Key point
- Vending Wolfsberg Lithium Project into NASDAQ SPAC
- EUR to receive US$750m for 82% of new Critical Metals vehicle
- Pass-through value is A$0.61 /EUR share
- US$15m prepayment funding from BMW offtake agreement
- Has 7.5% of Tanbreez world’s largest REE deposit
NASDAQ LISTING OF WOLFSBERG COULD BRING A$1.1BN TO EUR VALUE
EUR is developing a portfolio of European lithium and rare earth projects that have
considerable potential to significantly increase the market value of EUR and make it an
early leader in European lithium production.
The key asset is the smaller scale 8.8ktpa LHM Wolfsberg Lithium spodumene mining
project in Austria soon to be vended into CRML for listing on NASDAQ for US$750m in
shares to EUR and lead to it becoming the first EU producer of battery grade lithium.
Connect with Barry Dawes on Linkedin
That is also obvious from the broader ASX gold sector because many quality gold stocks are still quite friendless and the ASX XGD Gold Index has also been going sideways for over a year.
But that is not quite the reality.
The A$ gold price and a rejuvenating Australian gold industry have generated some outstanding returns from Australia’s geotechnical entrepreneurs.
This graphic shows the strength of the Australian Gold Mining Industry over the past five years with my unweighted index of ten Australian gold producers (ex Newcrest) with operations in Australia.
This index made its low in June 2013 and is almost 500% higher today.
In contrast the ASX All Ordinaries Gold Index didn’t make its low until November 2014 and is up ~200% from that time but it is just 150% from June 2013.
This graphic presents a wholly different view of gold sector in Australia.
The Terrific Ten have been wonderful with earnings and dividends flowing and are a great credit to the Australian mining industry.
These figures on growing cashflows and cost reductions from Evolution are typical of the results from NST, RRL and SBM so far.
Evolution Mining Ltd operating results FY2013-18
But the ASX XGD only looks like this.
Importantly however, the 2011 downtrend has now been broken and the 5000 level has been breached again in this latest surge.
This should lead to a rapid move in the XGD and is likely to be leading the US$ gold price higher.
These Australian gold producers have been leading the whole global economic recovery since their lows in June 2013.
From these contrasting graphics, the ASX XGD has failed abysmally in providing a proper picture of the true state of the Australian Gold Mining industry.
A gold index undiluted by pointless inclusion of foreign companies with no Australia assets would be a start.
The underperformance of Newcrest over this period, particularly since early 2015 has held back the Index but it has been the woeful makeup of this index.
The index has simply not reflected the remarkable gains made by the likes of NST, EVN, SBM, RRL, GOR and SAR.
The numbers look like this
Leonora has the most impressive Gwalia Mine.
And now with the rejuvenation of Jundee, reopening of Wiluna, action at Bronzewing and new management for Darlot, this Northern Yilgarn Wiluna-Yandal region can only get more exciting.
The net effect of this has been a remarkable recovery in WA gold production, producing around 70% of Australian output, such that a new quarterly record is likely to be set in 2018 and 2018 exceeding the previous high of 312t in 1997.
It is ironic that WA did not really participate in that US$250 to US1032/oz rally in 2008 as its output plummeted 48% over that decade but the recovery is well underway. The sharp increase in Australia’s gold output in Mar Qtr 2018 to 317tpa is a promise of more to come in 2018 and 2019.
This Dept of Industry graphic provides a useful summary of the distribution of the Australian gold industry and outside of WA.
The rising A$ gold price has also stimulated exploration and discoveries, brownfields and also some greenfields and we can expect more discoveries over the next few years. We are seeing the opportunities and the results now on a daily basis.
Despite these strongly upbeat numbers we have a true dichotomy of the likes of the Teriffic Ten and a few hundred smaller companies that are still doing it tough.
This graphic contrasts the Terrific Ten with 15 smaller stocks closely followed by Dawes Points.
