Author: Alison Sammes

European Lithium Ltd (EUR.ASX)

by Alison Sammes

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

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

Commissioned Research Report Lake Resources Ltd (LKE.ASX)

by Alison Sammes

Key Points

  • Lake Resources has five lithium projects in Argentina:-
    • Brines - Kachi, Cauchari, Olaroz and Paso in Jujuy Province
    • Pegmatites- 150km strike exploration in Catamarca Province
  • Flagship Kachi Inferred Ore Reserves of 4.4Mt LCE @216mg/L LCE*
  • PFS for 25ktpa LCE Kachi due in March Qtr 2020
  • Unique low operating cost Business Plan
  • Pilot plant for innovative Lilac direct extraction technology underway
  • Technology gives >80% lithium recovery and slashes processing time
  • Lilac Solutions now backed by Gates/Bezos Sustainability Fund
  • Cauchari adjoins Ganfeng JV - has achieved 506m @ 505mg/L lithium
  • Lithium market bottoming & turning up–needs >600% supply increase
  • Strong growth in batteries for EVs demand and energy storage uses
  • Project funding likely in 2020 for Kachi and first output in 2023
  • Significant rerating of the company due over 2020

* lithium carbonate equivalent

Call me to discuss:
+61 2 9222 9111

High Purity Lithium Production in Argentina

LKE has a lithium development strategy with projects in the prime Argentinian brine producing regions and utilising innovative technologies to minimise operating costs and to maximise earnings and sustainability benefits.

LKE’s 4.4mt LCE Kachi resource will utilise Lilac Solutions ion exchange technology in its project with a PFS due shortly for 2023 production startup.

Lithium sector undergoing improved conditions as supply and demand match.

The rise and rise of the lithium-ion battery is changing the world.

The versatility of this technology for application from smartphones, domestic appliances, power storage to Electric Vehicles (hereon EVs) implies universal acceptance and dependence. The advent of the high tech chemical refiner and processor for battery plants is changing the lithium industry.

It becomes critical to understand that whilst lithium prices are soft it does appear that they are bottoming and as the near term market balance is being sorted out. Underlying battery demand is inexorably rising between 15-18% per year together with EV and energy storage demand and will eventually impact the lithium price.

LKE has globally significant resources and has Lilac Solutions’ innovative approach to lithium recovery from brines.

Ion exchange technology cuts out the time and capital intensive evaporative process from the flow sheet.

Commissioned Research Report Torian Resources Ltd (TNR.ASX)

by Alison Sammes

Key Points From Research on Torian Resources Ltd

  • Small explorer resuming activities along Zuleika Shear near Kalgoorlie
  • A$6m of JV funding in place for the next four years
  • Mt Stirling resource near RED.ASX Ursus Fault discoveries along from King of the Hills
  • Small scale mining project in consideration for 2020
  • Kalgoorlie region has numerous new targets beneath alluvium cover
  • Very small market cap but high potential
  • Download Full Research Report here

Call me to discuss:
+61 2 9222 9111

Developing Quality Gold Exploration Portfolio in WA

Torian has quality exploration tenements in two prolific gold production regions in Western Australia and is ready to resume activity after a period of tenement rationalisation and management changes.

Kalgoorlie Region tenements have six projects including the Zuleika Shear, Credo Well, Mt Monger and Gibraltar. This Kalgoorlie region has a widespread blanket of transported cover and little outcrop and is undergoing a major re-evaluation and re-interpretation from basic principles as new gold hosting environments in the Black Flag Group (including sediments) are recognised. Over 127 targets have been identified by TNR on its tenements using geological and geophysical tools.

Leonora Region tenements have three projects Mt Stirling, Mt Stirling Well and Diorite. Mt Stirling is adjacent to RED.ASX’s very encouraging King of the Hills development and likely to provide near term cashflow from small scale mining.

Torian has accelerated the activity over its portfolio by farm-outs and is seeking to achieve gold production and build cash by end 2020.

