Like a balloon slowly deflating, share prices shed another 1.2% in a week of lacklustre trading to take the stock market, as measured by the all-ordinaries index, back to where it was six weeks ago and, perhaps more surprisingly, back to where it was 12-months ago.
One step forward and one step back.
If there was some good news it can be found in the fact that from a distance, Australia seems to be in robust economic health, or at least that’s how it looks from London, where I will be working until mid-March.
British investors are significantly gloomier than those in Australia, a result of proximity to Russia’s war in Ukraine. The distance from Kiev, Ukraine’s capital is roughly half that of Sydney to Perth.
Two big corporate events in the resources sector this week, the half year result of BHP and the full-year profit of Rio Tinto, did nothing to ease concern about the effects of inflation on earnings.
UBS, a leading investment bank, led a rush for the exits at BHP with a sell recommendation at share price forecast of $39, down 20% on recent trades and a view based on fading optimism about the outlook for the Chinese economy.
Other banks were less critical of BHP, but most downgraded the stock which is widely seen as a proxy for the Australian resources sector, if not the wider economy of the country,
Barrenjoey, for example, said an earnings miss for the six months to December 31 was largely a result of 12% inflation in BHP’s operating costs, an alarming increase which is eating the profits (and dividends) of every company. It has downgraded its BHP share price forecast from $45 to $44.
Rio Tinto, the other big Anglo-Australian miner, was an interesting proxy this week for the difference in how Australian and British investors see the future with the stock up early in the week in Australia but down in London. The prices moved together by Thursday, but the initial reaction was a measure of London’s greater gloom.
Another lesson from the latest result announcements of BHP and Rio Tinto was an acknowledgement that their future is largely in energy transition metals and green commodities such as potash and less on old economy products such as iron ore and coal.
Battery metals ran out of steam this week as doubts grew about demand for electric vehicles (EVs), especially in China where the price of lithium hydroxide has fallen by 30% since November.
Fastmarkets, a commodity research house, said there had been persistent weakness in the Chinese EV sector as potential buyers wait to see the detail of revised government EV subsidies before committing to buy.
Allkem shares fell by 59c (4.86%) over the week to $11.52 but remained a favourite of Goldman Sachs which sees the stock clawing its way back to $15.50. Pilbara Minerals was weaker, slipping 9c to $4.47 though Macquarie reckons it will climb back to $7.50.
The softening lithium outlook also its toll of explorers with Charger Metals an example of the shift, initially rising to 44c after reporting encouraging assays of up to 2.5% from drilling at its Norseman prospect in WA before retreating back to where it started the week at 39c.
Morgan Stanley used the decline in investor sentiment to warn that the risk/reward outlook was “skewed” to the downside especially as most miners had moved higher in the second half of last year and may have overshot.
“Miners have already re-rated and are pricing in a high degree of optimism,” Morgan Stanley said.
Two second tier stocks, South32 and Iluka, were marked down by investors and banks with Barrenjoey trimming its future price target for South32 from $4.70 to $4.60, describing its recent half year report as one exhibiting “growing pains” with higher costs and lower commodity prices hitting the company.
Iluka, according to Credit Suisse, has done “a great job” in generating exciting new projects “but must now deliver on time and on budget”. The bank has a neutral view of the stock and has lowered its price target from $10.90 to $10.80 – last sales were booked at $10.59.
Gold stocks continue to struggle with a weakening price for the metal which slipped US$10 an ounce lower this week to around US$1829/oz, down US$100/oz over the past month.
Evolution and Northern Star led the gold sector lower with Evolution down 11c to $2.86 and Northern Star down 86c to $10.64. Macquarie told clients that Northern Star was performing better than expected and paying a generous dividend. The bank sees the stock moving back up to $14.
Gold explorers and developers did well early in the week but faded later with OreCorp an example, rising to 45c as interest grows in its Nyanzaga project in Tanzania before fading to close steady at 42c, less than half the 93c target set by Bell Potter.
Titan Minerals is another low flyer with the potential to do much better, according to CG Capital Markets, which likes the high grade gold assays being reported from drilling at the Meseta project in Ecuador. Titan lost 1c to 6.2c this week but LG has a speculative buy on the stock and a price target of 20c.
The copper sector produced a surprise winner in New Century Resources, a company facing a possible takeover from its major shareholder, the South African based Sibanye-Stillwater, which is annoyed about New Century’s interest in the historic Mt Lyell copper mine in Tasmania.
New Century jumped 30c this week to $1.10 following reports that Sibanye was preparing a bid at $1.10 with the objective being to stop the Mt Lyell bid and for the focus to shift back to zinc tailings reprocessing.
AIC Mines, which operates the Eloise copper mine in Queensland, caught the eye of Shaw and Partners which likes the plan to expand the project, tipping it as a buy with a target price of 70c even as it lost 3c this week to 43c.
Other news and market moves this week included:
- St Barbara losing 7c to 57c after announcing a hefty loss of $420 million with most of the result due to asset value write downs, mainly on the Atlantic gold operation in Canada.
- Lunnon Metals initially rose by 2c to 95c before running out of support to close steady at 93c with Macquarie sticking to a buy tip on the nickel miner and price target of $1.30.
- Uranium stocks were talked up CG Capital Markets on the strength of reports that U.S. Government was preparing to ban Russian supplies of the nuclear fuel. It did nothing for local U-stocks with Boss down 18c to $2.33 and Paladin down 6c to 70c.
- Whitehaven retained its title of Australia’s top pure-play coal stocks after reporting a strong underlying pre-tax profit of $2.6 billion for the half year to December. On the market, the stock slipped 52c lower to $7.71 despite a Morgan Stanley buy tip and price target of $10.40, and
- Wesfarmers, a conglomerate best known for its retailing assets, attracted the attention of Evans & Partners which expects first sales of spodumene from the Mt Holland lithium project to contribute $300 million to the company’s pre-tax profit in the second half of 2024. On the market, Wesfarmers fell by $2.42 to $48.63.