Clients have strict orders (wisely) not to sell any NST EVN SBM RRL etc but the pressure of the difficulties some of the smaller stocks are facing purely because there is insufficient capital committed to the sector and trading liquidity is still low.
The market has clearly not yet embraced the big gold bull market thesis here in Australia.
The excitement over 2015-16 was strong for all types of gold stocks but since the highs in July 2016 the dichotomy has been strongly pronounced.
The reluctance of fund managers, financial planners and investors in Australia to embrace the now very obvious Dawes Points Global Boom TM and invest in Australian Resources Stocks has meant that this has been a much delayed bull market but much delayed markets have a habit of catching up quickly and running for much longer.
The picture for Dawes Points has been very clear for some years and it is all unfolding as suggested although the time table for the general resources market has been longer than anticipated. This has been unfortunate for traders in the markets but those with an investment approach these past few years in the better quality gold stocks have been outstanding.
Coming back to ASX XGD Gold Index while we can be critical that its 25 stocks is unrepresentative of the Australian gold industry it still is a published index and can be interpreted accordingly.
The ratio of the Gold Index to A$gold is probably meaningless overall but it does seem to have some meaning to the marketplace because it has provided support and resistance over the past 16 years or so.
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The market happily played 4, 5 and 6 times the A$ gold price previously.
The numbers for the ASX XGD Gold Index become:
Gold in a number of currencies is also above their respective 2011 downtrend lines so the the move in all currencies can’t be far away now.
Gold Sector turnover as a share of total ASX All Ords turnover is still a respectable >3% and likely to move higher along with the better A$gold price.
To better appreciate the overall mood of the current market place it can be seen that only a handful of gold stocks are up in 2018 with the Terrific Ten figuring prominently.
The average is only 7.5% whilst the XGD did 4.3%.
The past four quarters have been very tough for most of these stocks.
Amongst 53 other stocks monitored by Dawes Points, less than 40% were higher in 2018 and the average was -14%.
There was a lot of volatility in these stocks over the past four quarters but few were through true operational disappointments and most were trading liquidity issues.
A lot of gold resources have been discovered or delineated by dozens of these companies.
How many will become like the Terrific Ten? With the Australian mining sector entrepreneurial spirit there will be many winners here and given the strong difference in market ratings of the big stocks and these it is certain that M&A activity can only increase.
The long term shows the rapid and powerful from the 2000 lows around US$250 to US$1923 in September 2011. Completion of the 6-7 year pullback and resumption of the bull market gives very high technical targets.
Bond prices and yields need to normalise to properly reflect a true market and so higher bond yields are necessary to match risk and it is likely that bond prices will continue to fall for years yet with occasional bear market rallies.
Total Global Public Sector debt is US$61trillion in this World Data graphic and growing.
The issue is complicated and exacerbated by the whole debt matter of bond issuance by governments to fund current social spending.
Current refuge capital parked in these bonds is likely to leave for better opportunities as the bonds mature.
Who will buy the new issues? Pension funds will still have a growing need for income to match obligations and central banks will buy the rest. But even US$2-3tn leaving and going to property, equities, commodities and gold will send up prices here.
This graphic is disturbing for Europe. France has 30% of GDP as spending as public social spending. Its total budget is now 52% of GDP.
As interest rates rise, so will government budget interest payments.
Note this yield for the US 1 year Note:-
The last maturity schedule for the US Treasury bond portfolio that I have seen was 2016 and the overwhelming majority of the portfolio was less than 7 years. Very little had locked in the low 20 and 30 years rates when they were well under 3%.
Most of the portfolio was taking advantage of the low short term funding rates.
This is likely to have been a dangerous gamble as these yields rise and new bonds need to be issued at higher yields and coupon costs.
Let’s say US$1tn of theUS$21tn was for 1 year bonds.
In mid 2015 this 1 year rate was 0.4% so the interest bill was US$4bn.
Today, that 1 Year money will cost US$22bn.
