Some of last week’s share price rises were astonishing and very much in the “too good to be true” category.
Aquila Resources, a compact coal and iron ore explorer, soared back through the $1 billion market capitalisation barrier as if the global financial crisis was a non-event.
The $1.52 price rise posted by Aquila last week as it rocketed up from $3.50 to $5.02 means that on Friday night someone was celebrating a 43.4% return from seven days of “work”
The man with most to celebrate was Aquila founder and major shareholder Tony Poli because that extra $1.52 boosted the value of his 74.6 million Aquila shares by $113.4 million to a boom time total of $374 million.
Aquila wasn’t alone. A long list of small explorers enjoyed remarkable rises, especially in the heavily sold-down base metals and iron ore sectors.
Western Areas, one of the next generation of mid-tier nickel miners, did almost as well as Aquila, rising by $1.01 to $5.29, lifting its market value to $907 million, within sight of the magic $1 billion.
For Terry Streeter, founder and major shareholder of Western Areas, that means last week’s share price rise lifted his paper fortune by $32 million to $169 million.
Both Aquila and Western Areas have a long way to go before reclaiming last year’s high ground, when Aquila topped out at $17.95 and Western Areas peaked at $12.
But it is significant that both have moved back into the top 150 on the ASX – Aquila at 118 and Western Areas at 142. Other miners have also started to creep onto the list after last year’s wipe out.
Whitehaven Coal, which is caught up in a tricky takeover squabble, is back at 148th thanks to an 18c share price rise last week to $2.15. Another stock in the cross hairs of a corporate game is Extract Resources. It has come from nowhere to be capitalised at a remarkable $1.06 billion, enough to hold down 127th position.
There are a number of reasons for the stock market recovery.
For starters, many mining stocks probably fell too far last year and are now in recovery mode.
Another genuine reason is that some of the stocks performing well have been delivering strong exploration and production reports.
That’s the good news behind the rises and the return of Australia’s mid-tier miners from their near-death experience.
Then there are the less-than-convincing reasons for the rises.
Higher metal prices, which seem good on the surface, might turn out to be less than convincing if they are being led by Chinese stockpiling (to avoid investing in US dollars) and by investment fund hoarding, rather than genuine buying for consumption.
Having raised those concerns, Dryblower has to acknowledge that the rise in the nickel price by more than $US1 a pound to around $6/lb is a welcome sight. Copper also is performing well at more than $2/lb and zinc, the sick man of metals last year, is over 70c/lb after a long period below 50c/lb.
The problem is that while investors have enjoyed the boost in share prices, the world itself has not changed.
The US remains stuck in a deep recession. Europe has not yet acknowledged the depths of its problems, especially in banking.
China seems to be recovering, but Australia is heading into a horror week that will be capped by higher taxes and a budget deficit from hell.
It’s the global fundamentals that make Dryblower nervous and which some of his speculator friends seem to be ignoring.
Last year’s crisis has passed and recovery is underway.
But it is a recovery funded largely by government deficits, unbridled borrowing and “quantitative easing” – code for printing money.
At some point, and that might be sooner than we would like, government will demand its money back, via higher taxes. Government will also react to the threat of rising inflation by raising interest rates.
When that happens, perhaps as soon as late this year or early next, there will be a lot of people joining Dryblower in asking “where are the profits to justify the share prices?”
*Dryblower is a weekly column on ILN’s sister publication MiningNews.net.