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Guy on Rocks: Why China’s retaliation shouldn’t impact Australia’s iron ore market
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‘Guy on Rocks’ is a Stockhead series looking at significant happenings in 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
A major talking point this week has been what many are labelling a “stoush” between China and Australia over Prime Minister Scott Morrison persisting with his calls for an investigation into the origin of COVID-19.
This week China completely banned Australian beef exports and plans to slap tariffs of 80 per cent on Australian barley exports to the Asian powerhouse.
This has raised concerns other Australian exports to China could be subject to similar measures. But Le Page thinks the iron ore market could be safe from harm.
“Obviously we’re a bit concerned about the rhetoric coming out of the Australian government with respect to China — not that I think it’s going to have any impact on iron ore,” he explained.
“It’s probably more of a problem for the barley and livestock sector I would have thought.”
In fact, the iron ore price is still holding up pretty well, closing at just under $US90 ($139) a tonne on Thursday.
“Interestingly, China has had a drop in retail sales but quite a strong lift in production,” Le Page noted.
“Output in April raised 3.9 per cent from a year earlier, which is quite encouraging.
“That’s helping to underpin iron ore prices, which have remained quite strong despite a lot of forecasts projecting we’d see iron ore come off — which it may do longer term but certainly in the medium term that’s not looking like the case.”
All that glitters is (still) gold
Gold is also still continuing strongly, driven by strong demand from gold-backed exchange traded funds (ETFs).
However, there has been quite a bit of volatility in other sectors, particularly copper.
“The demand in China dropped around 5 per cent overall this year, it’s scheduled to pick up but there’s been about a 6 per cent drop worldwide,” Le Page said.
“So that forecast deficit in copper has evaporated. CRU have just downgraded their demand forecast by a further 2 million tonnes to 22 million tonnes, with China accounting for about 800,000 tonnes of that drop.
“So that’s a bit of a reversal from where copper was about four or five weeks ago.”
Hot stocks to watch
This week, Le Page has his eye on soon-to-be iron ore producer Fenix Resources (ASX:FEX).
Fenix has a high-grade direct shipping ore (DSO) project in WA that is very close to production. Its share price has more than doubled in the past month or so, from 3c in early April to close at 6.2c on Friday.
“They’re very close to getting all their approvals in place — environmental approvals and the mining proposal that was lodged with DMIRS in April this year,” Le Page said.
“They could be in production later this calendar year.
“One thing that remains outstanding is the financing, but given it’s a sub-$20m capex, we think a lot of that can be taken care of by an offtake partner.
“I’m anticipating news on that in the next two to three weeks.”
Fenix’s plan is to produce a high-grade product approaching 65 per cent iron content from its Iron Ridge project, which hosts a total resource of 9.2 million tonnes at 64.1 per cent iron.
Another stock on Le Page’s list this week is American Pacific Borates (ASX:ABR).
The company announced last week it was on track to start production from its flagship Fort Cady borate mine in Southern California in the second half of 2021, with the final operational permit expected to be in hand by the third quarter of this year.
For the entire three-phase project, American Pacific Borates has estimated a net present value of $US1.97bn ($3.1bn) and an internal rate of return of 39.4 per cent on a capex of $US737.9m.
IRR and NPV are used to estimate the profitability of a potential operation – the higher they are above zero, the better they are.
The recent news has provided a substantial boost to American Pacific Borates’ share price, which is now up over 210 per cent since late March to Friday’s close of 45c.
“They’ve got a draft environmental permit approval, which was their last major approval required and they’re likely to accept most of their conditions,” Le Page said.
“What that means is I think there’s a way forward to develop that project in southern California, which we think has got very significant share price upside from here.
“We’re seeing a bit of recovery in the share price and that’s likely to continue.”
Le Page’s final pick this week is Mako Gold (ASX:MKG) thanks to the interest in West African gold exploration being reignited.
“It’s highly prospective and it seemed to drop off the map with the market coming off and the Australian dollar being pretty weak but having said that, there seems to be a lot of interest back in Ghana, Côte d’Ivoire and Guinea,” he noted.
“Mako [has] started to kick a few goals at their Napie project in Côte d’Ivoire.”
The company announced in March that drilling had intersected several high-grade zones.
Top hits from the Tchaga prospect were 7.7m at 11.65g/t from 169m, including 3.55m at 23.06g/t from 171.7m with a peak assay of 1m at 47.3g/t from 172m.
“They’ve got about 300sqkm. They’ve got a 30km-long, 40ppb [parts per billion] soil anomaly, 17km-long shear zone and they’ve only tested about 3-4km,” Le Page said.
Meanwhile, the Gogbala prospect, another 5km soil anomaly, delivered hits of 12m at 5.39g/t from 11m, including 5m at 10.74g/t, and 7m at 2.73g/t from 77m.
“They’ve only got a market cap of $5.6m with about $1.7m in cash, so an EV [enterprise value] of under $4m,” Le Page said.
“Metallurgy looks good — recovery and grade are 94 per cent. So I think that’s a pretty interesting play and I think we’re going to hear more from that in the next few months.
“I think that is definitely going to be 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.
