Investment banks back upside potential

Economic uncertainty, especially the prospect of rising rather than falling interest rates, returned to haunt stock markets mid-month.

And top investment banks have been quick to spot the opportunities.

The best example of this phoenix theory of value rising from the ashes is Evolution Mining, which was trashed after a releasing a poor quarterly report on Wednesday January 17 but enjoyed a burst of ‘buy’ tips the following day.

Evolution’s 18 per cent share price fall to $3.14 was offset by Citi flipping from ‘neutral’ to ‘buy’ with a target price of $3.95. Goldman Sachs chimed in with a price target of $3.70 and Macquarie has an ‘outperform’ rating and price tip of $3.80. Morgan Stanley was more cautious, sticking with ‘hold’ and a price forecast of $3.45.

Oversold is the best description of Evolution’s position, and while Citi acknowledged a difficult outlook, it added that “value now beckons”.

That view could be true for the rest of the market, which threw a hissy fit when the promise of early rate cuts was withdrawn; a condition that looks more like a case of timing rather than an end to the process.

Christine Lagarde, president of the European Central Bank, summed up the situation by forecasting that rates would fall in the northern summer rather than spring, which is undoubtedly a delay (but for a few months, not years).

What caused most worry among central bankers is that inflation is down but not defeated, as shown in a modest increase in the British inflation rate, the first move up in 10 months.

There were exceptions to the gloomy mood, especially for uranium, which continued its record-breaking run, and oil, which enjoyed a boost from the spreading Gaza war. But just about everything else lost ground as the pre-Christmas rally came to an end.

Gold, which traded up to an all-time high of $US2,075 an ounce immediately after Christmas, dropped back to $US2,010/oz, a victim of interest rate speculation that lifted the US 10-year bond rate back over 4 per cent, dragging the Australian 10-year rate up with it to 4.27 per cent.

Gateway Mining was a rare gold stock to post a rise in the January 15-19 period, up 0.5 cents to 2.4 cents after reporting encouraging assays of up to 5 grams a tonne over 18 metres at its Montague project in Western Australia.

Ausgold did almost as well, standing still at 2.7 cents after announcing that a definitive feasibility study into its 3.04-millionounce Katanning gold project was on track for release in the June quarter.

The lower gold price has not deterred the world’s gold bulls from seeing higher prices later in the year, with managing director of Canada’s Sprott group, John Hathaway, saying gold is heading towards a “break-out” with most top stocks “excessively discounted”.

Sprott expects gold to head up into a range between $US2,500 and $U3,000/ oz, which is an encouraging view given overall the gold sector suffered a 6 per cent fall from January 15-19.

Uranium, as mentioned, was again the top-performing metal with a price around $US100 a pound.

And there’s potential for more to come, according to Morgan Stanley, which told clients that the “risk/ reward assessment was still skewed to the upside from here”.

There was plenty of other news from the uranium sector, and related share price movements.

• Toro Energy returning to its roots at the Lake Maitland project in WA after dabbling in other commodities during the uranium sell-off. Toro added 6.5 cents to 60 cents.

• Basin Energy rose by 5.5 cents to 19 cents after reporting the start of exploration on permits in Canada’s prolific Athabasca Basin.

• Haranga Resources said it had discovered multiple new uranium anomalies at its Manankoly project in Senegal, news of which lifted the stock by 4 cents to 25 cents.

• Global Uranium and Enrichment added 3.5 cents to 17 cents after announcing receipt of final permits to explore its Tallahassee uranium project in Colorado.

• Terra Uranium rose by 4.5 cents to 18 cents after reporting the acquisition of tenements in the Cable Bay sheer zone of Canada’s Athabasca Basin.

Price moves by the usual uranium suspects included Boss Energy, up 47 cents to $5.46; Paladin Energy, down 13 cents to $1.23; and Deep Yellow, up 21 cents at $1.52.

Iron ore, Australia’s most valuable export, dropped back to $US130 a tonne, down 10 per cent from the $US145/t reached in the early days of the new year.

The three major iron ore stocks weakened with the ore price and relatively poor production reports. BHP lost $1.48 to $46.01; Rio Tinto was down $2.87 to $126.73; and Fortescue was 14 cents weaker at $26.97.

Investment bank UBS warned the background economic news might be indicating that the fundamental forces underpinning iron ore and coal could be starting to weaken, with the iron ore price heading down to $US120/t.

Lithium and nickel had a tough time mid-month, with Albemarle leading the lithium sector lower and BHP warning it might join the rest of the nickel sector by slashing costs and production at its ageing Nickel West business.

Nickel West has since made the call to close part of its Kambalda processing operation after major customer Wyloo Metals announced it would put its local nickel mines on care and maintenance.

New York-listed Albemarle indicated that the sharply lower lithium price would trigger deep cuts to its Australian operations and started a process of selling its 4 per cent stake in takeover target Liontown Resources.

Albemarle shares fell by 8 per cent from January 15-19, taking their 12-month loss to 51 per cent.

The lithium price crash, which now stands at exactly 80 per cent for the past 12 months, could have further to go, with warnings from analysts that big asset-value write-downs could be on the way, further bruising investor interest in the sector.

As expected, most lithium stocks lost ground.

Global Lithium Resources led the way (if that is the correct term), down 21 cents (26 per cent) to 58 cents. Patriot Lithium was down 13 cents (14 per cent) to 77 cents, and Pilbara Minerals dropped 30 cents to $3.49.

Pioneer Lithium was almost an exception, slipping just 1 cent to 18 cents after reporting high-grade channel samples assaying up 4.61 per cent from its Benham project in Canada, perhaps a sign that strong exploration results can still arouse investors’ interest.

Graphite stocks followed the lithium lead with most losing substantial ground.

The one exception was Metals Australia, which added 0.1 cents to hit 3.5 cents after reporting high-grade flake graphite recoveries from its Lac Rainy project in Canada.

Other graphite moves included Talga, which was down 10 cents to 60 cents and Syrah Resources, down 14 cents to 44 cents despite an optimistic ‘buy’ tip and price target from Shaw and Partners of $1.30.

There was plenty of other news and market moves in what was generally a mid-January down week.

• Azure Minerals said the latest results from drilling at its Area 3 target at the greater Andover lithium project in the Pilbara had confirmed a major discovery. The stock held its ground at $3.68.

• Metals Acquisition Limited– the unlisted cash box that bought the CSA copper mine early last year – is heading towards an ASX listing, possibly as soon as the end of January.

• Copper-exposed Rex Minerals attracted interest with a $29.8 million capital raising for work on its Hillside project in South Australia. The stock slipped 2 cents lower to 17 cents.

• Firefly Metals lost 2 cents to 53 cents despite reporting a high-grade copper assay of 4.6 per cent over 46 metres at its Green Bay project in Canada.

• WA1 dropped $1.08 to $10.90 after announcing a $40 million placement at $10 a share. The stock was trading at $1.41 this time last year.