MPS Commissioned Research Report Nova Minerals Ltd (NVA.ASX) – Update

by Alison Sammes

Nova Minerals Report Key Points

  • Maiden 2.5Moz Inferred JORC Resource achieved in Sept 2019
  • Resource size 181m tonnes @0.43g/t Au at 0.18g/t cut-off
  • Korbel is a near-surface, large scale and low strip IRGS deposit
  • Blocks A & B are open at depth and along strike
  • Resources drilling program underway in early 2020
  • Expect resource upgrade to double current resource base
  • Follow up drilling on RPM target - 102m @1.04g/t Au
  • Estelle tenement area extended by 85% to 220km2
  • Tenements have 15 known gold prospects so far
  • Estelle value could exceed $0.20/NVA share
  • Download Full Nova Minerals Research Report here

Nova Minerals (NVA) has the Estelle Gold Camp in the premier Tintina Gold Belt that hosts >220Moz in mostly bulk tonnage but high margin deposits.

Estelle has established a 2.5Moz JORC resource on Korbel Blocks A&B and the 2020 program is targeting a further 2-5Moz from here and in Targets C&D.

Officer Hill Gold Project with Newmont showing encouraging results chasing Callie-style mineralisation in the Tanami Region gold system. 

Nova Minerals Ltd Research Report Front Page

NVA is fortunate in having a number of existing new or project mines in the Tintina Gold Belt for comparison so indications on capital and operating costs are current or recent.

Nova Minerals Ltd Research Report Comparisons with Dublin Gulch (Victoria Gold - Eagle Mine)
The geophysical work at Korbel has identified additional potential resources at Targets C and D but it is important to note that no drilling has yet tested these Targets at all.

Call me to participate.

Barry Dawes BSc F AusIMM MSAFAA

Executive Chairman
Martin Place Securities

+61 2 9222 9111

Disclaimer: This commissioned report has been written by Martin Place Securities Pty Ltd. Data has been sourced from available public information and reflects the author’s own assessments.

The Gold Rally Happening Now

by Alison Sammes

Interviewed on Proactive Investors on Wednesday afternoon, Barry Dawes talks on Bulls, Bears & Brokers about his predictions regarding the gold rally that is happening now in the market.

As a long-time GoldBug, Mr Dawes has consistently read the gold market accurately and is happy to share his insights. Regular commentary has been provided through his stock market analysis "Dawes Points". He regularly suggests that, like himself, investors need to follow the markets, not the commentators.

Is Now The Time To Buy Gold?

If you have subscribed to Dawes Points or follow either MPS or Barry on Twitter, you would have received Wednesdays' commentary. Inspired by trends in the Gold price and in Gold Stocks, Barry's shows why he thinks it's a good time to Buy.

In fact, just in the process of accumulating the data for that issue saw the price jump 1 per cent, a definite sign of the gold rally!

Who Says This Is A Gold Rally?

The Dawes Points is an in-depth technical analysis of the stock market. The focus is usually on the effects world events have on the Australian stock market. Before starting his own firm Barry spent 30 years in investment management as a senior executive.

While his training as a geologist ensures Barry has an exceptional understanding of the resources industry. This is why when he gets excited, those around him get excited as well.

If you don't have time to read the full analysis, watch his latest interview to get the overview in under 5 minutes. And stay updated by following Barry on Twitter (where he regularly shares his favourite charts of the day).

How To Develop Your Own Analysis Strategy

To quote from the latest Dawes Points market commentary:

Watching the technicals of the price action of gold in US$ and also in other currencies helps a lot.

Watching gold stocks helps even more.

The Philadelphia Gold Index is the key index to watch.  It has already broken out of its wedge and is showing leadership.