At 5% it is US$50bn.
Across US$21tn of mostly short maturities a 2% interest rate rise is US$400bn. Good bye Budget.
In Europe and Japan where yields have been lower than in the US and bond maturities generally shorter then the impact will be greater on budget interest expense outlays.
So this issuance of bonds will need to accelerate and so bond prices will continue to fall – for many years yet – as supply increases.
Some swamp draining will be required but it is probably already too late.
The rise in rates at the longer end of the bond maturities will just continue and at a faster rate than at the short end.
While this is all happening we are finally seeing an expansion in the velocity of circulation of money as the banks increase their lending of all their previously hoarded QE funds into a booming economy.
The impact on the economy will be positive and the Trump tax cuts, capital repatriation and technological revolutions will be inflationary.
The banking sector is now outperforming the S&P500 so there is not yet concern about failing banks here.
And so when we see strong housing in the US as the MIllennials finally make that housing commitment and that 6 million dwelling shortage becomes really visible, the result is clearly inflationary demand for housing and housing raw materials and furnishings and appliances etc.
At this stage individuals and funds everywhere will be looking to buy gold.
Will they find it?
May be in China or India. Or perhaps not.
This combination is likely to lead to much higher gold (and silver) prices than you had imagined.
Do you have enough of the Terrific Ten or those ridiculously cheap minnows?
Call me to discuss +61 2 9222 9111
Barry Dawes
BSc FAusIMM (CP) MSAAF
I own many stocks mentioned in this report.
7 May 2018
The top of the channel has been hit by the Dow 30 so it will probably need some consolidation before moving higher. Other individual stocks have only just broken through their top channels so more upside is still coming and the US Banking sector is not overbought and still well below previous highs.
The Australian market has been playing catch up but the Resources Sector is giving it underlying strength and will propel it higher in 2018.
Commodities are looking strong and resources equities are starting to take off with gold now likely to move sharply higher after breaking the 2011 downtrend and providing enough retests, good bye kisses and fake-outs to deserve to go higher now. Gold has gained US$100 since early December and now has US$1350-70 as the major resistance. Pullbacks and consolidation may be expected but it just may be more powerful.
Oil is in its next channel and should achieve US$80 (WTIC) and US$86 (Brent) in 2018. Demand side drivers, especially China where consumption is expected to surge again, are reducing the inventory position and supply side issues like no growth in Non-OPEC output and flagging US tight oil output.
Iron ore will surely provide the U$100/tonne target set by Dawes Points early last year.
Resource sector stocks large and small are having a wonderful start to 2018 and can be expected to provide a magic year.
Keep the buy and hold mentality close to your nose. Fortunes are made by being patient, not by furious trading.
This graphic is showing the long term trends and is notable how well BHP did from 2000 to 2008 when the S&P500 went nowhere. BHP out performed the S&P500 over 12 years, has had a correction and is now moving on to outperform for another decade.
RIO is a few months ahead of BHP but BHP should get a benefit from the rising oil price and should catch up.
Again, keep in mind the time frames involved here. At least a Decade. Not a few months.
Long term Dawes Points readers might recall the early 2016 discussion anticipating the `bifurcation' in markets with the bond markets, the bureaucrats, the public sector, snout in the trough politicians and the media heading for trouble while the backers of industry, raw materials, Asia and gold were heading in another direction.
This bifurcation has been clearly underway. And in three dimensions.We are moving upwards in a new direction. They are stumbling down an old and treacherous path.
Dawes Points continues to focus on the Flow of Funds concept for markets.
As with China, the other emerging economies are also performing and receiving strong capital inflow. Some repatriation of safe haven capital and some is new investment.
The outlook is powerfully positive.
These long term trends are so useful and inspiring.
Take the bond markets. This is for US Ten Year T Notes. Almost 80 years of history in a single market and asset.
Long term trends. Generational and hence easily ignored by each generation.
