Evening Wrap: ASX 200 falls + Goldman Sachs turns bearish on rare earths

The Index slumps to a one-week low amid weakness across most sectors, Australia's trade surplus surprises to the upside, St Barbara shares almost halve as it returns asset sale proceeds back to shareholders, Goldman Sachs expects the rare earths market to be "well supplied over the medium term" plus a few Macquarie notes of interest.

Let's dive in.

ASX 200 Session Chart

ASX 200 lower and finished at worst levels (Source: Market Index)

Markets

Ah it's an ASX classic – Taking the staircase up but the elevator down. Wednesday's weakness intensified today, with Resources, Discretionary, Banks and Staples leading to the downside. We've seen this happen far too many times this year, where a strong winning streak comes to an abrupt end and followed by 2-3 big red sessions.

The market is in a little bit of an awkward place. Historically, July has been the third best performing month of the year (up an average 2.19% since 1992). On the other hand, we've got rising geopolitical tensions between China and the US, investors remain overly optimistic (according to CNN's Fear & Greed Index) and bond yields are pushing back to recent highs (US 10-year yield is 4 bps away from reclaiming a four handle). Taking things one day at a time, the market needs to stabilise around these levels or we run the risk of further one of those episodes.

Economy

Australia’s trade surplus increased to $11.79bn in May, from $10.45bn in April.

• Beat analyst expectations of a rise to $10.50bn

• Overall, exports rose 4.4% in May to $57.77bn which offset a 2.5% increase in imports to $45.9bn

Latest news

Market Insights: Gold Under Pressure

Gold has been drifting lower ever since its brief push above US$2,000 in late May.

Gold spot price since 2020 (Source: TradingView)

That's in parallel with the recent strength behind bond yields. The US 10-year Treasury yield is up 62 bps since early May, trading at a 5-month high and close to a 4.0% handle again.

US 10-year yield (Source: TradingView)

While Fed rate hikes have shrunk from 75 bps to a pause, policymakers continue to reiterate that there's more to come.

"Some participants indicated that they favored raising the target range for the federal funds rate 25 basis points at this meeting or that they could have supported such a proposal," the FOMC minutes noted on Wednesday.

The higher-for-longer narrative has

Interesting news and movers

Trading higher

• +20.3% Imricor Medical (IMR) – Secures up to $30m from GGY

• +15.8%% Medical Developments (MVP) – Continuation rally, up 22% in last three

• +11.4% Australian Mines (AUZ) – Continuation rally, up 118% in last three

• +10.2% Vista Group (VGL) – Organisational transformation

• +5.1% Weebit Nano (WBT) 

• +4.8% Incannex Healthcare (IHL) – Receives ethics approval

• +4.5% Arafura Rare Earths (ARU)

• +3.9% Block (SQ2) 

Trading lower

• -48.2% St Barbara (SBM) – Ex dividend

• -8.7% Star Entertainment Group (SGR) – Debt investors circling (AFR)

• -8.3% Magellan Financial (MFG) – Reports FUM

• -7.6% 29Metals (29M)

• -7.5% Lifestyle Communities (LIC)

• -5.4% Universal Store (UNI) – Pullback after +12.4% in last three

• -5.1% Australian Ethical (AEF) 

• -4.8% Nanosonics (NAN) – Initiated at RBC

• -4.8% Neo Metals (NMT) 

• -4.4% Link Administration (LNK) – Downgraded by Barrenjoey

• -4.3% ARB Corp (ARB) – Downgraded by Macquarie

• -3.5% Elders (ELD)

• Gold sector move: Ramelius (-3.8%), Evolution Mining (-2.6%), Gold Road (-1.9%), Newcrest Mining (-1.5%), Perseus Mining (-0.9%)

Broker notes

Goldman Sachs on rare earths:

• “NdPr market now well supplied over medium term on China mine supply increase … In March, China announced a production quota of 120/115kt for 1H23 (+20% YoY) for mined/refined light rare earths (unchanged for HRE) which has pushed the market into surplus.”

• “Channel checks suggest Chinese mine capacity is operating at ~75%, implying further growth is possible.”

• “We remain positive on the NdPr demand growth from EV’s and Wind and expect RE wind and EV demand to increase from 25% of market in 2022 to ~50% of our ~110kt 2030 consumption estimate, driving ~7% demand CAGR to 2030. However, we expect global demand to outpace supply from 2028 onwards only.”

• “Based on our new market balance forecasts, we reduce our 2024/2025/2026 NdPr price forecasts to US$80/85/90/kg (from US$90/95/95/kg).”

Plus a few standalone Macquarie notes of interest:

29Metals (29M) – Neutral with $0.80 target price

• “Phase 1 of the Capricorn recovery plan is on track, with the restart of operations remaining on plan for August 2023.”

• “29M has now drawn down on additional debt, however the softer cash balance highlights risks to the balance sheet as the restart progresses.”

ARB Corp (ARB) – Underperform with $25.70 target price

• “We analyse US/Aus. 4x4 product fitment rates post our recent US trip; structural differences reduce ARB's addressable market in the US.”

• “In the US, fitment rates are materially lower, fall rapidly outside key models, have a different product skew, & more competitors.”

• “Rising consumer headwinds create downside risk to FY24 earnings in core Aus. aftermarket business (57% sales), D/G to Underperform.”

Bellevue Gold (BGL) – Outperform with $1.80 target price

• “BGL signed a toll treating agreement to process early ore from Bellevue ahead of plant commissioning, which is still on track for 2QFY24.”

• “The toll ore will be predominantly form the Vanguard open pit, which was previously scheduled to be stockpiled and treated later in the mine plan.”

• “In our view, the toll treating agreement is positive for BGL with the opportunity to bring forward cash flows and further bolster the balance sheet …”

Johns Lyng (JLG) – Outperform with $7.70 target price

• “JLG acquired two essential home services companies funded by $65m placement and $5m SPP.”

• “We think the acquisition is highly complementary to the BAU and strata businesses, generating recurring income streams at relatively high margins.”

Patriot Battery Metals (PMT) – Outperform with $2.30 target price

• “DMS testing has confirmed that a spodumene concentrate of +6.0% Li2O is achievable at an average recovery rate of greater than 70%.”

• “The test results indicate that ores from both CV5 and CV13 could be processed jointly, a key positive in our view.”

• “Ongoing drilling results at CV5 and CV13 present key near-term catalysts ahead of the maiden resource release in the 3QCY23.”

Scans