The $XAU Gold & Silver Index - Philadelphia Index is one of the key charts to watch, here you can see where it was supported on the downtrend and that it's now ready to go

China And Steel Impact On Australia Mining Sector #87

by Alison Sammes

Key Points

  • China steel output makes new record levels of 1034bntpa
  • China economic data still robust
  • Iron ore prices to rise further
  • Coking coal prices heading higher
  • India to increase iron ore imports
  • MENA DRI operations requiring magnetite are soaring
  • ASX iron ore producers printing money`
  • BHP ,RIO and FMG heading much higher
  • @DawesPoints Global BoomTM on track

Call me to participate:
+61 2 9222 9111

The achievement of over 1,000mtpa in crude steel production in China in April 2019 is truly remarkable and may be even higher in Dec Half 2019. This is not a sign of a declining economy in China.

China is by far the world’s largest consumer of raw materials and steel is the most important non-energy commodity for China.  It consumes almost 50% of global steel.

Steel is so important across the economy so that whatever happens for steel consumption will just as surely be repeated in aluminium and copper as well as many other commodities where China consumes even more than 50%.

Steel itself is universal and gives a clear indication of activity in every sector within an economy.

The monthly World Steel Association crude steel production figures are one of the best near-real time indicators of economic activity.  These World Steel Association figures show the underlying strength of the economy in China and also show the economic strength of other parts of the world.

Obviously the current US-China Trade War will have some impact if it is not soon resolved but because China faces west and not east it is far more concerned with its own economy and those of Asia, Africa and Europe.

But with steel the figures are current and some of these numbers from other parts of the world might surprise you as will be shown a bit later.

The economy in China has continued to grow such that it is currently around US$14tn and 90tn Yuan RMB and despite all the perpetual bearish talk the economy has continued to expand.

The key point is that whilst the growth rate itself is slowing the China economy is adding around US$1tn each year.

Note this idiosyncratic table that shows GDP in US$ falling with a weaker Yuan.   

The US$ has been firm so the Yuan RMB has weakened against these other currencies over the past five years.

The key drivers in China are of course a liberalisation of the Communist State that has allowed rapid expansion of commerce of all kinds and also the urbanisation such that since 2000 over 350m people have been added to city life and now cities now make up 60% of the population.

China has a population of around 1420m growing at 5mpa with a demographic problem arising from the One Child policy that is likely to see a population decline from around 2032 as China’s aged cohort peaks.

Another key factor is the remarkable growth in Personal Disposable Incomthat continues to exceed GDP growth reflecting the entry of about 20m people each year into paid workforce rather than on subsistence farming in many parts of China. These people experience a sharp boost in their own incomes and so it affects the averages.  The self employed and the entrepreneurs are also adding to this growth rate.

This is particularly important factor as the Middle Classes in China as they move to housing, cars, appliances and better food. The appetite is voracious and inexorable at present.

The savings rate is still very high at >40% and vast hoards of cash are still reported to exist.

It is also noteworthy that wealthy Chinese (and most SE Asian) businesses have just two asset classes for investment – the business (including property) and cash.

Consequently the economic expansion drive remains strong.

Anecdotally, the driving forces of property (location, location, location) together with the dramatic urbanisation has produced very large rises in true property value and rental incomes that can readily support the high property debt load.

And I see no sign of any significant slowdown that could turn to a downturn although the momentum has clearly slowed. Nevertheless, overall investment in construction is still rising.

With this level of construction it is to be expected that demand for steel will be firm.

It is notable that demand for steel reinforcing bar is at robust new highs.

Source: China Steel Industry Network

The MPS steel rate of change indicator is providing another turning point.  The 12 month moving average is ~5% higher than a year ago and the six month rate of change is turning up again.

Crude steel output should be even higher in the Dec Half.

It has been clear that domestic iron ore production in China has seen a dramatic decline of around 50% from highs in 2014 as the iron ore price fell.  Almost all iron ore production in China is magnetite ore and requires crushing and grinding beneficiation to produce the saleable 65-70% magnetite concentrate so it is a high cost source of iron units and mines closed accordingly.  Ore grades had been declining over the past 5-8 years down to around 15% but with closure of some very low grade mines the average has begun to rise again.

