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10 March 2020

Investing in time of coronavirus

Robin Bromby

It’s likely that, in the coming weeks, we will hear from CEOs and chairman on the impact of the Coronavirus. If not, we should — especially on anything which might impact metal prices.

While this column is concerned with the resources sector, it is worth noting the comments late Friday of the chairman of an investment company. Alex Waislitz (once described by the Australian Financial Review as a “famed stock picker and rich lister”) sent out a message to shareholders in his Thorney Opportunities (ASX:TOP) trying to see some light at the end of the tunnel.

While Covid-19 had highlighted the vulnerabilities of global economies and financial markets, he said, it had also demonstrated the world’s ability to work together — while agreeing that for investors these were very stressful times, made worse by algorithm-led programmatic trading.

The bottom line of his advice to shareholders: “Now, in my view, is not the time for aggressive selling or aggressive buying on dips. It is time for investment discipline and extreme vigilance”. His experience over 30 years in the financial markets tells him that, no matter what the short-term outlook, “this too shall pass”.

The bottom line of his advice to shareholders: “Now, in my view, is not the time for aggressive selling or aggressive buying on dips. It is time for investment discipline and extreme vigilance”. 

How bad will it get? Egon von Greyerz at Zurich-based Matterhorn Asset Management sees it as the gravest financial crisis since the 18th century. “Closing all factories, offices, schools, shops, railways, cinemas, etc., will paralyse the countries [concerned] and the world economy … To totally close down countries and production, leading to shortages of food and medicine, will probably kill more people over time than the virus itself,” he wrote at the weekend

(Parenthetically, a woman I was talking to on Friday had just come away from her dentist who treated her without wearing a face mask — he couldn’t get any replacements.)

However, as will be shown below, the resources sector has not yet seized up. Companies, even with currently unpopular commodities, are attracting fresh capital.

Last week, for example, German investment house Deutsche Balaton AG upped its stake in Matsa Resources (ASX:MAT) taking a placement at $1.55 a share at a premium; the stock had closed the previous day at $1.14. The company has two gold mines and two other exploration projects, plus a nickel prospect.

Another gold play, Saturn Metals (ASX:STN) last week saw 1832 Asset Management of Canada move on the register from 6.49 per cent to 7.51 per cent. The firm is a subsidiary of Toronto-based Scotiabank, founded in 1832 as Bank of Nova Scotia of Halifax. Saturn has a growing gold resources southeast of Leonora in Western Australia. (As will be noted below, it’s not just gold attracting money still — one tungsten play has now refilled its coffers.)

Warwick Grigor of Far East Capital sent out a note over the weekend to clients saying this: “As far as equity markets are concerned, we need to be prepared for what could be an extended period of uncertainty that is unavoidable, but stock market investors are used to the risk that comes with uncertainty”. He added that business activity may go through a period of suppression, but then the speculation would return when the recovery starts to take root. 

(Warwick set up Far East 25 years as an investment bank specialising in the resources sector; the other founding partner was Andrew Forrest, who has since gone on to other things.)

And just remember Warren Buffett’s advice: “The stock market is a device to transfer money from the impatient to the patient”.

 

Coal seam gas surges

A surge in development drilling that began in mid-2018 has driven coal seam gas production to a record 1,486 petajoules in 2019. That’s a 7.2 per cent gain on 2018’s output. Adelaide-based  industry watcher EnergyQuest, in its latest quarterly report, said that improved availability and reliability of gas processing plants played a part, but fundamentally the increase was due to the greater number of wells being drilled: they numbered 728 in 2018 and 899 last year, “the highest level since 2014 when a drilling frenzy was under way to build ramp gas ahead of the first exports from Queensland”.

The report notes that Comet Ridge (ASX:COI) has signed an MOU with LogiCamms for a study on a 70km-long pipeline to connect COI’s Mahalo North project to the east coast market.

Galilee Energy (ASX:GLL) has brought forward plans for exploration drilling at its Kumbarilla project in the Surat Basin.

 

Tungsten: tough metal, tough market

Back in 1937 as Washington planners realised they may be drawn into war, the Americans recognised that they faced a problem. Without tungsten, the defence plants could not make armour or ammunition tough enough and sufficiently heat-resistant. For war purposes, only tungsten would do: its main attribute is strength at high temperatures, its melting point being 3,420C — the highest melting point of all pure metals.

Most of America’s tungsten in 1937 came from China — and China was rapidly being conquered by the Japanese; and the territory still in Chinese hands was being cut off by a Japanese naval blockade.       

