Rising prices, capex and supply deficits reveal resource sector’s new boom

2nd February 2018
Tim Treadgold

One company cannot truly reflect the near-boom conditions in Australian mining today, but if you had to choose one it would be Ausdrill, a drilling rig contractor, which added 18c to $2.76 over the past week - taking its rise over the past two years to $2.55, or 1214%.

That remarkable increase is better than most of its clients, the mineral explorers looking for gold, copper, lithium and other members of the battery-metals family, with Ausdrill exposed to them all via its rigs in the field.

Ausdrill’s latest price rise was one of three significant indications which this week confirmed that the Australian resources sector is in the foothills of another growth surge that, in theory, will be bigger than that enjoyed in 2009-to-2013 boom.

The other clues pointing to a continuation of the recovery which started in January, 2016, were increasing levels of capital expenditure (capex), ending five-years of decline, and fresh signs of key metals, such as nickel, copper and zinc, slipping into supply deficits, ending years of production surpluses.

A report by the London-based asset-management firm, ETF Securities, highlighted what’s happening in capex via a graph (see graph below) which shows the collective spending by the world’s 100 biggest mining companies on capital assets (new mines and maintenance on old mines).

In 2013, after a three-year investment binge, capex growth went into a steep decline and remained there until late last year, with the ETF graph picking up the return to growth in the form of a rather appropriate “green shoot” at the tail end of the capex versus share-price graph.

No-one knows precisely how the upward spending trend will develop, but it is unlikely to be a straight line, it is likely to see a large share of the new capex directed into Australian resources assets and it is also likely to be big because the world is enjoying synchronised growth across all the major economies.

Other signs of improvement are easy to find with one of the best being a three-way takeover tussle for the oil and gas producer, AWE.

Deeply unloved since mid-2008, the time of the last great oil-price spike, AWE has seen its share price decline by 92.7% from a peak of $4.55 in 2008 to 33c in early 2016, but with multiple bids being made for the stock, thanks to its Waitsia gas discovery in WA, and a rising oil price, the stock is now trading at around 98c, a 196% rise on the 2016 low.

Ausdrill, the drilling contractor mentioned earlier, was lifted higher this week for the best possible reasons, a massive contract for work on the Wodgina lithium project of Mineral Resources, with 29 rigs expected on site, manned by 150 workers – a boom-time job if ever there was.

Mineral Resources, the company paying Ausdrill, did not do as well, largely because of its exposure to iron ore which has seen producers of lower-grade ore come under pricing pressure. The stock lost 70c over the week to $18.97.

Other iron ore miners also felt the impact of the quality-versus-quantity debate. Fortescue Metals fell 33c from its Tuesday peak to $4.95, while Atlas lost a seemingly modest 0.6c to 2.6c, though that slide equates to a fall of 21%.

Gold stocks weakened, though perhaps not because of the gold price which added a few dollars in Australian terms and lost a few in US dollar terms --- but those moves did not stop selling in sector leaders such as Northern Star, which shed 50c (7.5%) to $5.76.

The issue for Northern Star, and other goldminers, appears to have been the release of December quarter production reports which, while good, were not as good as investors had been hoping for.

The phenomena of post-report selling could be seen across the mining sector. Ramelius lost 4c to 43.2c after reporting record December quarter gold production of 58,012 ounces at a cost of $A1146 an ounce, well below guidance of $A1250/oz. Gold Road updated its construction work on the Gruyere mine and slipped 4c to 79c. Regis reported steady production and fell 17c to $4.11.

Other production reports and news events which moved prices, up or down, last week, included:

  • Galena Mining, the latest company to tackle the Abra lead project in WA, added 13c to $1.28 after reporting more encouraging drill results with the best being 21.7 metres assaying 12% lead, plus useful silver grades from a depth of 550m. Since listing last September, Galena has risen by $1.04, or 430%.
  • Orocobre, the Australian lithium producer with its best assets in Argentina, reached an all-time high of $7.44 on Tuesday after announcing a deal with an associate company of Japan’s Toyota, before easing to close yesterday at $7.11 for a gain over the week of 23c.
  • Talga, another battery-metals leader, said it had appointed a Cambridge University researcher to head research operations into its Swedish graphite and graphene project, a move which lifted the stock by 11c to 74c.
  • Danakali, a potash project developer with its best assets in the North African country of Eritrea, reported that financial and engineering studies had cleared the way for offtake sales deals and funding. On the market the stock added 8c to 77c, but with the stockbroking firm of Bell Potter refreshing a speculative buy tip and a price target of $1.08.
  • Hampton Hill Mining, a low-key but well-connected explorer headed by Joshua Pitt and Neil Tompkinson, added 1c to 4c, with that 33% rise not due to anything the company did but a realisation by investors that it is a major shareholder in Peel Mining, the successful NSW base metals explorer. Peel rose by 2c during the week to 72c.
  • Magnetic Resources put on 2.5c to 19c after reporting encouraging drilling results from its Hawks Next gold prospect in WA, including 8m at 4.26g/t/ from just 4m below the surface.
  • Vimy Resources generated lots of interest with the release of a definitive feasibility study into its Mulga Rocks uranium project in WA, dropping 3c in the process to 14.5c.
  • Syrah Resources slipped 18c to $3.93 after releasing an optimistic December quarter report which focussed on construction of its Balama graphite project in Mozambique, but which also attracted widely diverging investment opinions. Credit Suisse loved it, repeating a buy recommendation and price tip for Syrah of $6.60. Morgan Stanley was unimpressed and forecast a future price of $3.75.
  • Bryah Resources added 2c to 15c after reporting encouraging gold grades from drilling at its Tumblegum South project in WA with a best hit of 3m at 23.8g/t from a depth of 45m, with the core also containing useful grades of copper (0.32%), and
  • Triton Minerals added 0.5c to 10.5c after reporting that it had received preliminary environmental approval for its Ancuabe graphite project in Mozambique.

 

Graph via ETF Securities Equity Research:
Macro outlook supports the mining sector but further upside remains muted, A.Gupta

 

 

 

 

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