Samso Insights Episode 106
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Investors in the Australian Stock Exchange (ASX) are scattering for cover as global markets went on a volatility roller-coaster the last six months. Last week when people thought that the end was near, the Fed decided to raise even more and that brought markets more heartburn. Investors are now well and truly running into the caves to get an early start to next winter's hibernation.
Figure 1 below is a daily chart of the Dow since 2015. The 5th of January looks like the last green bar before the market turned south. There was an attempt to reverse the trend middle of August but that failed as well. What will be interesting to see is if the bulls have enough power to resist the bears now.
Figure 1: The daily chart for the Wall Street Cash chart from Ig Markets.
As the world continues to go through rate hikes to curb the inflation yardstick, the equity investors are sitting on the sidelines, licking their wounds or just waiting for the green light from the Investing Gods.
Investors, long term investors are pretty comfortable as you can see in Figure 1, the Dow has moved in the right direction for a while since January 2022. The slope of the bearish tone seem to be flattening which may be a good sign.
Meanwhile, in Australian Mineral Resource Small Cap Sector...
While the big end of town is pondering the ins and outs or global equities, the small end of town has pretty much gone aground. I tell people that we are now in the good old days. The last two years was an anomaly like the whole COVID story. The market (small cap mineral resource) that we are in now is pretty much what it was like for most of my time (over 30 years) in this sector.
When you speak to punters today, the main narrative is that the lithium boom is hanging in there and the REE sector is running second. Nobody is paying attention to gold, copper, nickel and even to some degree the "rest" of the periodic table.
Exploration Discoveries are still awakening Investors
A recent discovery by WA1 Resources Limited (ASX: WA1) which was announced on the 26th October 2022 was titled "Discovery of Niobium m-REE Mineralised Carbonatite System" and it has thrown the spotlight into the sector. As you can see in Figure 2 below, the market was definitely excited. As this is always the ultimate test of relevance, it is a relevant discovery.
Figure 2: The share price chart for WA1 Resources Limited (ASX: WA1). (Sourced from www.commsec.com.au)
I met Paul Savich in May 2022 and we discussed his projects and the potential of coming onto Coffee with Samso to showcase WA1. I have always liked the Arunta Block as this is one of the very few remaining provinces that has not been "fully" explored.
We spoke about how the remoteness of the area has stopped historical explorers from being efficient. In fact, if I am not mistaken, the remoteness and the lack of an agreement with the local traditional owners have completely shut this area from previous explorers.
It will be interesting to see how this journey goes for Paul and his team at WA1 Resources Limited. Irrespective of the journey, this shows that although the market is asleep and anxious, a good discovery, a real discovery is welcomed. A good discovery will always be a better result than a good nearology play or a flavour of the month play.
The Lithium and REE Story
I don't think there is any need to say that this is a booming sector. In fact, a couple of very well known identities in the industry were heard laughing at how easy it was for companies in this sector to raise money. They joked at how the word lithium was a guarantee of investment wisdom.
Investors need to understand that the lithium industry is no different to any other commodity. You explore, you find the resource but it has to be an economical deposit. As Allan Kelly from Miramar Resources Limited (ASX: M2R) once said in his Coffee with Samso, you need to find an economical deposit.
I don't think the investors out there have put value into the potential economical project. The scarcity of the commodity, lithium, may force the price up higher but you still need to have an economical deposit. The existence of a pegmatite or some rock chip is not the prelude to an economical lithium deposit.
This is the same for the the REE hopefuls out there. To get a good understanding of what the REE industry needs to focus on, have a look at the Coffee with Samso with Brett Hazeldon from OD6 Metals Limited (ASX: OD6). Brett has given a great conversation about Investing in REE 101.
This is a great time for the REE players to entrench their tory. It looks like the dynamics is changing with the government finally making noises of supporting the critical metals sector. The time for the REE players to shine is now and if the geopolitical overtures are correct, the Non-China governments are finally going to support the Non-China REE story.
Gold and the Path Forward
There may be an argument if there is a value in gold but people need to understand that, like hydrocarbons, gold is not going away anytime soon. The narrative on gold has come and gone and in my thirty year plus years, this has been up and down like a yoyo.