Here’s the point: back then, two-thirds of the world’s tungsten was supplied out of China; in 2013, China was producing four-fifths of the world’s supply of that metal.

The U.S. in 1937 was consuming 31 per cent of global supply; but American mines were able to supply only eight per cent of world output.

China holds 65 per cent of known global tungsten resources and accounts for around 80 per cent of the raw material supply, according to the British commodities information firm Argus Metals. In 2018, China produced 64,900 tonnes of tungsten contained in concentrate out of total global production of 80,100 tonnes. Vietnam, the next largest producer, contributed a much smaller share with 4,800 tonnes.

Tungsten — critical metal 1937, critical metal 2020.

During the 1980s and the 1990s, China used its enormous domestic resources and low cost of production to flood the world market. This drove tungsten producers in Australia, North America and elsewhere out of business. It is only now that Australia is starting to get its tungsten act together.

On Friday Specialty Metals International (ASX:SEI) had raised $4.5 million (with oversubscriptions). Its Mt Carbine mine inland from Cairns was discovered in the late 19th century and has been a significant producer in the past, the most recent mining taking place between 1973 and 1987 — the closure then coinciding with China starting dumping the metal.

In another recent announcement, Tungsten Mining (ASX:TGN) reported drilling which confirmed there were significant thicknesses of tungsten mineralisation at the Mt Mulgine project, located in the Murchison region of Western Australia.

King Island Scheelite (ASX:KIS) continues to work toward production next year. It has an offtake agreement with a subsidiary of Swedish conglomerate Sandvik which covers 20 per cent of its planned output. The deposit on the Tasmanian Island was mined between 1917 and the mid-1920s, closing then when tungsten prices collapsed. It was an important supplier of tungsten for Australia in the Second World, Korean and Vietnam wars, but was last closed in 1990 — again during the price collapse triggered by China.

Last week we saw a presentation from Rafaella Resources (ASX:RFR) which has the Santa Comba tungsten and tin deposit in northwest Spain. The drilling campaign is well advanced and test work has already begun. The presentation gives us an up-to-date picture of the market for this strategic metal: China supplies 80 per cent and consumes 55 per cent of the world’s tungsten; other key suppliers are Vietnam and Russia — but Europe produces only half the 16,000 tonnes it consumes each year. Western users, the company says, are eager to seek increased supply from countries in the OECD..

Thor Mining (ASX:THR) not only  has a completed feasibility study at its Molyhil tungsten-molybdenum project 220km from Alice Springs but also sits on 13 known tungsten outcrops nearby. In January a maiden resource of tungsten trioxide and copper was announced for the Bonya deposit, in which rare earth hopeful Arafura Resources  (ASX:ARU) has a 40 per cent stake.

 

More historic leads

Following up our earlier notes about explorers going back over old records for leads that might have been missed, two more instances.

First, Europe-focused explorer Variscan Mines (ASX:VAR) has been looking through drilling results reported between 1965 and 1985 at its Novales-Udias project in Spain. Of the 130 holes drilled, 85 hit mineralisation, some of the better ones including 8.4 metres at 26.75 per cent zinc, 6.3 metres at 29.89 per cent and 7.05 metres at 22.83 per cent. Many of the intercepts are shallow (the 7.05 metre hit starting at just 1.95 metres from surface). However, VAR says the drilling was done while the old mine was operational so some of the zinc found may have been mined back then.

Shree Minerals (ASX:SHH) has acquired another tenement to add to its Golden Chimney project south of Leonora. Production records show the new ground was mined in 1983-84 and gold extracted at an average grade of 2.08 grams a tonne.

 

More rare earths action

A timely moment to keep on top of this story given the as yet unknown repercussions of the Covid-19 close-downs in China (not to mention the concerns that rare earths resources there are being depleted).

Zenith Minerals (ASX:ZNC) has had further positive metallurgical testwork at its Laramie project in Wyoming. There are encouraging concentrations of the battery elements neodymium and praseodymium.

Meanwhile, Alkane Resources (ASX:ALK) reports that the federal government’s Export Finance Australia has let the company know it would like to be part of the financing consortium needed to get the Dubbo project (finally) off the ground. The deposit contains zirconium, rare earths, niobium (needed for steel making) and hafnium (nuclear reactors and alloys).

Your correspondent cut his rare earths teeth in the late 1990s reporting on Alkane. In 1999 the company had begun test work on its rare earths. Is the end of the development road in sight now that Canberra has its critical minerals policy (again, finally) in place?

 

 

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