Monsters of Rock: Westpac (less) bearish on iron ore despite recent positivity, gold miners rise as inflation subsides
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Iron ore has been a rough and tumble market in 2022, punctuated by stunning and unexpected highs (US$160/t despite winter cutbacks in steel production in China in March) and sudden and partly expected lows (under US$80/t in October thanks to China’s strict Covid rules).
Right now it has settled in between, after the wind back of Covid restrictions gave steel suppliers and traders cause for hope.
The charge to US$110/t in just six weeks from its year lows has seen iron ore reclaim its spot in the commodity winners list. It is down 0.9% in Singapore today to US$107.90/t.
How long that can last remains a matter for debate.
Westpac, for one, remains bearish despite the recent run, with the big bank noting fundamentals remain weak and putting it down largely to supply-side tightness.
“The recent strength in ore prices is more about tight supply than a meaningful strengthening in demand,” the bank said in an update today.
“Ore shipments year to date are down around 1% with Australian shipments flat, South African shipments down 4% and Brazilian shipments down around 3%.
“It is the expected recovery in supply that is key to our caution in regards to iron ore fundamentals and why we see prices easing through 2023 as ore shipments lift.
“We now see iron ore falling to US$90/t by end 2023 and US$80/t by end 2024.”
While that seems low compared to current levels, it’s a big reversal on its November guesses, a reminder that predicting these things is a qualified (or unqualified) gamble.
A little over a month ago Westpac had tipped December quarter average prices of US$84/t for 62% Fe iron ore, falling to US$80/t by the end of this year, US$70/t end 2023 and US$60/t end 2024, rebounding to a long run outlook in the mid-80s by 2026.
Gold miners are licking their lips at the prospect the pace and severity of rate rises from the US Fed could fall after inflation dropped to 7.1% on the year for November in the States.
Lower than analysts predicted, the figure is around 2% below the peak year on year rate seen in June.
That saw the US dollar trip and gold rise, Undertaker style, above the 1800 mark to US$1812/oz.
The All Ordinaries Gold sub-index was up 2.39%, outpacing the 1% gain for the materials sector and 0.67% lift across the ASX.
But no one could hold a candle to Genesis Minerals (ASX:GMD) and St Barbara (ASX:SBM), trading for the first time since they announced their merger as “Hoover House” under GMD boss Raleigh Finlayson.
Both were up around 20% in early trade before settling to a gain of about 13%.
Approval of the deal is in the hands of Genesis shareholders, who must vote 75% in favour to support the scheme, bankrolled by a $275m raising completed today to instos like AustralianSuper, Resource Capital Funds and Kerry Stoke’s Australian Capital Equity.
RBC Capital Markets analyst Alex Barkley noted there was a break fee to the transaction on St Barbara’s side if a third party comes in with a compelling bid.
However, the consolidation play in the Leonora gold district, which will see SBM spin its Canadian and PNG assets out into a new company called Phoenician Metals, is being pitched as more than the sum of its parts.
“The new strategic plan due SepQ is likely to help cement valuation,” Barkley said.
“With rough calculations we estimate Hoover House could be worth around A$1566m, SBM’s 38% share of this would be A$595m. This is before considering any scale premium a larger entity might create, or a premium for simplified WA focus.”
Barkley said Hoover House (we’re still not sold on its historical vacuum associating name) could trade higher than SBM’s multiples with increased scale and its simpler WA-only focus.