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Article from the Financial Times
Once in a generation a new graduate joins that elite circle of globally recognised and traded commodities. Now widely viewed as the second most important commodity behind oil, the evolution of iron ore has mirrored the transformation of China. One of the least volatile commodities in 2020, iron ore has outperformed metals and mining equities, which over the past seven years are roughly flat, while the S&P GSCI Iron Ore index has more than tripled. The emergence of iron ore has been a rapid one by commodity market standards. A decade ago the magnetic red dirt was an opaque market with contract negotiations taking place annually in smoke-filled rooms in Japan and later China. The market now has two liquid futures markets on the Singapore Exchange (SGX) and Dalian Commodity Exchange (DCE). These financial markets are trading 1.2 times and 20 times physical seaborne market volumes, respectively.
The iron ore market has several characteristics that make it distinctive as an investable asset. Supply is concentrated in a handful of geographic regions, notably Brazil and Australia and held by a small number of participants. Global demand is dictated by one big end-user, China. Both supply and demand are subject to shocks caused by geopolitical events, unforeseen natural disasters and policy decisions, as well as the actions of individual asset owners. Platts IODEX, the main prevailing industry price benchmark, which represents medium-grade ore with 62 per cent iron content, has once again spiked, breaking through $100 a tonne driven by strong demand-side fundamentals in China with rising steel prices and strong steelmaker profit margins.
The unique characteristics of iron ore present opportunities for investors, as a liquid and easily accessible proxy for Chinese economic growth or, more specifically, the performance of the Chinese manufacturing and infrastructure sectors.
Link here to the FT article
The year 2020 has already delivered what HM Queen Elizabeth would refer to in her end of year speech as an Annus Horribilis. It is still only April 2020, and Covid-19 continues to wreak almost biblical levels of havoc and human tragedy across the globe. In our previous article on junior gold explorers, we stated that it seemed trite to discuss investment opportunities in the midst of the ongoing battle against CoronaVirus. But life does go on, and so does mining exploration, even with the movement restrictions currently in place.
Gold Set To Rebound Following Monetary Stimulus Measures
Although gold has retreated from the late March highs of $1700 oz, at $1646 the yellow metal still sits close to year highs, well above the 2019 highs of $1277 last August.
Kitco, a website dedicated to gold and metals believes a major rebound in gold is just around the corner as prices look ready to surge on massive global monetary policy stimulus and unprecedented fiscal policies. United Overseas Bank (UOB) head of markets strategy Heng Koon said their forecast is “for gold to rebound significantly in the quarters ahead to USD $1,650 in 2Q20, $1,700 in 3Q20, $1,750 in 4Q20 and $1,800 in 1Q21.”
“Once the USD funding crunch potentially dissipates across 2Q20, massive global monetary policy easing coupled with unprecedented fiscal policy stimulus will light the fuel for further gold strength.”
Heng also added that global central banks “have not only floored rates near zero but many have also entered into large Quantitative Easing programs. These significant stimuli bode well for gold and will be the fuel for gold’s rally once the USD funding crunch abates across 2Q.”
This compelling backdrop continues to drive healthy levels of investor interest in junior gold explorers. Across the globe, the focus on gold is manifesting itself in investor speculation into small cap explorers with quality projects. Most small explorers however only have one or two key project in their asset arsenal, leaving little room for any disappointment. However, there are a handful of micro-cap gold exploration plays offering a broad spread of assets, and consequentially an attractive risk profile with significant upside potential.
Once such company is AIM listed ECR Minerals (AIM: ECR), which has 100% ownership of five gold exploration projects in Central Victoria, Australia, and four exploration licences in the north-eastern Yilgarn region of Western Australia.
ECR’s Bailieston at the Centre of the Current Gold Exploration Boom
ECR’s Victoria projects include Bailieston, Avoca, Timor, Creswick and Moormbool. Indeed Bailieston, which targets epizonal / epithermal gold mineralisation of the Melbourne Zone, is at the epicentre of the current gold exploration boom in Victoria, being located close to the highly successful Fosterville mine owned by Kirkland Lake Gold. Recently, Australian mining giant Newmont arrived in the district with an application for ground immediately to the north of the Black Cat prospect.
