EDITOR: | August 8th, 2016

InvestorIntel Report: China’s new metals splurge?; Lithium forecast; Gold stock profits

| August 08, 2016 | No Comments
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Businessman Placing Chess Pieces On Stacked CoinsIf the Fitch rating agency is right, China will need to consume mountains of metals — copper, zinc, iron, as well as all the technology metals — for the next 14 years. Fitch is predicting that China will need to build new housing stock of 800 million square metres every year through to 2030. As the Nikkei news service adds, that is roughly equivalent to the housing space of Singapore 15 times over for more than the next decade. (Apologies for the italics, but the sheer enormity of this forecast demands them.)

Where is the zircon going to come from for the tiles and wash basins? What about all that copper wiring? How much stainless steel, and therefore nickel, will all this require? Those buildings will all need steel containing manganese and niobium as well as iron ore (not to mention graphene). The digital electronics will need everything from tantalum to rare earths, from tin to lithium and graphite.

This is not the first time we have heard of the potential of China’s housing demand. Four years ago the international consulting firm McKinsey & Co predicted that China could every year add floor space totalling 2.5 times the entire residential and commercial square footage of Chicago (and India could add floor space equivalent to Chicago’s annually).

At this stage, two caveats: one is that China has made some serious mistakes in this business with plenty of evidence that there has been horrendous over-building in the wrong places and the country is covered with ghost apartment buildings, all complete except for people living there; two, from all accounts, China’s banking system is tapped out. The country is swimming in debt and one has to ask whether the capital for all this proposed building can be found.

But setting those worries aside for the moment, Fitch does suggest that something will have to be done to house China’s population in modern-style accommodation. Its analysts expect some 12 billion square metres of old housing stock will be torn down, and many Chinese will be looking to upgrade their housing. Add on urbanisation and first-time home buyers and you have the demand factor.

Many residential buildings erected before the mid-1990s have fewer than six storeys and they mostly were built without elevators. Many more built after 1989 are expected to fall into disrepair by 2030.

Lithium price forecast

Lithium hopefuls (at least the hard-rock ones) have a five-year window of opportunity, according to a Melbourne, Australia, brokerage.

Beer & Co, in reviewing one Australian company’s lithium plans, comments that its projections show “prices will fall in about 5 years, when supply from the plethora of early stage projects that have been announced during 2016 come to maturity”. It expects the spodumene concentrate price to remain at about $650/tonne for an extended period. It is assuming prices for 6% LiO2 spodumene concentrates will, in about the second half of 2022, begin falling and ,by 2024, plateau at around $475/tonne (by which time, presumably, production costs will have risen considerably).

That five-year window expectation is based on the assumption that lithium demand continues to be strong (and also presumably assumes that not too many other hard-rock lithium projects get up before 2022).

Gold is where the money is

At least if you bought gold stocks in the past year.

In a note titled Fast and Furious, Morgan Stanley says that its basket of gold stocks has risen in value by 240% over the past 30 months. Reports are that Morgan Stanley makes the point that, based on trading prices, investors are willing to pay prices that assume a much higher gold price; for example, Randgold Resources (traded on the London Stock Exchange and Nasdaq) has been trading at a level that assumes a gold price of $2,350/oz — that’s more than $1,000/oz ahead of where gold is now (especially after the body blow the yellow metal took on Friday after the latest — and better than expected — U.S. jobs report).

Gold stocks in Australia certainly seem to be the glamour attraction. At last week’s Diggers & Dealers meet in Kalgoorlie, 29 of the 43 companies giving presentations were either mining or looking for the yellow metal.

Sydney-based Warwick Grigor of Far East Capital appears here in my posts more than most analysts but that’s because, one, he has been one of Australia’s longest-serving observers of the mining scene and, two, because he spends a good deal of his time at resource conferences both at home and abroad. He has his fingers on the pulse of the industry.

He made this point after Diggers & Dealers: gold is the best commodity for a junior company. It is the least demanding technically; it is the easiest commodity to sell. There is no risk that any one gold mine, or even group of gold mines, will flood the market and drive down the gold price.

“There can be dozens of companies running around taking advantage of booms in individual commodities such as graphite, lithium, rare earths, uranium or any other exotic metal without any real likelihood that there will be more than a handful that make it into production, but with gold the conversion rate is usually much higher,” he noted at the weekend.

What is happening here in Australia — and I assume it to be the case in North America — is that many old gold projects are being picked up again. Advances in technology make it possible to find and extract gold that has been missed or beyond the capability of previous operators. For example, I read a report just last week about a company that has taken up a project in Western Australia that was first discovered in 1892, mined on and off over the next decade and with a number of companies working over the ground in the years since. One of Australia’s more successful mid-tier gold producers worked this deposit for several years until 2010 with good production results. Now the new company that has picked up the lease says there’s still plenty of gold left in deeper zones.

 Resources sector still firing

July was a good month for the Australian mining crowd. Over the trading days of that month, 104 resources companies saw their share prices rise by more than 50% (normally the monthly average of late has been between 60 and 70 companies; the only comparable month was April when 102 companies saw that degree of share price gain).

Brisbane-based number cruncher Austex Mining tells us that Morgan Stanley and Grigor are reading the tea leaves correctly when it comes to the rising sentiment for gold stocks.

“There were 17 Companies with a ‘Significant Rise’ in both July and April, their gains following the announcement of new resource projects,” says Austex. “Six were gold projects and four lithium in July, as against 10 lithium and only two gold projects in April.  This difference reflects the change in market sentiment over the past three months from lithium to gold as the glamour commodity”. (Again, italics justified.)


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