US sanctions on Russia add another leg to rising commodity prices

20th April 2018
Tim Treadgold

Nickel with a 7 in front of its price and oil moving closer to a price with an 8 in front were two highlights in a week dominated by geopolitical events, but there was perhaps a subtler shift underway with mid-tier resources stocks possibly being acquired as yield plays.

Both nickel and oil benefited from the turmoil which has followed US sanctions being applied to Russia’s aluminium billionaire, Oleg Deripaska, and concern that nickel oligarch, Vladimir Potanin, could get drawn into the dispute.

Russia is a major exporter of aluminium and nickel, as well as a number of other important commodities such as copper, potash and palladium.

ASX-listed Alumina, which works in joint venture with US aluminium leader Alcoa has been the biggest winner in Australia, so far, from the Russian situation, rising over the past week by 15% to $2.87, down slightly on the 10-year high reached in early trade on Thursday at $2.96 – meaning the stock is up 67% over the past 12-months.

Nickel, however, provides many more entry points for Australian investors, with sector leaders such as Western Areas adding 16% over the past week to trade at $3.82 – more than double the $1.90 of last June.

The nickel price, while currently around $US6.94 a pound, popped above $US7/lb in London on Wednesday night, forcing investment analysts to quickly revise their share tips and profit projections. Over past three weeks nickel has risen by $US1.10/lb, or 18.8%.

Apart from Western Areas, other nickel winners included Mincor, which added 6c to 44c after reporting the emergence of regional-scale nickel potential at its Cassini project near Widgiemooltha in WA. Panoramic joined the sector wide improvement with a rise of 8c to 52c.

Copper’s rise to a 30-day high of $3.16/lb, possibly aided by the threat to Russian exports of that metal, did wonders for local copper stocks, including Sandfire which added 46c to $8.48 and OZ Minerals, up 31c to $9.35.

Significant as the Russian dispute with western countries might be, there is a more important message in the price shocks being felt by a number of minerals and metals as well as to the oil sector, where the price of Brent quality crude oil has risen to a four-year high of $US73 a barrel, followed by forecasts of $US80/bbl being possible by mid-year, and $US100/bbl by the end of 2018.

That more important message can be found in the underlying boost to prices from five years of under-investment in new resource projects and minimal investment in exploration, which is essential to identify future potential project.

It’s the five-year project development and exploration drought, combined with surprisingly strongly global economic growth, which really lies behind the widespread recovery in resources – and they’re factors which will last long after the Russian situation is resolved (if it is).

Where the effect of higher prices lasting longer can be seen is in the relative outperformance of profitable (and dividend paying) mid-tier miners and oil stocks.

Until recently, it was only the big boys of mining and oil which attracted serious investors, leaving the small end of the industry to speculators. But when a series of high-quality mid-tier miners all hit 12-month share price highs in the same week, it’s a sign that serious capital is being re-directed to resources stocks, perhaps even at the expense of unpopular banks.

Over the past five days, high-quality mid-tier miners to reach 12-month price highs included Iluka, St Barbara, Evolution, Sandfire, Independence, Alumina, Regis and Western Areas. All are dividend payers.

Other newsworthy, or market moving events over a week which saw the first March quarter reports filed, included:

  • Kin, hammered last week for putting its Leonora Gold Project on hold, staged a recovery after reporting strong drill results from its Kyte project, including 5 metres at 10.3 grams of gold a tonne and 7m at 3.4g/t. On the market, Kin added 4c to 18c.
  • Celsius Resources rose by 4c to 22c after reporting a maiden cobalt resource at its Opuwo project in Namibia. The indicated and inferred resource of 112.4 million tonnes of material assaying 0.11% cobalt, 0.41% zinc and 0.43% zinc represents a contained 126,100 tonnes of cobalt, which is more than the company expected.
  • Breaker Resources had a tough week after reporting what looked to be an encouraging maiden resource of 624,000 ounces of gold at its Bombora project in WA. Investors wanted more, and a quicker development pace, selling the stock down by 20c to 32c.
  • Gascoyne Resources added 2c to 54c after reporting that first gold would be poured at its Dalgaranga project in WA next month.
  • Strandline Resources made progress on a number of fronts at its titanium minerals projects in Tanzania with the Fungoni deposit likely to be first developed after receiving the support of the Tanzanian Government. On the market, Strandline added 2c to 14c.
  • Deep Yellow, one of the early movers in the Namibian uranium industry, put on 1c to 26c after reporting that the Japanese Government, via its minerals investment arm, had approved a $1.3 million exploration budget for the Nova prospect.
  • Metro Mining added 2c to 30c after announcing that it had started mining at its Bauxite Hills project in north Queensland, with bauxite a beneficiary of the Russian aluminium problem.
  • Aura Energy rose by 1c to 2.6c after reporting that its Haggan project in Sweden contained an estimated 13.1 billion pounds of vanadium, 18-times more than the uranium in the same deposit.
  • Aurelia added 2c to 40c after reporting strong gold production in the March quarter from its high-grade Hera mine in NSW with 16,991oz produced at a low cash cost of $A117/oz and an all-in cost of $A316, and
  • Kingsrose continued its revival, adding 1.1c to 9.1c after reporting the production of 5249oz of gold from its Way Linggo open pit mine in Indonesia at a cash cost of $US737 and an all-in cost of $US912/oz.



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