A good week for miners as copper is tipped to rise while gold and iron ore hang on to highs

Iron ore has been the newsmaker in the mining world over the past few weeks
15th February 2019
Tim Treadgold

Iron ore has been the newsmaker in the mining world over the past few weeks thanks to Brazil’s dam dilemma, but the commodity to watch over the rest of the year could be copper, a metal with its “stars aligning”, according to Morgan Stanley.

The big US-based investment bank said the next two years would see “a combination of favourable supply and demand dynamics, equity re-rating and asset scarcity” culminating in an attractive investment case for copper miners.

A glimpse of what lies ahead could be seen this week in the upward moves by two local copper leaders, Sandfire and OZ Minerals, with Sandfire adding 47c to $7.78 and OZ rising by 28c to $10.13.

Those handy moves were lost against the background noise generated by Australia’s two mining majors, BHP and Rio Tinto, which continued their impressive rises to multi-year highs, with the potential for more to come when they report full and half-year results over the next two weeks, complete with what are expected to be bumper dividends.

Rio Tinto will be watched particularly closely after this week’s $1.60 rise to $92.04 with Citi, an investment bank, tipping a move by Rio over the $100 mark later in the year to a target of $102.

Both BHP and Rio Tinto are exposed to a basket of commodities, including copper and iron ore, which is performing remarkably well, especially given the pre-Christmas scare of a slump this year as the US v China trade war dragged on.

The fact that the trade war has proved to be less of a dampener than expected is a bonus for investors, who shrugged off the doomsday predictions and held on to their mining stocks.

On copper, Morgan Stanley’s optimism has been matched by Citi, which sees electric cars (EVs) as the key driver of the metal over the next few years because EVs consume three times as much copper as petrol and diesel-powered cars.

In China alone, copper consumption will rise sharply as the switch to EVs gathers pace with conventionally-powered cars forecast to suffer a 9% drop in sales this year while EV sales rise by 53%, with the overall effect being a modest increase in copper consumption, according to Citi.

Morgan Stanley’s view of the global copper market starts with the supply side where there is likely to be a 2.4% fall in overall copper output, which means that even if demand is only up modestly, a shortfall is certain and could be as much as 380,000 tonnes this year, and more next year.

“The cost of existing production is structurally rising and new supply is challenged by rising capital intensity,” Morgan Stanley said. “This, in addition to reduced security of tenure and higher political risk, supports growth in real terms of the industry’s profit pool.”

Decoded from investment bank speak, the bank is tipping higher profits for copper miners already in production because demand is reasonable and the supply pipeline looks to be crimped.

Iron ore, which has delivered a star turn for Australian producers over the past two weeks, appears to have peaked, albeit at a handsome price premium, especially on conversion to Australian dollars.

The upward rush of the benchmark iron ore price from around $US70 a tonne to more than $US90/t appears to have eased and while it might break through the magic $US100/t mark, most of the increase is already in the share prices of the miners.

Fortescue Metals Group, the leading pure-play iron ore stock, added 26c to $6.32 this week, but that was a limited move compared with the $1.50 per share uplift over the previous two weeks. Mt Gibson also ran out of puff, sitting at a steady 68c for the week after a 10c rise over the previous three weeks.

Gold stocks had a reasonable week despite the gold price easing marginally in US and Australian dollars, down $US6 an ounce to $US1308/oz in US dollars and $A9/oz to $A1840/oz in A-dollars – which is still close to a record high.

The price of gold was not the big issue in gold this week. Profits and dividends led the way with the big three, Northern Star, Evolution and Newcrest all reporting strong results with Northern Star boosting its interim payout by 33% to 6c a share and the other two holding their half-year dividends steady at 3.5c in the case of Evolution and US7.5c in the case of Newcrest.

Another largely unseen and certainly unreported event over the past week was the impressive number of companies trading up to 12-month share price highs, a reflection of last year’s downturn as much of the recent upturn.

Stocks hitting a 12-month ceiling included three coal miners, Stanmore, Atrum and New Hope, gold explorers Bellevue and Red Five, iron ore producers Mt Gibson (mentioned earlier) and Grange, as well as a number of explorers, including Adriatic and Galena.

Other news and market-moving events included:

  • Gold Road adding 5c to 80c as it moves to within three months of the first gold pour at its half-owned Gruyere mine in WA. With the project 91% complete, the broking firm of Canaccord Genuity has lifted its price target for the stock to $1.05.
  • Stavely Minerals rose by 5c to 26c after reporting a significant drilling result from its Thursday’s Gossan base metals project in Victoria, including the intersection of the key copper mineral bornite. The bornite was seen in a 40m zone of a wider (110m) section of the more common copper mineral chalcopyrite.
  • Breaker Resources rose by 9c to 44c after the latest drilling at the company’s Bombora project in WA extended the discovery zone in all directions, leading to a re-rating of the stock by the broking firm Bell Potter, which sees Breaker heading as high as 87c.
  • Navarre Minerals reported encouraging drill results from its Langi Logan exploration project in Victoria, including 2m at 19.4 grams a tonne with a 1m section in that zone assaying 33.6g/t. On the market, Navarre added 1c to 7.2c.
  • Nzuri Copper gained 3c to 23c after announcing a fresh $3 million funding injection to progress financing and development of Kalongwe copper and cobalt project in the Democratic Republic of Congo.
  • Bellevue, mentioned earlier as a 12-month high stock, enjoyed its uplift partly because of a 47% increase in the inferred resource at its namesake gold project in WA to 1.53 million ounces in material grading 11.8g/t. On the market, Bellevue rose by 8c to close yesterday at 62c after reaching the high of 66c in early Thursday trade.
  • Myanmar Metals added half-a-cent to 7.5c after reporting a 50% increase in the indicated resource at its Bawdin lead and zinc project in Myanmar, and
  • Galan Lithium put on 2c to 35c after announcing the discovery of thick and high-grade lithium bearing brine in the Candelas project in Argentina.
  • South African-focussed zinc project developer Orion Minerals continued its recovery with closing sales yesterday at 3.4c, up 0.4c on the week and 1.4c (70%) up on the price of two weeks ago.

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