the Nyanzaga project. Three months ago, the stock was trading at 20c.
  • St Barbara received glowing investment reports after analysts visits to its recently acquired Atlantic Gold assets in Canada which, when combined with its Denver presentation, lifted the stock by 14c to $3.01 – despite a negative report from Credit Suisse which said sell because it reckons St Barbara is heading for a price of $2.76.
  • Metals X continued its slide with a fresh lurch down by 5c to 19c after announcing a $32.7 million equity raising priced at 19c with the funds earmarked for work on its under-performing Nifty copper mine in WA. The stock was trading at 59c at this time last year and $1.21 at the start of 2018.
  • Agrimin slipped 2c to 66c after raising $8 million for work on its Lake Mackay potash project, with the successful capital raising in stark contrast to the funding troubles of the big Woodsmith potash project of Sirius in Britain, and
  • Mt Burgess Mining, one of the smallest ASX stocks, had the pleasure of a speeding inquiry from market regulators after it rose from 0.15c to 0.5c, perhaps as interest grows in its Nxuu vanadium, silver, lead and germanium, prospect in Botswana. After answering the ASX, Mt Burgess continued rising to a 12-month high of 0.7c, before closing at 0.6c.

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