The commodities market has been under pressure this year due to multiple factors, particularly concerning recovery efforts for the Chinese economy. Copper, lithium, iron ore, and other commodities have been hard-hit. However, recent talks of a potential government stimulus in China are triggering optimism that could bolster prices for these materials. This is good news for metals producers and explorers who have been impacted by a bearish market sentiment that could now turn around.
China’s Stimulus Package Signals Hope for Markets
Commodities such as crude oil and iron ore have seen a resurgence of optimism with expectations of China shifting into stimulus mode to support its pandemic recovery. Crude oil prices have steadied above US$69 ($102) a barrel after a 3% rise in the previous session, the most in five weeks. Iron ore prices have also followed suit, rallying to a near eight-week high of US$114 a tonne.
Romano Sala Tenna, Perth-based money manager at Katana Asset Management, considers the expectations of a broad stimulus package in China a “sugar hit” to market sentiment, as wider global economic concerns have dampened commodity prices. The risk of Europe, the US, and Australia tipping into recession has exacerbated this trend.
China’s Central Bank Rate Cut Cycle
The world’s second-largest economy is reportedly entering a rate-cut cycle after China’s central bank lowered its short-term interest rates unexpectedly for the first time in nine months. According to Barclays, this anticipates the People’s Bank of China to speed up its monetary easing into the next year with several cuts to interest rates and the reserve requirement ratio.
The recent rebound in commodity prices and producers is unsurprising considering that investor positioning in commodities had fallen to record lows. A significant rebound for commodities and commodity producers is expected, fueled by both the surprise rate cut by China’s central bank and a Bloomberg report that Beijing is considering a broad stimulus package.
Besides interest rate reductions, the policies under consideration include support for real estate and domestic demand. All of these factors could boost demand for commodities in the coming months, with some of the hardest hit sectors including copper mining recovering fastest from the oversold conditions it currently faces.
Solaris Resources – A Beacon of Upside Potential
Solaris Resources is a copper exploration company that has been oversold for quite some time. The Warintza Project stands out as world-class, offering a significant proposition to copper bulls in a region rich with undeveloped copper porphyries with easy access to nearby primary infrastructure. The company issued a 43-101 resource in April 2022 for the Warintza Central deposit of 1.5 billion tonnes of copper at a CuEq grade of 0.5% with a high-grade starter pit of 287 million tonnes at a CuEq grade of 0.8%.
Over the last 18 months, the deposit has significantly expanded with an updated mineral resource expected around the year-end to incorporate new drilling with an expected resource growing to 2-3 billion tonnes. Two new discoveries on the project, Patrimonio and Warintza Southeast, have been announced in the last few weeks, located just outside the 43-101 resource and offering major growth potential. This brings the total to six major deposits discovered within the Warintza porphyry cluster.
The current SLS market cap is US$ 690 million, compared to an analyst consensus on the current 43-101 resource showing a net present value (NPV) of US$ 4.0 billion at an 8% discount rate and US$ 3.50 per pound. Therefore, the price to net asset value (P/NAV) stands at a mere 0.2x. With such a low-risk, high-reward opportunity at this valuation, Solaris presents an attractive opportunity for buyers looking for a robust asset in the world of copper mining.
Into the Second Half of 2023 with Optimism
The anticipation of China’s stimulus package, coupled with strong growth prospects for companies like Solaris Resources, provides a much-needed uplift to the commodities market, particularly the metals sector. The potential shift in sentiment could spark a much-needed revival and establish a new, positive trajectory for the global economy. This could be an excellent opportunity for investors to capitalize on the rebounding commodities market and the growth potential in copper mining companies along the way.
