Rekindling an old relationship: An iron ore love story

Australian mining giant Rio Tinto announced that it will be working with Chinese steel production company Baowu on a joint venture (JV) to develop an iron ore project in Western Australia in the Pilbara region. Rio Tinto (ASX:RIO) will be investing US$1.3 billion while Baowu will be contributing US$700 million, bringing the total project investment to US$2 billion. The Western Range mine that Rio and Baowu are developing may be new, but their relationship goes, as the kids say, “way back.”

Morningstar equity analyst Jon Mills explains the JV between the two companies began 20 years ago in 2002, Rio and Baowu planned to develop both the Eastern and Western Range mines in the Pillbara region of Western Australia. However, only ended up developing the Eastern Range mine with a total production cap of 200 million tonnes which is expected to be reached in 2027 under the existing JV. This brings us to today and the companies current needs for a replacement mine.

Mills calls the JV an updated joint venture as opposed to a new agreement. He believes the project and the long-term sales agreement allowing Baowu to purchase up to approximately 125Mt of Rio’s iron ore production at market prices is mutually beneficial for the miner and the words largest steel maker. Rio’s share price fell 1.9% on Tuesday after the agreement was announced and is currently trading at $92.45.

Star waves goodbye to its shine

On Monday, Adam Bell’s long-awaited report on Star Entertainment (ASX:SGR) was released stating that the company “is and remains unsuitable” to hold a casino licence in New South Wales. The 946-page report detailed a multitude of the failures of Star as well as the potential criminal conduct regarding money laundering.

After Monday’s trading halt, the share price at Star Entertainment fell 2.7% on Tuesday when trading resumed and is currently trading at $2.90. The company Interim Chairman issued a statement on Thursday morning saying Star acknowledges the finding and recommendations and confirmed that the company is developing and will implement a comprehensive remediation plan.

If you are interested in what our equity analyst has to say about the matter, you can watch this short video: A complete loss of Star's casino licence is unlikely: Morningstar

Woodford Matter is back to bite Link

After ending into a trading halt on Monday, Link Group chief executive Vivek Bhatia has flown to the UK in an attempt to rescue the troubled takeover deal with Canadian private equity firm Dye & Durham. In a company update on Tuesday, Link (ASX:LNK) confirmed that the UK Financial Conduct Authority (FCA) has approved the Canadian firms buyout subject to Link paying up $519 million fines related to the Woodford Matter.

For those who are unfamiliar, the Woodford Matter regards Link Fund Solutions being the fund administrator on Neil Woodfords failed managed investment fund. In A report on Wednesday, Morningstar’s director of equity research Matthew Hodge explained that the Woodford Matter may sink the buyout ship.

“Based on the conditions set by the FEC to the takeover by Dye & Durham, we now think it’s unlikely the acquisition will go ahead,” says Hodge.

Shares at link group fell 22.5% over the week and has slipped 27.7% since the beginning of the year.

US inflation: The Fed’s final boss

August inflation data released this week has shocked equity markets and investors as it flexes its policy proof muscles. Both headline and core inflation rose over the month by 0.1% and 0.6% respectively. The announcement of this data triggered a sell off in US equity markets during Tuesday nights trading session and quickly spread to Australian shares on Wednesday. US indexes such as the Dow Jones Industrial Average and the Nasdaq Composite slipped 3.9% and 5.2% intraday respectively, their worst performing days since June and March in 2020.

In Australia, the ASX200 dropped 2.5% over Wednesday, finishing the week down 2.1%. The US inflation data has investors questioning whether the Fed will hike rates even higher than anticipated in next weeks meeting to fight inflation. Senior economist at Federated Hermes Silvia Dall’Angelo believes the data will “probably tilt an already hawkish Fed to deliver a 0.75% rate hike for the third consecutive time at its meeting next week.”

If you would like to read more about the latest US inflation data and its impact on investors, please see my article: Equity markets tumble as US inflation runs hotter than anticipated.

Elon the EV king has been served

Electric vehicle giant Tesla was sued on Wednesday this week in a proposed class action claiming the company mislead the public by advertising its Autopilot and Full Self-Driving features which either did not work or exist. The lawsuit was filed in a federal court in San Francisco seeking damages for individuals who may have been affected by Tesla’s alleged false advertising through buying or leasing a Tesla vehicle since 2016 with the claimed features.

The company it yet to respond to the lawsuit publicly however saw shares rise 3.4% despite the controversy. The bump in share price on Wednesday comes as US president Joe Biden announced the federal governments first round of funding for the EV charging network across 35 states.

Governor Lowe talks Lowe unemployment and high inflation

RBA Governor Philip Lowe took to the stage in Canberra this morning to address the House of Representatives Standing Committee on Economics, discussing the hot topics of unemployment, inflation and interest rates. He acknowledged that at 3.5% Australian unemployment is currently at its lowest rate in almost 50 years, attributing the strength of our economy to the low levels of unemployment and increase in labour force participation.

“I wanted to recount these facts because the improvement in the Australian labour market is a major achievement. Australians are finding it easier to get a job than they have for a long time,” said Lowe.

He then addressed the elephant in the room. Inflation.

“The second change since February – the increase in inflation – is an unwelcome,” he said.

“Seven months on, we are in a very different position. Inflation has very quickly gone from being too low, to being too high,” he added.

At the current rate of 6.1%, headline inflation is largely out of Australians target rage of 2% to 3%. Lowe attributes the increase in inflation to a combination of global factors such as Russians invasion of Ukraine and the major disruptions caused to energy markets but also the strength in Australian consumer demand. He then casts our mind back to the “dark days of the pandemic” reassuring that the RBA’s decision to end quantitative easing and hike rates was the right one.

“But in those dark days of the pandemic, the Reserve Bank Board judged that the bigger policy mistake would have been to do too little, rather than too much,” he says.

When it came to interest rates Lowe acknowledged that interest rates have come sooner and has been larger and faster than earlier expected. He confirmed that the Reserve Bank expects that further cash rate increases will be required to bring inflation back to target but also mentioned that at some point it will be appropriate to slow the rate of increases in interest rates.

What we are watching:

  • Wednesday: Federal Reserve interest rate decision, RBA Bullock Speech
  • Thursday: Bank of England interest rate decision

One good read:

The case against aggressive rate hikes