New Beginnings

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Which metals could be worth another look in 2019?

The second half of 2018 was difficult for commodity investors, with market turmoil and concerns around slowing global growth hitting sentiment considerably.

We are by no means out of the woods yet, with many macro concerns remaining in place indefinitely. However, in their review of the next 12 months, many analysts have highlighted favourable supply/demand trends and underlying fundamental strengths across numerous metal markets.

With this in mind, could today’s low prices present a compelling buying opportunity for investors? Here, we look at the outlook for several metals and highlight some stocks that are likely to be impacted.

Gold

Gold enjoyed a strong rally over the fourth quarter of 2018. Investors piled into the traditional safe-haven asset as protection against equity market turmoil and slowing global growth. This strength has continued into the New Year, and prices are now closing in on the psychologically important $1,300 level. Current strength is being driven continuing volatility and expectations that the US Federal Reserve will halt its rate-hiking cycle. These factors have dented the dollar, lifting gold demand from holders of other currencies.

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Commodity analysts at JP Morgan believe prices will remain healthy over coming months before rising considerably in the final quarter of 2019. As the Fed continues to tighten, the analysts think the yield curve will rise and flatten before inverting in Q3 2019. When this occurs, they believe the policy rate will move into restrictive territory. This will put the brakes on economic expansion, potentially pushing gold prices up by 18pc. Indeed, they predict average gold prices of $1,460/oz in the final quarter of the year.

If JP Morgan is correct, it would be exciting for UK small-cap investors, with many junior gold firms listing on London’s junior markets. One particularly interesting example is exploration and development company ECR Minerals (LSE:ECR).

Recent months have seen ECR announce considerable progress at its gold licences in Victoria, Australia. In particular, it has identified the potential for a rare bulk tonnage gold operation at its Creswick licence. Meanwhile, it has determined a significant gold system at its Baillieston licence. Last month also saw Newmont Mining, one of the world’s largest gold producers, apply for a permit next door to Baillieston.

The firm plans to carry out extensive exploration programmes in Victoria this year, including 4,000m of RC drilling. As part of this, the business lodged nine new exploration licence applications in the Yilgarn region of Western Australia earlier this month.

ECR’s shares are yet to enjoy a recovery in line with the broader gold market. It will be interesting to see how the market reacts to its newsflow this year if the precious metal’s bull-run continues.

Copper

Copper-bottomed out last year, dropping every quarter in its worse run since 2015. Like many metals, it was hit by concerns of slowing global growth and fears that US/China trade tensions would hit demand. However, industry indicators are currently suggesting a more favourable backdrop for 2019.

Copper holdings in London Metal Exchange sheds are as a decade-low, according to Live Mint. This has come as demand tops supply by a large margin. Meanwhile, according to the International Copper Study Group, supply outstripped demand by 595,000ts in the nine months to September. As such, Goldman Sachs believes prices will hit $7,000/mt by the end of the year; a level last reached in February 2018. Prices currently sit below $6,000m/t.

With copper so bottomed out, these predictions could provide an exciting buying opportunity for junior market investors in the UK. The index is full of copper businesses that saw their share price decline last year thanks to broader market conditions.

One example is Asiamet Resources (LSE:ARS). The firm fell considerably over Q4 2018 on concerns over protests in Indonesia near its Beutong asset and a $3.3m placing. However, it has enjoyed a strong start to 2019, with shares currently sitting at 4.7p.

The company is currently in the process of completing a bankable feasibility study for its BKM project. Here, a PEA has demonstrated robust economics. This includes an NPV10 of $204, an after-tax IRR of 39pc, and 25KTpa copper cathode production over eight years with expansion potential.

Last month, Asiamet said the initial results of a 4,500m resource infill and geotechnical drilling programme to enhance the BFS at BKM are expected shortly. If the firm can deliver strong fundamental newsflow, it could be flattered further by stronger copper market conditions.

Another potential opportunity in the copper market is Metal Tiger (LSE:MTR). Last year saw the firm sell off its stake in the T3 project to JV partner MOD Resources. Like most of Metal Tiger’s portfolio, T3 is located in Botswana’s Kalahari Copper Belt (KCB). As part of the deal, the two businesses have started a new JV focused on exploration in the KCB. The venture holds permits covering 8,000km2 of ground in the prospective area.

Metal Tiger also bought a large stake in a company called Kalahari Metals last year to strengthen its KCB position further. As a result, Metal Tiger now has the most direct and indirect exposure to the area in the world.

Early exploration results from Metal Tiger’s new JV have been encouraging. It will be interesting to see whether the firm can gain enough traction to prompt a market re-rate in 2019. If the KCB offers as much potential as Metal Tiger appears to believe, then it could be a real value driver moving forward. Strong copper market conditions will only support this progression.

