Contrarian Twiggy tops up on sold-down FMG, sets nickel tongues wagging with Mincor trades

Plus, market’s brutal response to Red 5’s production downgrade ignores the bigger game.

It is a good time to be boldly looking beyond the current vapourisation of equity values in response to the coronavirus pandemic to secure what with time, will (hopefully) be seen as astute pick-ups.

Mind you, you’ve got to have the readies to do it. That’s not a problem for Andrew “Twiggy” Forrest.

Because iron ore has managed to hold at elevated levels, and because China is reportedly getting back to work while the Western world goes in to quarantine, he is in line to collect a $1.58 billion annual dividend cheque for the 2020FY from Fortescue Metals (ASX:FMG).

Twiggy now owns 36.25% of the Pilbara’s Third Force, which is up from 35.22% after he splashed $278m between February 20 and Wednesday this week on more shares to take advantage of the 32% slump in Fortescue’s share price from its $12.87 peak in Januar, to $8.79 in Thursday’s market.

It’s a wonder he didn’t buy more given Fortescue now has a prospective yield well into double digits, something based on the notion that iron ore in the high $US80s a tonne will stick around as China gets backs to work, and the rest of the world frets about COVID-19.

Still, the price smashing of the iron ore producers, including BHP and Rio Tinto - has BHP really lost 36% or $75b in value since the COVID-19 sell off got going on January 22? - suggests that there is not a lot of confidence in the ability of Chinese steel production to keep iron ore where it is for much longer.

So even if your annual dividend cheque was $1.58bn, you wouldn’t necessarily be betting it all on iron ore. After all, one’s personal portfolio should be diversified to spread the risk.

Nickel

That could well be behind Twiggy’s recent stirring of the nickel pot in WA, with thoughts that he just might be contemplating spearheading a rationalisation of the sector.

His privately owned Squadron has just increased its stake in Kambalda nickel redeveloper, Mincor (ASX:MCR), from 8.51% to 12.01%, paying an average of 56c a share compared with Thursday’s market of 54c. It is a $194m company but was worth more than $1bn back in better times for the nickel price.

Twiggy was also mentioned in a dispatch from Nick Evans at The Australian earlier in the week which said Panoramic (ASX:PAN) could be back in play – IGO (ASX:IGO) dropped a scrip bid for the nickel redeveloper in January- on suggestions Squadron was behind some recent big buying in the stock.

Panoramic responded by saying that as previously disclosed, it remains in discussions with third parties regarding a range of corporate and funding options and its data room remains open. “There is no guarantee this will lead to any transaction,” Panoramic said in a cloud of smoke.

Rounding out the mumblings about Twiggy’s nickel ambitions (Anaconda and the Murrin Murrin project was a long time go now) has been the arrival of a pair of legendary Harold leather boots under the CEO’s desk at Poseidon Nickel (ASX:POS) which belong to Harold family member, Peter Harold, Poseidon’s new CEO.

Poseidon is owned 17% by Twiggy and Harold was previously CEO at Panoramic.

Now despite the mumblings about Twiggy’s nickel ambition, it is clear that being in the nickel space has not made the companies immune to the COVID-19 shakedown. Falls since the market stepped over the January 22 cliff amongst the WA nickel stocks have included 35% for Panoramic, Western Areas (WSA) 31%, IGO 30%, Mincor 23% and Poseidon 25%.

Nothing much can be read into that roll call other than to note Mincor has done best, with the help of Twiggy’s buying.

Meanwhile, the nickel price has not been shooting out the lights either. It has drifted back to $US5.57/lb, leaving it 12% short of last year’s (calendar) average of $US6.32/lb and looking longingly at the $US10.36/lb peak in 2011.

Like Twiggy, don’t worry about that. Once the world gets back to driving around the place, it will increasingly be in electric vehicles, and the preferred battery chemistry is long on nickel.

It’s why BHP’s Nickel West boss Eddy Haegel has declared nickel's exposure to the EV revolution as once-in-a-generation opportunity, noting as he did that a 60kwh NMC811 battery needs 9kg of cobalt, 11kg of lithium and a massive 70kg of nickel.

And it’s why Rio nominates nickel as a preferred growth metal, along with copper. Twiggy presumably agrees with his Pilbara bedfellows.

RED 5

Gold had a brief squiz at $US1,700/oz earlier in the week but has since back-pedalled back to $US1,635/oz.

It has not mattered that the local price of $2,532/oz remains more than $500/oz above its level a year ago, gold stocks have been pummelled.

Thursday’s market was particularly savage for the leading producers, with most of them down by 6-12%. The sector then, wasn’t much of a haven on the day.

Things were not any better for the second ruck of producers, most notably for Red 5 (ASX:RED) which plunged 23% to 21c on a production downgrade. It’s never a good idea to combine a downgrade with a down day in the gold markets.

But in the case of Red 5, it can be argued that Thursday’s sell-off was overdone.

That’s because the downgrade (to 100,000-105,000 ozs from 110,000-120,000oz for the 2020FY) was not overly significant because the short-term issues at play have been overcome, and because as mentioned, Aussie gold is a magical $2,532/oz.

But more than that, Thursday’s heavy-handed treatment ignored the fact that Red5 is a company in transition to something much bigger than it is thanks to what is in the pipeline at one of its two mines in WA’s Eastern goldfields, King of the Hills.

A final feasibility study into stand-alone processing at a much bigger KOTH (instead of trucking ore 120km to the Darlot operation for treatment) is expected to be completed in the September quarter.

The flavour of the upside was captured in a research note by Canaccord dated March 5, before gold’s sharp retreat, and before the production downgrade. Canaccord put a speculative 55c price target on the stock which is kind of interesting after Thursday’s sell-off (none of which is related to KOTH’s near-term upside).

“Broadly speaking, we model a 12-year combined mine life producing about 140,000oz per annum at an average AISC of $A1,335/oz,’’ Canaccord said.

Substantial near-term growth in Aussie gold is a good thing to have in these wild times.