Falling A$ helps protect investors against fears of global slowdown and rising rates

27th April 2018
Tim Treadgold

Gold, at least when priced in Australian dollars, saved the day for investors in what was a lacklustre and short trading week of falling values as the threat of a global economic slowdown grew larger and rising US interest rates helped build a wall of worry.

Officially, gold was caught up in the move by the US 10-year bond rate to more than 3% for the first time in four years, a well-telegraphed rise but one which nevertheless caused the US- dollar gold price to slip by $US10 an ounce to around $US1324/oz.

In Australia, the gold price fall was cushioned by a 3% fall in the local currency which turned that US fall into a modest rise of $A9/oz to $A1749/oz – a level at which any self-respecting gold miner should be able to make money.

The higher local gold price helped sector leaders such as Northern Star, Evolution and Newcrest hold their share prices around where they were a week ago, or even rise a few cents.

Other minerals and metals, perhaps aided by the ongoing uncertainty hanging over Russian exports, also did relatively well despite ominous hints from investment banks in the US and Europe and a warning shot from one of the biggest suppliers of mining equipment, Caterpillar, that the March quarter might have been the high-water mark for the year.

Overall, the brew of rising interest rates, the Caterpillar profit warning and comments from banks such as Morgan Stanley that China’s growth rate is slowing, appears to have set the scene for a weak period of share trading, except in special circumstances such as those which come from exploration and discovery.

Before getting to the best (and worst) market moves of the week, it’s worth digesting a bit more from Caterpillar, which delivered an excellent March quarter report that featured a 31% increase in sales of equipment to the mining and oil industries.

Then came the bucket of cold water from management which said the first three months of 2018 might have been the “high-water mark” for 2018 – code for demand for mining and earthmoving equipment is falling.

The Morgan Stanley warning about China was partly interest-rate linked (“tightening of credit availability and higher interest rates on refinancing”), and partly on a hit to earnings from the ongoing environmental clean-up in that country.

The Morgan Stanley observations sit well with a comment from Citi, another investment bank, that the old slogan of “sell in May and go away” is actually quite real, with mining company share prices falling in seven of the past eight years during May.

With so much uncertainty blowing through markets, especially when it comes to the cost of money, it’s easy to understand why companies are being heavily marked down if they delivered a surprise of any sort, which is how some investors saw the maiden resource from Breaker Resources for its Bombora gold discovery.

Cooler heads have, however, come to the party because while some speculators would have preferred a one-million-ounce resource, the 624,000 ounces wasn’t a bad start, which is what analysts at Bell Potter reckon.

After noting the sell-off, Bell Potter stuck to a buy tip on Breaker and provided a 12-month share-price target of 96c, down on a previous target of $1.30, but 96c is still more than 200% higher than the stock’s latest price of 30c.

Other market moves, mainly down, and news events worth noting included:

  • Tungsten Mining was one of the best performers in a flat week, adding 11c to 58c after announcing a successful $20 million fund raising to help fund the development of the Mt Mulgine tungsten project in WA.
  • Aeon Metals put on 2c to 30c after reporting that its first hole in a fresh drilling campaign at the Walford Creek copper project in Queensland had successfully encountered the primary mineralised zones being targeted in what has been described as a gap between known copper zones. Assay results will be released as they become available.
  • Paladin Energy slipped deeper into trouble with a report that its Langer Heinrich uranium mine in Namibia was being considered for closure and a period in care and maintenance because of “the stubbornly low spot uranium price”. On the market, Paladin lost just 2c to 15c, a sign that investors have been expecting the worst.
  • Western Areas fell 19c to $3.60 despite a positive March quarter report which featured positive cash flow of $16.9 million and a start on the new Odysseus mine. Analysts were unimpressed, citing higher costs. UBS put a sell tag on the stock with a 12-month price target of $3.02.
  • Archer Exploration said it had received advice that manganese from its Jamieson Tank project near Cleve in South Australia could be converted into electrolytic manganese dioxide for possible use in battery production. On the market, Archer added 2c to 14c.
  • Pacifico Minerals rose by half-a-cent to 1.5c after reporting that drilling had started at the Lorella copper exploration project in the McArthur basin of the Northern Territory where it is in joint venture with Sandfire Resources.
  • West African Resources said it had received environmental approval for the development of its Sanbrado gold project in Burkina Faso, slipping 1c lower to 36c on what was a significant milestone for the company.
  • Resolute Mining was another Australian gold company working in West Africa to have a tough week, falling by 14c to $1.20 after reporting weaker than expected gold production. Macquarie Bank shrugged off the slowdown, retaining a buy tip on the stock with a 12-month share-price target of $1.40.
  • Artemis, local leader of the conglomerate nugget-gold explorers in WA’s Pilbara region, shed 2c to 18c despite what was described as a positive report from the Canadian-based Novo Resources which said it had discovered 80 fresh nuggets.
  • Sabre Resources added half-a-cent to 2.5c after raising $1.6 million to help fund the acquisition of three vanadium exploration projects in WA, and
  • Gold Road lost 2c to 80c after adding its name to a long list of explorers and mine developers being hit by rising costs and a potential completion delay to its Gruyere gold mine in WA.

Image credit: The Australian

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