Ann: Inside Briefing, page-18

In today's Australian.

Interesting read. Some concern at the level of "hidden inventories".

For nickel at least, the old adage that the best cure for a low price is a low price does not seem to apply.

The reasoning behind this so-called market wisdom, whether it applies to oil and any other commodity, is that market realities force reduction in supply (as, in this case, mines begin to make losses and are mothballed) and then, eventually, demand becomes greater than supply, and consequently prices rise again.

Nickel dropped $US155 a tonne on Friday to end the week at $US9925/tonne; this was after a $US350 drop on Thursday trading at the London Metal Exchange (although at the beginning of the session it had raced to a six-week high before crumbling).

Yet some nickel shares had a good week. St George Mining (SGQ) rose 20 per cent on Friday to 9.6c. The company begins a drilling program this week. Panoramic Resources (PAN) rose 8.6 per cent. On Thursday PAN reported a resource upgrade at its Savannah North project to 109,400 contained tonnes of nickel at a grade of 1.59 per cent.

Poseidon Nickel (POS), which has had the backing of Andrew Forrest and bills itself as “Australia’s new nickel”, had two days of rising share price to end the week while Western Areas (WSA) rose over three trading sessions. Last week WSA completed the acquisition of the Cosmos nickel project from Xstrata Nickel.

Nickel prices have taken a fair hammering in recent months, but the mines seem to just keep churning it. And, to judge by the actions of local investors, the local nickel stocks were getting some backing. One of the reasons for this could be that some of these producers have pretty strong financial positions and will be well placed to ride the commodity recovery.

Nickel inventories at the LME warehouses continue to increase and now stand at more than 452,000 tonnes. But Daniel Hynes, senior commodity strategist at ANZ, says what worries him more are the hidden inventories in Asia, with ANZ estimating more than 100,000 tonnes is being held in the region that has not been reported. Indeed, Hynes estimates there is over 1 million tonnes of nickel sitting in stockpiles around the world.

So, to get back to our opening point, one heading in this ANZ note reads: “Low prices not inducing supply cuts”. Hynes says that despite sustained price pressures, global mined output remains largely unchanged.

Even though prices are down 38 per cent this year, only one significant producer (Canada’s First Nickel) has reduced output citing financial reasons. And, while Indonesian exports of nickel have fallen, there have been output surges from the Philippines, Madagascar, Guatemala, and North America.

China’s rebalancing

So what metals should investors be following? According to Caroline Bain at London’s Capital Economics, there are three metals that should benefit from China’s rebalancing: aluminium, tin and zinc.

She argues that this rebalancing (that is, the transition from industrial-driven growth to consumer-driven) may not be the death knell for mineral commodities it is often made out to be. Sure, iron ore and coal are toast in this scenario. But other metals are widely used in consumer goods.

Bain writes that aluminium is increasingly being used in transport, electrical sectors and packaging. Something like 50 per cent of zinc is used for galvanised steel, widely used in white goods and vehicles. More than half of all tin goes into solders for electronics.

Green energy, now being promoted in China, has become a new source of demand for metals, notably zinc and aluminium, but also cobalt, tin, silver and the platinum group metals. Oh, and one other beneficiary: gold.

Bain thinks Chinese savers will buy more as only $US300 billion ($425bn) of the $US7.5 trillion in private savings in that country are held in the yellow metal. Rising incomes should see more spending on jewellery and, finally, China has a strong cultural affinity with gold — all points made many times by Pure Speculation, but ones we never tire of mentioning.

One gold story we noted during the week was from ActivEx (AIV). The company is exploring the historic Gilberton field, 300km inland from Townsville where rock samples have returned grades up to 10.65 grams/tonne.

Samples of mined rock from some of the old operations, including the Homeward Bound mine, returned grades up to 75.2g/t. Mining began in the area in 1869 and the field has been picked over sporadically in the past 30 years, including by Newcrest Mining (NCM).

Bottom at sight

More positive news: Peter Strachan is dusting off his bell and getting ready to begin ringing loudly to mark the bottom of the commodities cycle. Strachan, who runs Perth-based StockAnalysis, says that “the ASX 200 Resource index is moving toward a target of around 2000 and the way this market is moving this 15 per cent fall could happen in a matter of weeks if not days”.

He suggests mid-tier miners with little or no debt and with net cash in their balance sheet as the best way to ride the recovery. These include nickel miners Mincor Resources (MCR) and the aforementioned Western Areas and Panoramic. Mincor has $33m of net cash supporting a market cap of $48m; Panoramic has $55m of net cash and is capitalised at $101m while WSA has $68m of net cash to support a valuation of $539m. Strachan also cites diversified miner (including tin) Metals X (MLX) that holds $94m of net cash with a market cap of $561m. Regis Resources (RRL) is worth $885m and has net cash and gold worth $43m. He also mentions Independence Group (IGO) that finished on June 30 with $121m of net cash.

Vital takes a hit

Vital Metals (VML) haslearned no Japanese metals majors put up their hands for 30 per cent stake in VML’s tungsten project in Queensland. The Japanese government’s resources arm, JOGMEC, wanted the private sector to take over its holding now that the project is about to enter the development phase. VML shares took a 25 per cent hit.

And Chinese investor Yang Xia has failed to send a cheque for the shares in New Talisman Mining (NTL) he agreed to take for an agreed $1.46m investment. NTL is considering its legal options, the money having been earmarked for its New Zealand gold project. NTL shares dropped 11.1 per cent on the news.

No investment advice is implied and investors should seek professional guidance. The writer does not own shares in any company mentioned.