Iron Ore and Gold: Where The Action’s at?
1) Now here’s a surprise for some: iron ore has rallied back toward US$200 a tonne.
I kid you not; it was only last week that I saw a headline in the mainstream press saying something like, ‘Iron ore may never see $200 again’.
Here we are one week later.
I beg you. Please don’t take your cue off mainstream gibberish like this.
I saw another article saying that there’s more supply coming into the market from BHP’s new mine called South Flank.
Actually no. South Flank is a replacement mine for BHP. It only keeps production steady. There are no new tonnes in the market.
One lady who knows a thing or two about it is Elizabeth Gaines.
Senora Gaines is the boss of Fortescue Metals.
The Australian Financial Review reports:
‘The Fortescue chief executive sees the market conditions that have pushed up iron ore prices remaining in place for some time, despite China’s recent efforts to pull them back from record levels.
‘She said there was strong and growing demand from Chinese steel makers while in the rest of the world steelmaking was returning to pre-pandemic levels.
‘On the supply side, Ms Gaines said there was little on the horizon in terms of extra tonnes with most producers investing in replacing depleted mines.’
But wait! Of course, she would say that…she’s the boss of an iron ore miner.
True. Being sceptical is OK.
But Senora Gains was also saying the same thing before iron ore shocked practically everyone by going over US$200 in the first place. I give her cred for that.
We also have a data point to back this up. Here’s a tweet from analyst Robert Rennie recently:
The big miners still refuse to spend big on capital investment here. Too burned last time.
And their investors don’t want them to. They want the dividends!
However, every day the miners are running down their reserves too.
This is making for an interesting dynamic over the next few years. Iron ore could certainly stay higher for longer.
Now we have the added complication of a labour shortage in WA. Even if the big miners try to expand in a big way, where will the staff come from?
If demand holds up, there’s not going to be a rush of supply anytime soon.
This makes for a compelling case to hold iron ore stocks. The price is defying expectations.
And there is a tidal wave of cash flow running through any miner that can dig it up and ship it out right now.
I don’t plan to sell my Fortescue or Rio Tinto shares anytime soon. The dividends are about to shower down.
I like the fact that everyone is sceptical about the price. That tells me there are plenty of people left to buy.
The junior sector is interesting to start watching too.
There are quite a few projects that did their initial project assessment when iron ore was around US$150. They look even better with it near US$200.
2) What about gold? Some of the stocks are looking very strong here.
It’s been another surprise how sharp the rally in gold stocks has been since they bottomed out in February/March.
I stuck my neck out — and my wallet — and started buying around that time. What about now?
Suddenly it feels too easy and obvious.
Don’t get me wrong. I’m not recommending you sell your gold stocks.
But a slight dip wouldn’t surprise me right now. The market is always trying to wrong-foot us.
There’s also the wild card, as I allude to above: the labour shortage in WA. A few of the gold miners have downgraded their production guidance, citing this as a factor.
That’s problematic as an investor.
You can take a position on gold — expecting it to go up — and be right, but still get caught out and lose money if your gold miner misses their targets. So far, we’ve seen Red 5 and St Barbara hit in this way.
You also need to know a little about each stock’s management. Some gold companies have a habit of creating a target and then missing it.
Usually, it’s a case of the target being too ambitious in the first place. The share market hates disappointment as much as it does uncertainty.
How to track something slightly intangible like that? Get my colleague Brian to do it for you.
He tracks all the top Aussie gold miners and runs a gold fund. See his latest commentary on the gold sector here.
Editor, The Daily Reckoning Australia
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