Australia’s Paydirt, Issue 323
It never surprises how quickly the mood in the resources sector can swing, but it feels like everything is accelerated these days.
Just like the 24-hour news cycle, the resources investment landscape latches onto new trends or dynamics with an intense enthusiasm, only to dump them for the next big thing once reality catches up with ambition.
The world of politics is much changed as a result of this acceleration. Governments across the globe are kicked out in landslide defeats, only for the new governing parties to find themselves polling just as badly within months of being elected.
It has led to a situation where the fundamentals of governing are disregarded, everyday is a campaign day, no matter where we are in the election cycle.
It fuels the idea that we are lurching from one catastrophe to the next on a near daily basis. One day we must worry about the pandemic, the next about Ukraine, the next Gaza, then the climate crisis before returning back to the pandemic.
In the resources space, a quick glance at social media trading discussions will show a similar narrative. The pace of investment trends has increased rapidly in recent years. No commodity group appears in a comfortable space, they are all in a state of flux. Investors who were enamoured with lithium a few months ago are now all-in on uranium. Those who dismissed gold as a dinosaur investment in 2022 are exclaiming its enduring appeal in 2024.
The situation is confounding (and at times frustrating) seasoned market observers.
“Back in the good old days when fundamentals mattered, cycles in mining stocks coincided with economic activity, but there were fewer players in the stock market and fewer listed companies,” Far East Capital managing director Warwick Grigor told me recently. “The dramatic fall in stock market transactions since then has increased the velocity of money in the pool of funds so that there is more hot money running around like chickens without heads.”
Nowhere is the speed of correction more evident than in lithium. It was less than six months ago that the world was lamenting a lithium supply squeeze and what that would do for ambitious decarbonisation plans. Western governments and OEMs were in a scramble to find new sources of lithium. In November, US oil major Exxon Mobil announced plans to start producing lithium using as yet unproven direct extraction technology from 2027.
Just weeks later, the sector looks in tatters after the spodumene price fell more than 90% inside a year. Every supply side expert is now talking about an ongoing glut of supply for the rest of the decade and beyond and developers such as Liontown Resources Ltd are curtailing their plans.
The situation is similar in nickel where the price continues its slide on the back of Indonesian supply and apparent overestimation of the EV boom.
The West Australian nickel sector took a beating in January; administrators of Panoramic Resources Ltd closed the Savannah mine in the Kimberley, First Quantum Minerals Ltd slowed its Ravensthorpe operation and Andrew Forrest’s Wyloo Metals announced it would put its recently acquired Kambalda mines on ice.
The fact is, however, that most of the underlying fundamentals have not change as dramatically as spot prices and equities suggest.
The EV rollout continues – albeit at a slower pace – and that places demand on key commodities. China still dominates global supply of battery materials and Western governments and OEMs are still desperate to break that stranglehold. But the new narrative is in place and everyone is committed to following it.
The intensity is not restricted to downside stories. Uranium spot prices are up 90% year-on-year, breaking the $US100/lb for the first time since the Fukushima incident in 2011.
That has sparked interest in uranium equities, sending many of them to decade highs after a forlorn period.
Like in lithium, the fundamentals are not much changed. There was a commitment at COP28 from 22 nations to triple nuclear capacity but the nuclear world regularly talks about new capacity more than it actually delivers.
And, with so much opacity surrounding supply from Russia and Kazakhstan, the world’s largest supplier, it feels very early to be tipping uranium to take the decarbonisation crown from lithium.
It is all confusing and unsettling for those who want to see fundamental narratives developing, but given there is now slowdown apparent in the political sphere, market watchers may just have to strap in for the new reality.