‘Guy on Rocks’ is a Stockhead series looking at the significant happenings of the resources market each week. Former geologist and experienced stockbroker Guy Le Page, director, and responsible executive at Perth-based financial services provider RM Corporate Finance, shares his high conviction views on the market and his “hot stocks to watch”.

Market Ructions: Metals chaos

The tug of war between longer term metal supply problems and economic data appears to have been won, in the short term at least, by the latter as soaring inflation and higher than expected interest rate hikes (Bank of Canada raised interested rates a full 1% to 2.5% late last week) continue to pummel both precious and base metals.

For the Australian market Macquarie is anticipating (Macquarie Research, 14/7/2022) a 75bp hike in late July and 50bp lift in September.

The US dollar continued to set highs, closing at 108 up 1% for the week but lost 56 basis points late last week. Surprisingly, long-term yields continue to fall despite 9%+ inflation. The Euro closed at par with USD for the first time in 20 years.

The next significant economic news will no doubt be the Federal Reserve meeting next week where we will find out if the US economy is officially in recession.

The doomsday preppers will no doubt be interested in Dan Denning’s (Bonner Private Research) analysis of 50 out of 51 countries who defaulted on their debt repayments where debt to GDP ratios exceeded 100%. The exception was Japan.

The US debt to GDP ratio currently stands at 137% (figure 1) with China close to 300%, up from 68% two years ago.

Figure 1: US debt to GDP ratio, 1966 to 2022. Shaded areas represent recessions. (Source: https://fred.stlouisfed.org/series/GFDEGDQ188S, 15 July 2022).

Gold was down over 2% for the week to close at US$1,706/ounce and looks like testing US$1,700/oz. Platinum lost over 2% to close at US$847/oz and palladium a whopping 16% fall to US$1,759/oz. Silver has fallen heavily to US$19.20/oz after trading just under US$29/oz in February of this year.

Figure 2: Gold-silver ratio 1968-2022 (Source: https://goldprice.org/gold-silver-ratio.html, 15 July 2022).

Micky Fulp (Mercenary Geologist) pointed out last week that since 1970, the ratio of gold to silver (figure 2) has only exceeded 90 for 3% of the time (19 out of 630 months); so, it’s been a rough period for silver. Interestingly CME Group (derivatives marketplace) gold open interest (figure 3) has increased recently which could be a more bullish sign for medium term gold prices.

Figure 3: CME Group gold positioning Jan-21 to Jul 22 (Source: Macquarie Research, 14/7/2022).

Copper (figure 4) had its worst week of 2022 finishing off 8% for the week to close at US$3.21/lb racking up six consecutive weeks of declines.

Figure 4: 1-year copper spot price (Source: www.kitcometals.com).

Energy also got caught up in the down draft with Brent closing at US$97.52/bbl late last week.

Uranium appears to have fared much better and has found support around US$47/lb. Interestingly Japan is looking to switch on another five nuclear reactors which will give them nine operating reactors in total. This compares to 56 operating reactors prior to the Fukushima incident.

After digesting the above, I was seriously considering taking a leap off the top of Cigar Social clutching my favourite cigar but realised that with it only being a single-story building and remembering I had actually gone long gold and short the broader market, I thought better of the idea.

It’s not all bad news however as the sharp fall in the Australian dollar has cushioned the blow to Australian domestic miners and the unstoppable EV train should put a floor on metal prices in the medium term.


New ideas

Figure 5: LME 2-year price chart (source: CMC Markets, 18 July 2022).

The Ian Junk led Lunnon Metals (ASX: LM8) has had a busy period since listing mid-last year assembling an impressive footprint of nickel projects in the prolific nickel producing district of Kambalda (figure 6).

Figure 6: LM8 Western Australian nickel portfolio. (Source: LM8, ASX Announcement, 15 June 2022)

Lunnon recently raised $30 million and acquired nickel rights to two further mines, Fisher & Silver Lake,
doubling its footprint.

The recent news (ASX Announcement 18/7/2022) focuses on the Baker Shoot that was previously drilled by Western Mining and contains a JORC Resource of 568,000 tonnes @ 2.8% nickel for 15,600 tonnes of contained nickel. The company has drilled 36 RC and three diamond holes with the more recent results highlighting the potential for thicker, higher-grade mineralisation to the southeast (figure 7).

As well as being shallow the deposit benefits from being close to the West Idough open pit (a possible underground access point) and therefore has potentially low start-up capital costs.

Figure 7: Plan view of the geological mineralisation model at Baker Shoot illustrating section line 6,531,180mN (A-B see Figure 8).
Figure 8: Geological cross section 6,531,180mN updated to include ECO22RC_048 plotted against the recent June 2022 Mineral Resource. (Source IM8 ASX Announcement, 18/7/2022).

An 8,000m RC and 3,000m diamond drilling program was designed to infill and extend the existing resource with ECO22RC_048 (section 6,531,180mN) and returned an impressive 23m @ 6.78% Ni, 0.45% Cu, 0.12% Co, 0.98g/t Pd, and 0.26g/t Pt (figure 7, 8).

While there is no metallurgical testwork undertaken to date there is a long history of production in the district. Development options could involve combining production with Foster (48K tonnes of contained nickel-figure 6).

With an enterprise value around $140 million the prospects of developing a mine here look excellent (based on exploration results to date) and if you are looking at quality emerging junior nickel explorers this is definitely one to watch.

At RM Corporate Finance, Guy Le Page is involved in a range of corporate initiatives from mergers and acquisitions, initial public offerings to valuations, consulting, and corporate advisory roles.

He was head of research at Morgan Stockbroking Limited (Perth) prior to joining Tolhurst Noall as a Corporate Advisor in July 1998. Prior to entering the stockbroking industry, he spent 10 years as an exploration and mining geologist in Australia, Canada, and the United States.

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed, or otherwise assumed responsibility for any financial product advice contained in this article.