Evening Wrap: ASX 200 flat, RBA leaves rates on hold + Morgan Stanley's take on uranium

The S&P/ASX 200 closed 5 points lower, down -0.06%. 

The Index recovered from a weak start to close around breakeven, the RBA holds rates in-line with market expectations, Alan Joyce leaves Qantas two months ahead of schedule, shares in Chalice Mining slump another 12%, Macquarie says rare earths are showing signs of improvement and Morgan Stanley's take on the recent uranium breakout.

Let's dive in.

ASX 200 Session Chart

ASX 200 breakeven on Tuesday (Source: Market Index)

Markets

The ASX 200 finished around breakeven, up from session lows of -0.66%. It was a rather odd and uneventful day, with no US lead (closed for Labour day) and the RBA decision was a rather non-event for markets.

At the sector level:

• Defensives such as Healthcare, Industrials and Staples led to the upside

• The performance of Utilities was distorted by ex-dividend names such as Origin Energy (-0.8%) and Viva Energy (-0.5%)

• Energy stocks pulled back in-line with softer oil prices

Economy

The RBA left interest rates unchanged at 4.1%, in-line with market expectations. Key takeaways from Lowe’s statement:

• Progress on inflation: “Inflation in Australia has passed its peak and the monthly CPI indicator for July showed a further decline. But inflation is still too high and will remain so for some time yet.”

• Inflation forecast: “The central forecast is for CPI inflation to continue to decline and to be back within the 2–3 per cent target range in late 2025.”

• Uncertainties: “There are significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas … many households experiencing a painful squeeze on their finances … increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.”

• Outlook: “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data …”

Latest news

Market Insights

Leo Lithium: For those that can stomach sovereign risk

Leo Lithium (ASX: LLL) shares fell 50% on Monday after the Malian Ministry of Mines ordered the suspension of Direct Shipping Ore, which removes a source of early cashflow for the company.

JPMorgan released a note on Monday reiterating an Overweight rating for Leo, with a $1.10 target price or an upside of 83% (as at Tuesday close).

"Leo Lithium's position looks tight but manageable (further liquidity via pre-payments, trade finance etc.) ... for investors willing to stomach the geopolitical risk, we believe there is significant potential upside in the name," the analyst said.

Ironically, this upside scenario happened just four months ago, when the stock rallied almost 200% from 44 cents in late March to a peak of $1.28.

Chalice Mining: Brokers are beginning to turn

Chalice Mining (ASX: CHN) tumbled another 13% on Tuesday, now down 42.5% since the release of its scoping study last Wednesday.

The volume on Tuesday (16.8 million) was just as high as last Wednesday (16.9 million) as investors continue to dump the stock while brokers slash their target prices.

• JPMorgan: Downgraded to Underweight from Overweight with $2.40 target from $7.70

• Jefferies: Downgraded to Underperform from Hold with $2.00 target from $6.50

• Morgans: Downgraded to Hold from Add with $3.45 target from $8.20

Interesting news and movers

Trading higher

• +6.6% Seven West Media (SWM)

• +5.2% Emerald Resources (EMR)

• +4.8% Global Lithium (GL1)

• +4.5% Myer (MYR)

• +4.4% Lotus Resources (LOT)

• +4.0% Melbana Energy (MAY)

• +3.8% Winsome Resources (WR1)

Trading lower

• -36.4% Mobilicom (MOB) – To delist from ASX, remain on Nasdaq

• -20.4% Tietto Minerals (TIE) – Production guidance

• -13.4% Chalice Mining (CHN) – Downgraded bn Jefferies

• -8.9% Yancoal (YAL) – Ex-dividend

• -4.2% Sayona Mining (SYA)

• -4.1% Sandfire Resources (SFR) – Downgraded by UBS

• -3.3% Syrah Resources (SYR)

• Gold sector move: Northern Star (-3.7%), Bellevue Gold (-3.3%), Gold Road (-2.9%), Evolution Mining (-2.5%), Perseus Mining (-2.1%)

Broker notes

Macquarie’s take on lithium and rare earths:

• “The rare earths market is showing signs of improvement with NdPr prices bottomed in late July.”

• “2HCY23 rare earths production quota in China presents a key catalyst for NdPr prices, which could be released in the near term.”

• “We review EV/Total resources for lithium developers and explorers in our coverage universe. GLN has the lowest multiple at 0.03x, reflecting its large resource endowment ...”

• “PLS is our preferred producer with PMT presenting the greatest upside on exploration over the near term.”

Morgan Stanley’s take on uranium:

• “Uranium is up 5% over the last two months, almost hitting our 3Q forecast of $60/lb, as production guidance downgrades and supply risks in Niger drive fears of disruption, against a stronger demand backdrop and suggestions that utilities are moving towards replacement rate contracting.”

• “Over the weekend, Cameco updated guidance, cutting 2023 estimates for its Cigar Lake mine … All else equal, this would widen the 2023 deficit we forecast by around 2 mln lbs.”

• “Uranium is one of several parts of the power complex that have been rallying, with Newcastle coal close to $160/t and Gasoil cracks leading the oil price rally, with robust global power demand.”

• “Fears over supply disruptions may boost purchasing activity in the short term, and any physical purchases from uranium funds would also provide support. However, we do see room for supply growth in 2024 from Canada and Kazakhstan, which narrows the deficit next year, potentially capping upside.”

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