Source: China Steel Industry Network

With rise in crude steel production and the decline in local iron ore production the level of imports rose strongly and Australia is the most important supplier.

Source: China Steel Industry Network

Port stockpiles in China had risen in 2017/18but began to turn down so with the loss of around 40mtpa of Brazillian output the market saw over 20mt cut from stockpiles in just two months.  Clearly this was more strong demand than declining Brazillian supply when viewed against the massive 1034mtpa monthly crude steel production in April.

No wonder the iron ore price has been rising.

But as indicated above, it is not just China.

India has become the second largest producer of crude steel with output now around 110mtpa with and has passed Japan.

Importantly, India has produced this steel from its own mines.  Also India uses magnetite concentrates for use in the production of Direct Reduced Iron (DRI) and Hot Briquetted Iron (HBI) for about 30% of its crude steel production in processes that are using gas as the reductant rather than the blast furnace route with coking coal. 

The demand however is outstripping existing mines and bureaucracy issues over mining titles is likely to limit near term expansion.  India is now an importer.

India would like to be producing 300mtpa of crude steel by 2030 so the jump from 110mt will be 190m crude steel requiring about 300mtpa of iron ore.  Probably 60% of this will need to be imported.

Where will it come from?

So with India needing more iron ore and Sth Korea still growing and Vietnam accelerating rapidly from a small start to a current 18mtpa the market for iron ore must remain tight.

And in addition to Vietnam we have other strong growth in MENA where again most production is as magnetite concentrate fed DRI products that use very low cost local gas and these are fed into electric arc furnaces (EAFs) that use low cost electricity from low cost gas for steel making.

Source: World Steel Association

So it becomes no small wonder that the iron ore price is strong.

It is clearly a demand issue not supply driven.

The iron ore price completed a text book A-B-C correction with that 5 wave C completing a Wave 2 into the 2016 low and this enabled Dawes Points to then call for new highs to come in iron ore prices.  That outlook is still on track. 

Iron ore prices are heading up and so are those for coking coal.

Source: China Steel Industry Network

So let’s now look at the Shanghai stock indices to see how the market views China.

Looks robust to me holding that 27 year uptrend and the recent 30% jump into 2019.

And I do like this relative performance chart vs the S&P500.

And while we are at it lets look at India’s Nifty 50 Index.

And also the Nifty against S&P 500:-

Capital is flowing to these `emerging markets’.

So the ASX Metals and Mining Index looks robust.

As do BHP


 and FMG

The chart formations for these companies suggest VERY MUCH higher prices are coming for these stocks.

The Dawes Points Global Boom is firmly on track.

Don’t delay.

Call me to participate.

Barry Dawes BSc F AusIMM MSAFAA

Executive Chairman
Martin Place Securities

I own many of the stocks mentioned in this report.

+61 2 9222 9111

10 June 2019

Bulls, Bears & Brokers: Barry Dawes from Martin Place Securities joins the lineup

by Alison Sammes

Barry Dawes, geologist and founder & executive chairman of Martin Place Securities, joins Proactive's Danielle Doporto as the newest contributor on the Bulls, Bears & Brokers lineup. Dawes emphasises that he is a bull, outlining areas of opportunity he sees for 2019 with a particular focus on Australian gold. 

Watch our full video interview for all of Dawes Points.