Study Data Endorses Creswick Potential
During Q4 2019, ECR reported ‘nuggety gold mineralisation’ in the Dimocks Main Shale prospect at Creswick, some of which proved to be exceptionally high grade. Creswick has long been viewed as a potential pivot project for ECR after the highest grade duplicate result of 80.97 g/t gold came from a 1 metre interval that originally assayed 44.63 g/t, confirming the original findings announced on 8 May 2019.
On March 27th, ECR announced the results of a study carried out by Dr Dennis Arne, a pre-eminent consulting geochemist in Victoria, whose experience includes extensive consultancy at the highly successful Fosterville gold mine in Central Victoria owned by Kirkland Lake Gold.
The well-regarded Dr Arne’s involvement was seen as a solid endorsement of Creswick’s potential, and indeed the results did not disappoint, as ECR CEO Craig Brown pointed out.
“We are very pleased with the results of this study, which show good indications of hydrothermal fluid flow related to gold mineralisation in a number of drill holes at Creswick. Importantly, the variation in the results, with some areas ‘lighting up’ and others not, is potentially useful for identifying gold-bearing shoots.”
Brown added that the results “underline the significant gold exploration potential that we believe exists at Creswick, where our tenement position covers approximately seven kilometres of the Dimocks Main Shale (DMS) trend, of which our 2019 drilling tested only approximately 300 metres.”
ECR’s Windidda Gold Project, based in the Yilgarn region of Western Australia originally consisted of a package of nine exploration licence applications covering a 1,600 square kilometre area with the potential to host komatiite hosted nickel-copper-PGE (platinum group element) mineralisation, as well as orogenic gold. Five exploration licences have been granted, and in its full year results statement at the end of March 2020, ECR said the remaining four licence applications had been withdrawn, in light of objections to the expedited grant procedure from native title parties and the findings of preliminary desktop work to assess the prospectivity of the licence areas.
Consolidation, R&D Cash Refund and Focus
A micro-cap gold explorer can only operate so many projects and licenses, and indeed with the burgeoning potential of Creswick now at front and centre, the board took the decision to sell its wholly owned Argentine subsidiary Ochre Mining SA, which holds the SLM gold project in La Rioja, Argentina. The sale to Hanaq Argentina SA still sees ECR retain a Net Smelter Royalty of up to 2% to a maximum of US$2.7m in respect of future production from the SLM gold project, while removing ongoing costs associated with acquiring and running an exploration license.
There has been further good news on the funding front too, as the group also received a significant cash refund under the Australian government’s R&D Tax Incentive scheme. A$318,972 (approximately £171,000) was received in relation to the financial year ended 30 June 2018, and received a further refund of A$555,212 (approximately £295,515) in relation to the fifteen month period ended 30 September 2019.
The qualifying R&D activities relate to research into turbidite-hosted gold deposits within the Company’s exploration licences in Victoria. It goes without saying that these two refunds have also provided a significant boost to ECR’s cash position.
The biggest boost however came on Monday 6 April 2020, when, in the midst of the upheaval and disruption caused by COVID-19, ECR announced that it had raised a further GB£500,000 in a placing at 0.5p. That ECR was able raise funds in some of the most challenging stock market conditions in living memory more than anything else underscores the quality of the asset portfolio.
Still trading on a miserly GB£2.5m capitalisation, the market has ascribed little more than the value of the administrative work undertaken to secure the licenses, with no premium whatsoever for the results from Creswick or any of the other work undertaken to ascertain the prospectivity and value of ECR’s projects.