Here, from 1946 to Sept Qtr 1981. 35 years of rising bond yields.
Then until Sept Qtr 2016, 35 years of declining bond yields.
Another 30+years of rising bond yields is now in train.
Bond yields and bond prices get a bit complicated when the coupon ( ie the income component of a bond) differs from the actual prevailing interest rate environment and bond yields.
The price of a bond itself is also complicated but the overall price is declining and a big fall is imminent. This is the 30 Year Tbond and you have seen the 10 Year has already fallen sharply. The 10 Year Price Index will include 30 year bonds from 1997 when rates were 7% and 20 Year bonds from 2007 when rates were 5%. These would now be trading at a premium to their issue price but are now falling back to par value as maturity comes closer.
Before we go on, note how equity markets are rising as bond yields head higher.
Now look at the yield on 30 Year T Bond. A major compression feature ahead of a strong surge in yields to probably 3.25% and then targets to 3.75%. Nothing much in 0.5%-1.0% in interest rates rises but it will have a major impact on bond yields and a significant decline in bond prices at a time of low coupons.
Note that yield on 10 Year T Bonds have already jumped. Likewise for 3 years and all along the yield curve.
Note that weaker TBonds are not necessarily a call for a weak US$.
The DXY US$ Index is very narrow with just six components and is terrible given it is 57% Euro, 13.6% Yen and 11.9% Sterling, 9.1% Canadian $, 4.2% Swedish Krona and 3.6% Swiss Franc. The CNY and A$ don't figure in this index. This US$ Index may be ready to weaken. Or may strengthen.
But look at this broader US$ Index. Doesn't look so bad at all. Note that the US$ is very strong against currencies of many smaller nations. The proverbial s**tholes are still weak currency states.
Also note how gold is rising with higher interest rates. And with equities. No Fear Trade here.
Can you imagine the current anguish of those believing that rising interest rates will make markets in stocks, commodities and property fall. Imagine their short positions in all these markets over the past year. Ouch.
I have called this global boom for almost four years now so have given it a trademark
- The Dawes Points Global Boom™.
I hope you agree that this is a fair assessment of things.
The Wave Pattern graphic below was first presented on 1 December 2008 at Mines and Money London that happened to coincide with the major 2008 lows in commodities, resources stocks and most things China. The major equity markets kept falling until early March 2009 but the earlier upturns here in resources with gold leading gave strong confidence for the future of world economy despite the extreme pessimism at that time.
The previous 8-10 years had been a good bull market but as long term readers would know, there was little participation by institutional investors and very little public retail interest. It was an excellent Bull Market that few believed in and hence the Disbelief leg.
The Subprime/Lehman Bros debacle in 2007/08 created that sharp Pessimism leg that was the GFC.
The Hope rally was encouraging with gold running to US$1923 in September 2011 however the resources rally petered out earlier in 2011 leading into the Despair leg that gave us an 80% fall in most gold sector indices into the lows of late 2014 in Australia and late 2015 elsewhere.
The key issues to focus on here are the time cover of these trends. Ten years Disbelief. Five to seven years of Pessimism/Despair. Now we have at least 10 more years of Optimism.
This pattern can be clearly seen in the resources sector indices and in commodities.
The big driver is GDP growth. Underestimated and disbelieved by so many commentators.
GDP growth (and Industrial Production growth) is good for commodities and growth in China is the best growth.And it is accelerating again.
Commodities have been priced for recession and resources companies have cut back on exploration and new capacity development. Particularly in energy.
The CRB Index has a heavy weighting in energy so this should be very strong over the next few years.
The shorter term is providing evidence for a sharp move soon.
Commodities were covered in more detail in Dawes Points #73 2017 Year in Review but the 2018 Outlook is still the same.
Record consumption demand still flowing through, restocking of inventory required, limited major new capacity coming on stream and, well, just no inventory.
Higher prices are inevitable and the outlook still suggests the supply/demand imbalance will be with us for several years.