Gold is now poised to rise #76

by Alison Sammes

Key Points

  • Australian Gold Sector leading global reflation
  • ASX XGD Gold Index pushed through 5000 and breaks 2011 downtrend
  • A$ Gold Price at ~ A$1750 also breaking 2011 downtrend
  • Australian gold production reaching new record in 2018 >310tonnes
  • Australian gold resources rising
  • Exploration and development increasing
  • Gold sector earnings rising
  • A Corporate M&A rush likely to unfold
  • Global macro outlook outstanding for gold
  • Large cap golds well ahead of minnows – time for catch up
The past few years in gold have been fascinating for those who can take a longer term perspective beyond the weekly and daily gyrations in the markets and see that the time has come for gold to reassert itself in the market place and for the value in gold mining and exploration companies to become better recognised. The key longer term undercurrents come down to supply & demand and for gold, with that unique position of having all its historic output of around 180,000 tonnes still available, it is the what and the wheres of gold inventory transfers that are most important. The price itself of gold may be an important driver in stock valuations in this sector with movements due to US$, interest rates and wars etc but to me the most important matter is the transfer from the West of most of newly mined gold and freely tradeable gold bullion inventory to the East being India and China predominantly but with Turkey, Russia and the Middle East also as key gold purchasers A time will come, and soon I expect, when the rundown of the this freely tradeable physical gold in the West will actually be felt.  The tightness in gold will become unprecedented. Looking at the overall market place it is clear that the gold bull market thesis has not yet been embraced as indicated from the generally weak performances of gold equities around the world and in particular in North America. The important Philadelphia Gold Index (XAU) bottomed in early 2016, had a rapid 6 month 200% surge and has spent the last 18 months causing emotional stress to the bulls and nothing clear for the bears.  The TSXV has been a Blockchain and Cannabis sorry story where small resources have been all but ignored. 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
Low + from 2013 + from 2014 low
MPS Terrific Ten stocks(ex NCM) Jun 2013 498% +390%
Eight dom-based with OS assets Nov -49% -13%
ASX XGD Gold Index (25 stocks) Nov 2014 +149% +205%
The Australian gold industry has been severely handicapped by this Index. But looking at this performance it is the Australian mining industry at its best.  Entrepreneurial geotechnicians who have found new deposits, reopened old mines, revitalised existing operations and earned cashflows that have built excellent balance sheets and rewarded shareholders. And done it quickly and efficiently. WA has been the leader with the services and infrastructure well in place. The reinvigoration of Kalgoorlie, Leonora and now the Yandal-Wiluna Belt is providing excitement. Western Yilgarn from Boddington and Katanning and out East to Gold Road’s Yamarna Belt are also providing new resources and new output. Kalgoorlie has had the Big Pit, Kanowna Belle and the Zuleika Shear and NST and EVN are key players in this reinvigoration. NST has two milling hubs to treat ores from all around the Kalgoorlie region. 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$gold is probably meaningless overall but it does seem to have some meaning to the marketplace because it has provided support and resistance over the past 16 years or so. < The market happily played 4, 5 and 6 times the A$ gold price previously. The numbers for the ASX XGD Gold Index become:
A$ Gold Price 3X 4X 5X 6X
A$1750 5,250 (now); 7,000 8,750 10,500
A$2000 6,000 8,000 10,000 12,000
Interesting thoughts. Keep in mind that over 2000-2008 the earnings of the Australian gold stocks would have been almost non existent.  Most of the action was in Africa and Sth America and with loads of overseas stocks listed on ASX for……(?) what reason? Gold itself in A$ is creeping up and has also breached the 2011 downtrend line and A$2000 is quite realistic target. Gold in a number of currencies is also above their respective 2011 downtrend lines so the the move in all currencies can’t be far away now. Gold Sector turnover as a share of total ASX All Ords turnover is still a respectable >3% and likely to move higher along with the better A$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 Macro Scene for Gold

The Dawes Points official view is that demand from China and India et al is tightening up the gold market to an extent that physical gold will be relatively difficult to come by in the West. This drive for gold comes from rising living standards amongst 1400m people in China, 1300 m in India and another 600-800m in ASEAN and the like. The rising living standards are also driving economic activity and the attractive economies and equity markets are reducing the need for capital safe refuge in US TBonds. The conclusion is that long term gold prices will be much higher and probably driven by a tight squeeze on available gold. Gold in US$ is hopefully completing the very last stages of its basing and reversal from the decline from the US$1923 in September 2011 and the next move up that passes through US$1370-80 should produce a powerful surge. 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 +61 2 9222 9111 I own or manage in portfolios I control: NST EVN SBM NCM GOR DCN PNR CLY WGX

