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Guy on Rocks: The forecasters seriously underestimated gold, iron ore
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‘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
This week gold and iron ore both notched new records. Gold touched near-seven-year highs of over $US1760 an ounce. Meanwhile, iron ore is getting very close to the $US100 a tonne-mark, hitting $US93/t this week.
Analysts like Bell Potter’s Kevin McKay predicts that another “break out to the up-side may be imminent” for the gold price. Recent forecasts have suggested figures ranging from $US3000/oz up to $US20,000/oz.
Morgans, meanwhile, believes that the iron ore price could re-test $US120/t.
But a review of earlier forecasts, according to Le Page, shows just how far off the market watchers have been on both commodities.
“I’ve been reviewing some forecasts over the past couple of years and it’s interesting … how wrong some of the forecasts have been,” Le Page told Stockhead.
“I think the forecasts on economic growth could be equally wrong.
“I was looking at one unnamed well-known investment bank forecasting gold would average $US1295 ($1981) over full-year 2020. It’s currently $US1740. Iron ore they were projecting at $US68 a tonne and that’s now in the $US90s.”
Oversupply overstated
The reason for the large iron ore price discrepancy, according to Le Page, is that forecasts were based on a big expected oversupply that hasn’t eventuated for a number of reasons, including COVID-19.
Vale’s iron ore shipments out of Brazil, for example, have dropped by about 100 million to 130 million tonnes a year.
“And aside from the seasonal disruptions obviously, the intense impact of the virus is currently understated in addition to the problems [Vale] have with the tailings dam failures over there,” Le Page explained.
“I think that the theme of iron ore being strong will help the majors. But obviously the juniors, like Fenix Resources (ASX:FEX), … stand to benefit because they’ve got a premium product.
“We anticipate their mining approvals will hopefully be through in the next 30 days and they’ll be in production late this year.”
Le Page said the strong iron ore price had boosted the potential earnings before interest, taxes, depreciation, and amortisation (EBITDA) on Fenix’s base-case scenario for its Iron Ridge project in the Pilbara from about $13m a year to $70m a year based on spot prices.
“So that could see the share price target revised from 20-30c a share to well over 40-50c,” he noted.
On the macro front, resources is gradually clawing back market share on the ASX.
According to Le Page, the banks have gone from making up 35 per cent of the All Ords Index to 28 per cent, while resources has climbed from 25 per cent to 28 per cent.
“We’re seeing a big increase in the representation of resources by value,” he said.
Hot stocks to watch
Gold-copper explorer Sultan Resources (ASX:SLZ) has made it onto Le Page’s radar this week.
That’s because the junior explorer has followed some of its peers into the now hot Lachlan Fold Belt in central New South Wales.
Sultan has just acquired a 330sqkm gold-copper exploration portfolio called ‘Colossus ‘in the region, which has become a recent hotspot for porphyry exploration, thanks to Alkane Resources’ (ASX:ALK) historic discovery at the Boda project, about 110km north of Cadia, late last year.
“I wasn’t a big fan of the Lachlan Fold Belt, but the last couple of years has seen a lot more sustained exploration success obviously on the back of Alkane and that spectacular result,” Le Page noted.
“So that I think has set the Lachlan Fold Belt alight.”
Earlier this week, Sultan reported rock chip results of up to 24.6 grams per tonne (g/t) gold and 26.1 per cent copper from the Gowan Green prospect and results of up to 2.5 per cent copper from the Big Hill prospect.
“I think the big news there is the potential 6km anomaly outlined by the magnetics that could represent a big copper-gold porphyry, and the high-grades they’re seeing on the surface could be some sort of epithermal veins emanating from this porphyry,” Le Page explained.
READ: Explainer: Why are so many explorers chasing a porphyry payday?
“On the back of a lot more exploration activity in the Lachlan Fold Belt and some success, I think you’re going to see a lot more activity and a lot more interest in the likes of Sultan.
“I think that’s a pretty exciting story that’s unfolding there.”