A final opportunity that spans both the copper and cobalt spaces is Arc Minerals (LSE:ARCM). Like many resource players, the business suffered for much of the second half of 2018 as macro conditions worsened. However, this followed a rapid rise from 2p to 5.4p between April and July as the business won over the market with progress at its flagship Zamsort project in Zambia.

Zamsort’s Kalaba prospect licence covers nine of 30 high priority targets ranked by a previous local JV operated by Anglo American. It is also located near First Quantum’s Sentinel and Kansanshi and Barrick’s Lumwana mines. The project has an existing near-surface estimated copper-cobalt oxide resource of 16.59Mt at 0.94pc copper and a historical exploration target of 150Mt, making it one of the most significant projects of its type in Zambia.

Arc has been increasing its position in the project and carrying out surveying and drilling work that has revealed strong cobalt and copper grades. With the project’s strong fundamentals still in place, a commodity market recovery could be a significant boon for Arc’s share price.

Nickel

After being boosted by concerns that the US would place sanctions on Russia in H1 2018, Nickel was another metal hit heavily in the latter part of last year by negative investor sentiment. Indeed, prices fell even as demand increased.

Analysts believe that macro conditions are likely to continue inhibiting nickel prices throughout 2019. However, they remain positive on the metal’s long-term fundamentals. Indeed, nickel demand is widely expected to increase considerably over the medium-to-long term as the uptake of electric vehicles continues to grow. At the same time, a limited amount of new supply is due to come online. If you believe this dynamic can push nickels price upwards over a medium-to-long term basis, then an exciting play could be Horizonte Minerals (LSE:HZM).

Horizonte is developing the Araguaia nickel laterite project in Brazil’s Carajas mineral district. The business is planning an open mining pit operation at the site targeting 900,000 tonnes of ore per annum. It expects this to produce 14,500ts of nickel a year contained in 52,000ts of ferronickel that. According to a 2016 pre-feasibility study, this could generate free cash flow of more than $1bn over the 28-year mine life.

Horizonte is also the owner of the Vermelho project in Brazil, which it describes as one of the largest, highest-grade undeveloped laterite nickel-cobalt resources globally. The site contains a measured and indicated resource of 167.8MMts estimated to house 1.68MMts of nickel and 94,000ts of cobalt.

The firm was battered in October when its feasibility study results for Araguaia fell short of market expectations. They have struggled to recover since.  The study gave the project an estimated post-tax NAV of $401m and an estimated IRR of 20.1pc, based on a flat nickel price of $14,500/t. This was lower than an estimated IRR of 26.4pc contained in a previous study.

Despite the disappointment, these figures remain highly robust for a firm of Horizonte’s size – it currently has a market cap of just £29.4m. The project looks even more attractive when taking a less conservative view. Indeed, Araguaia was found to have a post-tax NAV of $740m and an IRR if 28.1pc when using the consensus mid-term nickel price of $16,800/t.

If you remain a believer in the long-term nickel price boom, then Horizonte could look attractive at its current price – especially with Vermelho in the pipeline and a new pro-business president heading up Brazil.

Platinum

Platinum prices dropped almost 16pc in 2018. Alongside the usual macroeconomic concerns, this decline was driven by a decrease in the industrial use of autocatalysts for diesel engines and a dip in jewellery demand.

However, many are predicting that a drop in supply could boost prices this year. Africa accounts for more than 70pc of global platinum supply. Digging deeper, South Africa is the dominant player in the region. Here, wage-related labour strikes, currency issues, and weak infrastructure all present possible hindrances to platinum output over the next 12 months. Alongside this, some analysts are expecting a recovery in jewellery demand and stronger industrial demand for platinum. If these supply/demand dynamics play out and platinum prices receive a tailwind, then an interesting play could be Jangada Mines.

Jangada fell nearly 13pc in a day last month when it added a JORC-compliant nickel and copper sulphide resource to its flagship Pedra Branca project. This added 8MMts at 0.22pc nickel, 0.04pc copper, and 135g/t cobalt to the advanced platinum group metals project in north-east Brazil. The upside bolstered Pedra Branca’s already attractive JORC compliant resource, which came in at 1MMozs of gold and platinum group metals.

In June, work confirmed the project’s potential to house an open pit operation with an NPV of $192m, an IRR of 67pc, and a 1.6-year payback period. Then, several months after this, the business announced further reductions in development capex requirements. Pedra Branca operates in the exciting battery metals market, and its NPV far outstrips Jangada’s market value. Could recent weakness provide an attractive buying opportunity ahead of further developments and a potential platinum price boost this year?

The author does not hold shares but was remunerated for the article 


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