2018 Outlook – And it is only just starting #74

by Alison Sammes

Key Points

  • Brilliant year ahead for resources
  • Bond market peaking creates critical watershed
  • Global inflationary pressures building
  • Economic Boom broadening
  • Equity markets now playing catch up
  • Gold and silver now ready for major move
  • Resources commodities iron ore, copper and aluminium strong
  • Oil and gas (+LNG) rising as energy bull market resuming
  • Big caps wonderfully cheap
  • Mid caps proving production and earnings paths
  • Small and micro caps provide numerous opportunities
  • Small cap oil and gas stocks outstanding
  • Expect lots of M&A across the resources sector
Call me to discuss ways of participating +61 2 9222 9111 The Dawes Points Global Boom™ is now in its fourth year and has been accompanied by robust GDP growth in Asia and US and now Europe and Japan are fully fledged members of this expanding club. Also, China has just announced an uptick in growth in Dec Qtr 2017 to 6.9% annualized. Equity markets around the world have been showing enthusiasm and, quite frankly, rational exuberance as earnings growth accelerates and as new projects are being unveiled daily everywhere.Global trade is expanding again with major drivers in transportation, housing, construction and technology.  The list is ever-widening. The 3000-4000 Dow points surge called in early Sept provided 3000pts by end Dec and 4000 on 12 January and 4500 by 23 January. So much more coming over the next decade. 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. 

Follow the money.

The vast amount of capital tied up in bonds and also in cash has been tied up with the left bifurcation and, in anticipation of the demise of this defensive sector, is now flowing out. And flowing to the Resources Sector and tangible assets and infrastructure. (Did you note recent ECB comments that its policy settings were for continuing downturn. Now inappropriate. The boom is happening there as well. Some clearly worried EU bureaucrats.) China has indicated an acceleration in GDP growth with 6.9% recorded for the Dec Qtr. The equity market is going to respond positively to that in 2018. 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.

Emerging Markets surging after nine years of consolidation.

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.

MPS Dawes Points Wave Pattern

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. FMG is here too. Brilliant company with debt reduced and strong cash flow despite the discount for low Fe iron ore.

Energy Outlook

Energy is having its own resurgence thanks to robust demand and to supply side concerns. Inventories have fallen considerably. 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 Outlook

Gold continues to be looking positive and an appropriate switch is underway from T Bonds into gold as part of the great bifurcation. Which safe haven would you prefer? 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$2000 target within the next year or so. Gold stocks in North America have been trading constructively but have been net flat in 2017. The largest global gold stocks have had to unwind a lot of debt after some expensive new projects and mergers but improved cashflows and better balance sheets are making these stocks quite attractive again. In Australia the ASX XGD is leading the world resources industry, as it did from Dec 2014. The short term trend of gold stocks vs Gold is calling for a resolution soon. A similar wedging is apparent for these gold stocks against the S&P 500. Together these graphics suggest a VERY strong outperformance by gold stocks. And gold and gold stocks are important in the direction of the A$. Look at this long term correlation. Within all this the A$ looks very robust. The very long term is bringing about a change. To make A$ holders wealthier.


It is very clear that The Dawes Points Global Boom™ is well underway and the trends are coming into place that will last for quite some years. The broader resources sector has some excellent performances in 2017 and should continue into 2018 and beyond. This graphic of the ASX 300 Resources is at a critical juncture and a solid break above 4400 (now 4174) will unleash some massive buying that will take all these indices to new highs within two years. ASX S&P 300 Resources  2004- 2018 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 Dawes Points #74 25 January 2018 I own BHP, WPL, FMG, NST, OSH, PSA, LNG