Figure 3: The weekly price chart for Gold. Sourced from www.gold.org.
In a very inflationary time and if you take the geopolitical situation, you cannot ignore the long term thematic of gold. The long term nature of gold as shown in Figure 3 may give a clue as to how it has performed over the many decades.
I remember in the mid 1990s, gold crashed from a high of USD425 to less than USD250. The gold price in AUD has been performing well since 2014 and seems to be tracking well.
What is Happening with Gold Equities?
In terms of equities, let's have a look at Newcrest Mining Limited (ASX: NCM) (Figure 4) and Northern Star Resources Limited (ASX: NST) (Figure 5). The charts have not been kind to these guys as well, hence, reflecting the sentiment of the market. What is not reflected in the share price charts is that they are still making good money. The margins are still good but investors get spooked by the falling share price.
Figure 4: The share price chart for Newcrest Mining Limited (ASX: NCM). (Sourced from www.commsec.com.au)
As Warren Buffet professes, buy the business and not the share price. He has consistently been telling the public, the business just happens to have a share price as well. It is this kind of thinking that drives one to be positive on companies that have a driven business. In our sector, this means that they are either a promising producer to be or an exploration company that holds a great deal of exploration upside.
Figure 5: The share price chart for Northern Star Resources Limited (ASX: NST). (Sourced from www.commsec.com.au)
What Does All This Mean?
When you look at the state of the market, there is a lot of fear and uncertainty. Even the lithium stocks had a bearish tone but only until about mid July 2022 when they seemed to all turn up. In general, these stocks are doing well, and the chart you see in Figure 6 is pretty much what you will see in all Lithium companies.
Figure 6: The share price chart for Pilbara Minerals Limited (ASX: PLS). (Sourced from www.commsec.com.au)
One major difference in the chart is that the sharpness in the rise of the rebound post mid July is much stronger for Pilbara Mines because they are one of the only two real lithium producers in Australia.
If you look at the small companies with good lithium stories, this rebound was flatter. It was still a rise but less prominent.
Gold stocks which used to be the darling of the sector is experiencing the reverse. Copper and Nickel, the other main players in this sector are all experiencing the same trend. Does this make sense? Does the market think that the world only needs lithium?
Many commentators are saying that the long term view is still positive for the non-lithium stories. The issue is that the wave of Lithium sentiment is bypassing everything else. The fear from the global financial concerns is driving people out of these markets.
The fear I have for this sector is that like all market darlings, there are those that genuinely have a story and there are those that have an uneconomic story. There are numerous stranded projects of all sorts of commodities in the world. The reason they are still stranded is because it is uneconomical then and is still now. No amount of money spent or no amount of rising commodity price will make them economical.
These assets are great for those wanting to mine the market. Don't get me wrong, great wealth has been created with these assets. I don't begrudge this process but when they are in the mass amount that is now in the market, I am worried that when the bubble begins to open up, it will create a bearish wave which this sector will need a long time to recover from.
Most of us who have been around this sector for many decades will say that we have seen it all. I have been telling people that the last two years was not normal. The sharpness of the price rice and the amount of money raised, that was not normal. The EV Revolution and the need for commodities, now that is new but it is a long term proposition.
The long term fundamentals are in place and it will manifest itself soon. The downturn of the market was in some way caused by the COVID restrictions in China and the Ukraine war. The inflationary pressures were always going to come so that threw a spanner in the works.
Is there a light shining at the end of the tunnel? Yes, definitely. What worries me is the impending demand rush for lithium because there is not going to be enough lithium to go around. The brine lithium story will also have the same issues as capital for those are high.
The demand for copper and nickel will most likely bust soon. As I write, the copper price jumped to $3.71 on the 4th November 2022, which is almost the last high in September 2022. It is still a way to the $4.70 mark in April 2022, but it is a jump which sometimes is the trigger which may spark the market.
The last words are, use this time to DYOR and look out for something to take a position. This level will not be around for long. The market commentary seems to be gaining pace towards some recovery in the near future rather than the opposite. Always remember, Do Your Own Research, seek professional advice and don't take Samso as the gospel truth. :-)
Listen to Part 2 of Noel's Podcast with Mining HQ on "What should investors be looking at with so much marketing noise?"
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