Higher prices are just inevitable.
The producers of resources commodities are generating very robust cash flows on balance sheets that are now quite favorable.
The big commodities iron ore, copper and oil are really helping the bigger stocks. All are moving higher. So is aluminum with its 63mtpa and rapidly growing consumption level.
The big stocks still appear to be very cheap and here BHP is on its way to test the previous high A$50 (US ADRs US$75) and perhaps this year. Just repeating targets from 2016.
RIO is looking strong too. Aluminium, iron ore and copper here will send RIO up to US$75 and up 150% to my target from 2016 (100% from early 2017).
Here is a link to my 16 Jan 2018 CNBC Asia interview on RIO.
Source: HFI Research
Oil consumption is likely to hit 100mmbopd in the Sept Qr of 2018. That is 36bnbbl pa. The largest oil field in the US was Prudhoe Bay at 16bnbbls recoverable. Australia's largest was Kingfish at just over 1bnbbl. Oil will remain tight for many years yet.
Energy consumption is all about Non-OECD countries increasing their energy consumption while OECD has been flat due to stagnant economies and energy efficiencies. OECD is growing too now!
BP does it differently with some more detail but the picture is growth in China and India and in lots of `other'.
It is also useful to note the relative sizes of each source.
Fossil fuels aren't going away anywhere soon!
MPS Energy Consumption by Fuel Type
Energy will be covered in more detail in the near future but the basic position is quite clear.
Energy is the lifeblood of all economies.
Demand is rising and LNG is already assuming an important role again in Asian energy imports. WPL looks quite exciting. And also Oilsearch.
These larger companies need to be part of every portfolio.
The Oil and Gas Sector on ASX is quite unloved and doesn't even get a sniff of an index. This MPS index of 11 small explorers/producers shows a lag between oil prices and stock prices.
These stocks are down 80% from an arbitrary 1 Jan 2007 basis and almost 90% against the oil price so should provide outstanding returns to astute investors.
The market for many of these companies is the East Coast of Australia where decades of government and bureaucratic bungling and pandering to half baked ideals of special interest groups have put the entire well being of 80% of the nation at risk.
Shortages can be overcome by increasing supply. So simple.
Talk to me about them.
Gold itself is readying for another test of US$1350-1370 before launching a more powerful upmove. This may still take another three to six months to break through. Or maybe the coming week!
Gold in A$ has travelled sideways for three years now but it has bounced off the long term uptrend and is still heading toward a A$2000 target within the next year or so.
Gold stocks in North America have been trading constructively but have been net flat in 2017.
The largest global gold stocks have had to unwind a lot of debt after some expensive new projects and mergers but improved cashflows and better balance sheets are making these stocks quite attractive again.
In Australia the ASX XGD is leading the world resources industry, as it did from Dec 2014.
The short term trend of gold stocks vs Gold is calling for a resolution soon.
A similar wedging is apparent for these gold stocks against the S&P 500. Together these graphics suggest a VERY strong outperformance by gold stocks.
Within all this the A$ looks very robust.
The very long term is bringing about a change. To make A$ holders wealthier.
Equity markets around the world are acting as the barometers of improving economic prosperity in the years ahead as the vast savings in cash and bonds are redirected into equities, property and commodities.
The markets have been indicating all this for these past four years and the markets have often been at odds with the commentators. Dawes Points has held true through all of this and we are looking at further outstanding returns to our portfolios.
The year ahead will provide even better returns for resources sector investors starting with the major companies with strong revenues, balance sheets, earnings and dividends.
The mid cap sectors will also perform well and should be at the forefront of M&A activity.
The hundreds of small to micro caps offer outstanding value if you know how and where to look.
These will also be the targets of the M&A and once mid caps are comfortable with their own cashflows they will be looking for growth opportunities.
Talk to me if you want to participate.
Barry DawesBSc F AusIMM (CP) MSAFAA
+61 2 9222 9111