Mining stocks shake off wider market gloom with strong iron ore price underpinning buoyant sentiment

2nd November 2018
Resources Rising Stars

It’s probably too early to signal an all-clear for investors in the resources sector, though it is worth noting that the past few days have seen a significant improvement in sentiment with more stocks rising than falling, which is always a good sign.

From the top end, where four of the world’s leading mining executives said their businesses were not being badly affected by the US v China trade war, to a substantial rise in the iron ore price, to a solid set of quarterly results, the overall picture was one of improvement – and not before time.

Between May and last week, the overall resources sector, as measured by the ASX minerals and metals index, fell by 13%, with many individual falls much greater than that.

Over the past five days, the same index has risen 4.7%, with much of the credit for that recovery going to BHP and Rio Tinto. They are riding iron ore, which has risen to $US75 a tonne thanks to strong Chinese demand.

It wasn’t supposed to be like that, if you remember the warnings about a widespread economic slowdown resulting from the trade war.

But, rather than slow demand for the basic raw materials that Australia exports to China, there has been an increase as China returns to a policy of stimulating its domestic economy to make up for closing doors in the US.

Jean-Sebastien Jacques, chief executive of Rio Tinto, said the mood in China was still pretty good with the overall picture one of “the Chinese machine continuing to work well”.

That view was echoed at a mining conference in Melbourne by the chief executives of BHP, Anglo American and Glencore.

The iron ore industry, which is important to three of the four (but not Glencore) is the current driver of profitability, with the benchmark price entering a technical bull market during the week (up 20% from its previous low) thanks entirely to a rush of Chinese buying.

Pre-winter stockpiling is a factor in the burst of iron ore trading but another factor is at work, a change in the type of steel being made in China with hot-rolled coil as used in vehicles and appliances being overtaken by reinforcing bar (rebar) as required in major construction works.

The switch has seen the price of rebar overtake the price of hot-rolled coil for the first time in 10 years and is a pointer to China kick-starting its domestic economy, which is a positive sign for most raw materials, including copper, zinc and titanium minerals.

Fortescue Metals, the biggest pure-play iron ore producer, added 38c (9.8%) to $4.12 this week. Mt Gibson, which is redeveloping its Koolan Island mine, touched a 12-month high of 55c before settling at 54c for a rise of 5c (10%).

The recovery of interest in traditional minerals has been matched by a decline of interest in some of the newcomers with graphite and lithium producers being squeezed, especially those trying to sell low-grade direct-shipping ore.

Gold stocks were mixed as the price of the metal rose and then fell, leaving Regis down 15c at $4.25 and Northern Star, down 53c at $8.57, but with Saracen hanging on to a 3c gain at $2.44.

Apart from the overall improvement in sentiment, there was a noticeably better reaction to news flow. Rather than being ignored by investors, positive announcements saw a matching reaction on the market.

Moves worth noting included:

  • Adriatic Metals rising to an all-time high of 69c before easing to 66c for a gain of 10c after reporting its best drill results yet from the Rupice zinc project in Bosnia. Assays included a thick, 42 metre section grading 14.1% zinc, 8.4% lead and 5.7 grams of gold per tonne, 245g/t of silver, plus useful readings of copper and barium sulphate.
  • New Century Zinc finally shook-off the sellers who had been dogging the stock for the past two months, driving it down from $1.30 to a low last week of 62c. The cause of the price recovery to 91c yesterday appears to have been the securing of a $40 million debt facility with National Australia Bank which will enable expansion of the company’s Century mine to full production.
  • Gascoyne Resources was one of the few bad news stories of the week, shedding 8c (36%) to 14c after a fresh board shuffle that saw the managing director depart and newly appointed chairman Ian Murray head for the exit after 16 days in the job.
  • St George Mining added 2c to 15c after a fresh report of encouraging nickel grades at its Investigators project in WA. While only recorded using a hand-held X-ray fluorescence device, the best reading of 8.03% nickel plus 5.06% copper over a 6.39m intersection from a depth of 180.37m is significant.
  • Mineral Resources clawed back some recently lost ground after deals to expand its iron ore footprint, and perhaps courtesy of an analysts’ tour of its lithium operations. On the market, the stock added 46c to $14.61, an improvement but still well down on the May peak of $20.34.
  • Galileo Mining said it had defined new drilling targets at its Empire Rose nickel project in WA’s Fraser Range where a shallow air-core drill had returned 36m at 0.2% nickel from 18m. Not of economic grade, the assays could be a pointer to something significant at depth. On the market, the stock added 1c to 17c.
  • Xanadu Mines increased the open-cut resource in its Kharmagtai project in Mongolia to 1.9 million tonnes of copper and 4.3 million ounces of gold. On the market the stock added 1c to 11c.
  • Emerald Resources, which got a rare media mention here last week, slipped 0.2c lower to 3.3c after announcing a $30 million fund-raising to start work on its Okvau gold project in Cambodia.
  • Kingsrose Mining put on 1.2c (30%) to 5.2c after reporting positive drilling results which could lead to the expansion of its Talang Santo goldmine in Indonesia, and
  • Kasbah Resources remained steady at 1c despite an optimistic research report from Mirabaud, a London stockbroker, which reckons the stock could rise to 4.8c as it makes progress with the Achmmach tin project in Morocco.

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