Ground Breakers: War could send gold to US$2500/oz, Capital Economics says
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Investors running from risk assets piled into gold on the same day Russia invaded Ukraine, sending prices up to a 12-month high of US$1973/oz before they tumbled back late in US trade.
In step with the mood of the day gold was as volatile and unstable as the situation gold bugs were responding to.
— hgtp://OutlierTrading (@OutlierTrading_) February 24, 2022
But prices could soar higher as the drums of war continue to roll according to the normally bearish Capital Economics.
Chief commodity strategist Caroline Bain said an escalation of the conflict – which seems pretty escalated already – could send gold to new records in the months ahead.
“As for gold, we now expect safe-haven demand to drive its price higher in the coming weeks and months,” she said.
“The gold price has already rallied since the start of the year on investor buying, despite the rise in US real yields. (It typically has an inverse correlation with real yields.)
“If the Ukraine tensions rumble on, we now think that the price of gold will remain firmly over $2,000 per ounce in the first half of this year before falling back in the second half of the year as the historical relationship with US yields starts to reassert itself.
“Any escalation in the conflict could result in the gold price moving close to $2,500.”
US$2500/oz would be pretty wild given the record gold price in August 2020 as the world emerged from initial pandemic lockdowns was just US$2067/oz. But these are exceptional times.
Aussie gold miners fell off today after investors took profits on broad gains yesterday.
Nickel miners were up as prices rose 1.3% to US$24,716/t, having hit US$25,000/t earlier this week.
IGO (ASX:IGO) lifted 1.37%, with Mincor (ASX:MCR) up 1.86%, Nickel Mines (ASX:NIC) rising 3.11%, Panoramic Resources (ASX:PAN) 7.08% higher and Poseidon Nickel (ASX:POS) and Western Areas (ASX:WSA) also up.
Russia produces about 17% of the world’s “class 1 nickel”, nickel sulphide concentrate that can be converted into nickel sulphate for lithium ion batteries.
But despite the threat of sanctions, Russia’s Nornickel could get respite from another belligerent world power. Shanghai Metals Market reported that China could increase its share of Russia’s nickel exports in response to sanctions against Putin’s cronies from the West.
NdPr prices hit US$100/kg for the first time in 10 years in November, helping Lynas Rare Earths (ASX:LYC) to a massive fourfold uplift in profit for the first half of 2022.
The $8.5 billion company produced a record net profit after tax of $156.9m, up from $40.6m a year earlier, with revenues climbing from $202.5m in H1 2021 to $314.8m in H1 2022.
EBITDA also rose from $80.6m to $189.8m, while Lynas has bucked inflationary trends hitting the mid-tier and large cap mining sector, with costs dropping from $150.8m in 2021 to $140.3m in the first half of 2022.
Prices have risen even higher since the start of the year, with NdPr oxide, the most valuable product sold by Lynas from its rare earths refinery in Malaysia, selling for over US$173/kg Thursday according to the Shanghai Metals Market.
Despite China increasing its rare earths mining and separating production quota by 20% against 2021 for the first half of 2022, Lynas boss Amanda Lacaze says the company is looking at ways to increase production to meet demand in a market the company says is very tightly supplied.
Lacaze said Lynas’ 2025 growth plan of increasing production 50% on 2019 levels will “clearly” not keep up with the market and Lynas is the largest supplier of processed rare earths outside the Chinese market.
“They are many questions around how fast the demand grows. Fact is, after the announcement of quotas increased by 20%, the price of NdPr in China continued to grow from 900 RMB to 1100, which shows that the situation continues to be extremely tight,” Lynas VP downstream Pol Le Roux said.
“In fact, when you look at the balance of NdPr globally, in the past two years basically supply was a bit lower than demand. And so what we’ve seen, actually is all the existing stocks going down so a typical magnet maker in China would run with 6-10 months of stocks. Today they hardly get one month ahead of them.
“So situation is very tight and that means that all the existing suppliers, of course the Chinese but also Lynas, have a very simple crystal clear priority – grow as fast as possible.”
WA gold producer Westgold Resources (ASX:WGX) has become the latest to disappoint in its first half earnings, suffering a 58% decline in NPAT from $47.5m last year to $19.9m in the six months to December 31.
The profit drop comes shortly after Westgold paid a maiden unfranked 2c dividend at its annual results in August.
EBITDA fell 27% from $144.5m in H1 2020-21 to $106.2m in H1 2021-22, despite a 5% increase in gold sales to 131,917oz and 3% revenue bump from $301.8m to $311m, with overall costs up 22%.
Westgold executive director Wayne Bramwell said the company, which was hit with a 5% fall in its share price this morning, had ramped up investments at its sites and stock inventories to protect against Covid and labour disruptions as virus cases rise in WA.
“At a corporate level, COVID-19 has required all companies to reassess key business risks,” he said.
“On that basis Westgold made additional financial investments in several critical areas during H1 to mitigate potential operational disruptions.
“The investment made in building surface stocks, increasing critical spares and consumables inventory impacted short term financial metrics but the trade-off was considered prudent as this investment can insure future cash flows.”