Sometimes it pays to zoom out a little to explain price action and sentiment.

Let’s keep it really simple and assume you’re sitting here in Perth in the mining epicentre of the world.

And I ask you - where would you rather have your money at present (other than for sewn up in your matress)?

If you’re a trader, you’ll probably say lithium, thermal coal, nickel and (maybe) graphite and REs plus a good dollop of it sitting on the side lines waiting for ‘bottom’.

If you’re a long-term investor, probably still lithium (if you subscribe to the position that demand will exceed supply for longer 🤔) but you’re probably also thinking about the transitional fuels narrative plus gold (governments and centrals will be forced to stimulate again when the world is in recession next year) as well as a healthy top up of copper and the full EV/energy minerals and metals complex - but to do this you’re probably waiting for a bottoming while China prevaricates over COVID.

Some of you might say oil and thermal coal because of the uncoordinated and unfunded green transition. Few of you will say iron ore although you’re probably still holding some given where you live.

But at the moment, the equity market’s preference is lithium. So much so that there’s two lithium IPOs about to hit ASX and both are called Patriot. Is there that much faith in the structural demand deficit view on lithium that we’ve run out of names for lithium companies?

A couple of weeks ago, if memory serves, I wrote Sober October for industrial metals and remarked about Min Res:

“…….and diversified Fe, lithium and mining services champ, MIN.ASX is seriously up, and that’s down to its lithium exposure and forward roadmap. And if the people pulling the strings there are really considering a shareholder sugar hit IPO of the lithium business, this jury hopes that MIN retains a massive chunk of it, plus a contractual interest for its mining services business. Give me a uniquely diversified Fe, lithium, and mining services business any day of the week. Just saying.”

Well, perhaps someone was listening because as I was watching and listening to the Min Res AGM this is what I heard at question time:

“…………………………our strength comes from where we’ve kept these, all these beasts together……”

And while Min Res has not ruled it out, here’s hoping they keep it together and add, not subtract to their diversified powerhouse. If you look at the Min Res price chart today, it looks like what tech stocks used to look like (proof of its correlation to the EV narrative) with new all-time highs being reached.

And that’s compared to FMG that’s still generating most of its cash flow from iron ore sales to zero-COVID China, and 20% off its high.

But now to a different story, gold!

I mentioned in Sober October:

“However, as real yields continue to improve and the market wakes up to a pivot being further out, this makes non-yielding gold more expensive to hold, especially while currency debasement (QE Infinity on pause) has slowed for the time being.”

So, the last few trading sessions where bonds and gold have both popped have again proven that equities and bond markets do not believe Powell.

Markets continue to expect an early pivot. But agree or not with his ‘too much, too little, too late’ tightening, Powell has been consistent about taking monetary policy to restrictive levels. And at the last rate hike he said that the level so far reached was at the bottom of the range of what he would consider to be restrictive. 🤨

And to throw more fire on the restrictive bond barbecue, last week St. Louis Fed President James Bullard said that he thinks the minimum level of restrictive policy in the form of the federal funds rate (FFR) would be between 5%-5.25%. which is 25 bips higher than where he was before. And I stress he sees that as a minimum level.

In summary, gold’s been mostly sideways because of the FFR and Dollar Vader macros which are stacked against holding the non-yielding metal. But it’s also volatile because markets wax and wane between believing and not believing and then believing again in Powell’s resolve - which kind of happened after Bullard’s recent hawkish comments. Gold is hard at present.

So, let’s have a look at how this macro backdrop and negative sentiment has been affecting one of WA’s largest gold companies, which is a very different story to Min Res.

Here’s a comment from the Chair of once gold market darling Northern Star Resources (NST), which you might recall took over Saracen, err, sorry, merged with Saracen according to the peeps who pitched a ‘merger’ that would release billions in synergies, to bring the two pieces of Alan Bond’s Super Pit together under one owner.

While we’re waiting for those synergies to materialise, last week at the AGM the NST Chairman had one small lamentation:

“I must say that one of the frustrations we do experience is the way that our share price - and that of other gold companies - seems to be driven by short-term emotion rather than by fundamentals. For example during the last 18 months when the actual gold price in Australian dollars has been consistently in the mid a dollar A$2,000/oz, our share price has fluctuated by as much as 40%.”

He also said he thinks that:

“Northern Star’s outperformance in recent times has reflected the growing recognition that the company has many attractive features: high quality assets which generate strong cashflows, with good realistic growth opportunities, and long mine lives; a strong balance sheet; skilled operational an entrepreneurial management and highly skilled work force”.

That may be true, but some of the NST value destruction is a function of the ridiculous levels that valuations were mooned in the lead up to Perth’s worst kept secretive merger.

But it’s mostly about the macro (not micro) fundamentals for gold. When the macro headwind of higher (or improving real) yields for longer is against you, as it is for gold at the minute it really doesn't matter how hard you push against the hurricane. And I don’t think you can get more fundamental than that.

And that’s probably the reason why Min Res is paddling harder on its lithium assets than it is on its crack and stack iron assets at present – sneezing China and the macro landscape are acting against the red pile, so let that pass and focus on the tailwind asset instead.

While there are always smaller mining companies to invest in for a trader’s pop (like the two new lithium Patriots), Min Res and NST are good examples of liquid stocks that are high up on their respective peer tables but with contrasting stories because of the macro environment and their abilities to execute into tailwinds and defend the headwinds.

All of that said, if restrictive conditions continue, the Fed overtightens, and the recessionary aftermath requires governments and central banks to stimulate again - don’t be surprised to see market rotations back into gold and bonds.

I’ll try to see you in that hurricane.

Mike

Ps: if any readers are still holding digital assets on an exchange – perhaps think about transferring them to your Ledger/Tezos - the FTX debacle is unlikely to have played out in full, just yet.

Overlaying the global macro on two Perth miners