28. April 2021 | 07:38 CET
Orocobre, Goldseek Resources, First Majestic Silver - Falling interest rates and inflation fears boost commodity stocks
Interest rates on 10-year US Treasury bonds fell to 1.56% in April. At the same time, US inflation climbed to 2.6%, the highest level since March 2018. Typically, this is the time when investors seek salvation in commodities as an asset class. Gold, silver, and other precious metals such as palladium and titanium are in greater demand. But also rare metals, such as lithium or cobalt, are experiencing a substantial increase in demand due to the current energy transition and the switch to electric mobility. Below are two securities that everyone should have in their portfolio and one that is better avoided at the moment.
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ISIN: AU000000ORE0 , CA38150J1066 , CA32076V1031
Orocobre - Rising lithium prices and the acquisition of competitor Galaxy
Australian mining Company Orocobre Limited, based in Brisbane, specializes in the extraction of lithium. This metal is mainly required in the production of batteries or accumulators and is, therefore, an essential raw material for electromobility. As in the entire raw materials sector, there are also certain consolidation effects in lithium production.
The competitive environment can be pretty challenging if a critical size is not reached. For this reason, Orocobre recently agreed to merge with one of its main competitors, Galaxy Resources. This AUD 4 billion merger will create one of the world's top 5 suppliers of lithium with a market share of around 13%. The merger with Galaxy was a natural fit as both companies operate in similar jurisdictions.
Both Australian companies are currently operating major projects in Argentina. Lithium is extracted mainly from saltwater (brine) by evaporation but also from rocks. The new Company will be well-positioned in both the brine and rock markets and will have a combined production capacity of around 40,000t of lithium carbonate per annum. Legally, the merger will be completed through a takeover of Galaxy's shares by Orocobre. Galaxy shareholders will receive 0.569 Orocobre shares for one Galaxy share. This news boosted the price of Orocobre. After a long downtrend from January 2018 to March 2020, shares slowly worked their way back up as demand for lithium increased and prices rose. The announcement of the merger gave the stock another kick: since the plans were made public, the shares have gained more than 12% and are not far from their all-time high of January 2018.
What does this now mean for investors? Is it still worth getting in at this price? In our opinion, yes. Lithium plays a prominent role in achieving climate protection goals through a rapid energy transition. All major automotive companies have now announced that they will sooner or later discontinue the internal combustion engine. As a result, this will cause global demand for lithium to virtually explode and the market will continue to consolidate. However, as one of the heavyweights in the industry, Orocobre is not necessarily expected to be among the losers in these processes. Long-term investors should add this stock to their portfolios.
Goldseek Resources - Promising newsflow
A promising newsflow at Goldseek Resources: just last week, the small Canadian explorer reported having identified four new target zones in its just recently acquired Val-d'Or Nord concession area. The identification was based on assays, including soil samples. Gold grades of up to 1,747 PPB Au (parts-per-billion gold equivalent) were calculated.
According to CEO John Deluce, following these initial promising results, the Company plans to begin drilling here in the summer. Yesterday, the Company reported that it had identified a fifth target zone (Target Zone D) within the Horizon project on the southern boundary of the concession area. It extends in part to Barrick Gold's Hemlo property. The identification was based on an MMI survey which was based on two magnetic anomalies. Further measurements are to be carried out here in the summer.
The Company operates exclusively in the provinces of Ontario and Quebec. There, Goldseek is exploring and developing six projects. The 2021 exploration program is fully financed. For us, now is the right time to enter the market. The Company is currently valued at only around CAD 7 million. With the extensive newsflow that should be forthcoming, demand for the stock should also pick up strongly.
Goldseek, whose shares have also been traded in Frankfurt since April 6, has an attractive portfolio, which may eventually prompt neighboring gold producers from Osisko, Barrick or Wallbridge to make an acquisition. The Company has several arrows in its quiver to immortalize itself in the history books of the resource community with a major discovery.
First Majestic Silver - Poor figures cause bad mood
Things are not going well at all at First Majestic. The reserves and resources report presented on March 31 revealed a 26% drop in silver reserves, which the Company has not yet replaced with new production facilities. Gold reserves also fell by around 17%. In addition, production also fell: silver by 8% and gold by as much as 26% compared to the same quarter last year.
The Company currently has only three mining projects in Mexico, all of which have remaining theoretical lives of less than six years. Even the prices for silver optimistically used by First Majestic do not justify the Company's stock market value at the moment. Consequently, the stock has entered a sideways movement. As long as the Company does not show a clear strategy on how to replace the dwindling resources, investors should avoid the stock.