Selected Junior Gold Explorers Offer Great Value
Amid unprecedented efforts to limit the spread of CoronaVirus, the fiscal and monetary stimulus measures announced by the world’s major economies over the past month are global policy events without precedent in peacetime. Gavyn Davies of the FT pointed out that the increase in fiscal spending and loans in the US this year alone “will reach more than 10 percent of GDP, larger than the rise in the federal deficit through 2008 and 2009.”
This wholly supports the UOB / Kitco view that the gold price is set for a major rebound in the months ahead. As such, this rebound is likely to be reflected in the valuations of junior gold mining explorers with strong project portfolios. Fully funded for the coming year, and with nine projects and licenses in key territories across Australia, ECR Minerals should be integral to any junior gold explorer portfolio as the world grapples with the challenges and uncertainties of the Covid-19 pandemic.
Kitco – Here’s how gold prices will get to $1800 in the next three quarters – https://www.kitco.com/news/2020-04-01/Here-s-how-gold-prices-are-going-to-1-800-in-the-next-three-quarters-UOB.html
FT – Gavyn Davies: Can the world afford fiscal and monetary stimulus on this scale? – https://www.ft.com/content/0f289d20-6e97-11ea-89df-41bea055720b
Shareholders are revelling in bumper payouts, but prices could fade down the track.
Shareholders in Rio Tinto are likely to be celebrating another bumper payout when the miner reports annual results next month. The Anglo-Australian group — along with rivals BHP and Brazil’s Vale — is generating bucket loads of cash from the continued strength of iron ore.
Boosted by strong demand from China and a string of supply disruptions the key steelmaking ingredient rose 30 per cent last year and averaged $90 a tonne.
For big producers such as Rio that can mine the material for as little as $15 a tonne, that means windfall profits — and sturdy dividends for investors. Deutsche Bank reckons Rio generated close to $10bn of free cash flow last year.
Whether it can match that performance in 2020 will depend on the direction of iron ore prices.
The good news for its shareholders is that prices have remained elevated over the past month, trading at more than $90 a tonne as Chinese steelmakers have restocked ahead of the Lunar New Year holiday that starts on January 25, and the start of the spring construction season.
The risk of weather disruptions in the Pilbara — Australia’s main iron ore-producing region — has also kept prices firm, according to traders. A sharp fall in exports from Brazil because of lower shipments from Vale, the world’s biggest iron ore company, has helped too.
One final boost: the decision of the US Treasury to drop the designation of China as a currency manipulator. This has lifted the renminbi, making cargoes of iron ore cheaper for Chinese mills to buy in the seaborne market.
Still, most analysts expect prices to drift lower over the course of the year, as supply picks up and production in China remains broadly flat at close to 1bn tonnes.
Demand is likely to fade after China’s new year holiday, according to BMO Capital Markets. It reckons restocking has finished, pointing to a slowdown in activity at the main iron ore port in Hebei, China’s leading steelmaking province.
Ultimately, the direction of prices will hinge on Vale and whether it can hit targets for production.
The company was forced to cut more than 70m tonnes of capacity last year after a dam disaster at one of its mines in the state of Minas Gerais in which more than 250 people died.
Some of the supply has come back online and this year Vale expects to produce between 340m and 355m tonnes of iron ore, up about 40m from last year. However, no one is sure if the Brazilian miner can actually do that. Some of the shuttered output uses dams that have to be decommissioned before production can resume, for example.
If Vale hits guidance JPMorgan estimates the iron ore market could be in surplus, with supply outstripping demand by 28m tonnes. If it does not, then Rio, its shareholders and other big producers could be celebrating another year of elevated prices.
The squeeze is also seeing some recommissioning activities among previously mothballed iron ore mines.
In NE Brazil, a jv between AIM listed Cadence Minerals #KDNC and Singapore based commodities group IndoSino Pte Ltd will see the former Anglo American (AAL) and Cliffs Natural Resources owned Amapá iron ore project recommissioned.
With key rail concessions granted to Cadence for shipping in December, this large-scale iron open pit ore mine with associated rail, port and beneficiation facilities is expected to produce 5.3 million tonnes of iron ore by 2024.
If gold is anything to go by, investors are increasingly anxious about the state of the world.
Volatile equity markets and fears of a global economic slowdown have helped gold rally 10 per cent from its August lows, putting it among the best performing metals over that period.
It is a sharp contrast to much of the past two years, when rising US interest rates, a strong dollar and buoyant equity markets hurt gold bugs and the shares of miners such as Barrick Gold, Newmont Mining and Goldcorp. And when there was a correction in US stocks in early 2018, the gold price failed to benefit.
Almost a year on, the big question is whether 2019 could prove a profitable year to own gold, which is typically bought as hedge or haven by investors. The amount of physical gold in exchange traded funds has risen to 71.9m ounces, close to the record high of 72m touched in May 2018.
“We haven’t seen flows like this since the first half of 2016 — when the gold market really took off,” says Joe Foster, a portfolio manager at VanEck in New York.
“There seems to be a change in sentiment and investor psychology. People are waking up to the fact that we are late in the economic cycle and we could be ending [it] in the next year or two. That brings more risk into the system; that’s why gold is moving up.”
Those flows, along with investors covering their bets against gold, have helped the yellow metal’s price recover from the 18-month low of below $1,200 a troy ounce touched last August.
Analysts say there are a number of reasons to think the gold price can break through the $1,300 mark and push higher.
These include still-fragile stock markets, the expectation that the Federal Reserve will hold off from interest-rate increases this year, and a weaker dollar, which makes the metal more appealing. Rising US rates have been a drag on gold since the metal provides no yield.
Goldman Sachs, one of the most influential banks in commodity markets, raised its gold forecast last week and now expects a gold price of $1,425 over the next year.
“To take a view on gold, you have to first take a view on broader markets,” said Tom Holl, BlackRock portfolio manager, natural resources. “If we continue to see elevated levels of macroeconomic uncertainty and risk adversity, then gold will probably continue its positive momentum.”
Some investors believe rising concerns over US debt levels could sharpen gold’s allure, according to John Hathaway, a senior portfolio manager at Tocqueville Asset Management in New York.
Last week, Fitch Ratings warned that a continued government shutdown in the US could lead to a credit downgrade on the country’s debt, which is rated AAA by the agency.
“The US is beginning to sport a debt-to-GDP ratio worthy of any banana republic,” says Mr Hathaway. “We believe that exposure to gold is both timely and potentially rewarding.”
Higher levels of debt will also make it hard for the Fed to raise rates and tighten monetary policy, adds Trey Reik, a senior portfolio manager at Sprott Asset Management in Connecticut.
“I do think the dollar is in the midst of a long-term weakening,” he says. “You cannot raise rates with that much debt in the system without causing economic collapse.”
The buying of gold by central banks is also at its highest level since 2015, as many authorities remain keen to diversify away from the dollar. Standard Chartered estimates that central banks bought 500 tonnes of gold last year. China was among the buyers, adding almost 10 tonnes, following more than two years of unchanged holdings.
“While Russia, Kazakhstan and Turkey dominate central bank purchases, a host of other central banks entered the official sector gold market last year,” says James Steel, chief precious metals analyst at HSBC.
Mr Steel notes that the list includes Hungary, which had been out of the gold market for decades, with the exception of modest purchases in 2017. The central bank of Poland also purchased gold for the first time in many years, he adds.
However, the multiple disappointments for gold bulls over the past year leave some wary. Gold has not breached the $1,300 level since June.
While ETF holdings have risen to their highest level in five years, traders in the futures markets have not yet placed significant bets on higher prices, according to ICBC Standard Bank, a unit of China’s largest lender.
“On the one hand this does present an opportunity for gold prices to move higher still, if investor length now comes into the market,” says ICBC analyst Marcus Garvey.
“However, on the other, it begs the question as to why this has not yet happened, given the number of catalysts already present. If any of the recent tailwinds for gold were to abate, it increases the likelihood for a period of price consolidation.”