Material Matters: Mining And Miner Outlook

Commodities | Mar 16 2017

A glance through the latest expert views and predictions about commodities. Mining outlook; price and equity upgrades; coal and lithium.

-Signs of an aggressive supply response, yet upside for miners if prices retrace at a slower-than-expected rates
-First phase of increased capex usually favours explosives, contractors and services companies
-Mining companies moving away from emphasis on debt reduction

 

By Eva Brocklehurst

Mining Overview

2017 started strongly for material commodities, with a maturing industrial recovery, rising inflation expectations and a degree of economic confidence that surprised Macquarie. Nevertheless, some cracks are emerging in the bullishness, notably in China as the government continues to tighten monetary policy at the edges.

The broker believes current indicators are not showing the aggressive improvement in demand that was expected. Also, there are signs of a supply response and inventory is already elevated. That said, the broker raises 2017 forecasts across the majority of metals and bulk commodities.

Ord Minnett has lifted its mining sector coverage to an Overweight position. The broker believes the recent pull-back, particularly in European-listed names, has opened up an opportunity. The broker's global commodities team is confident that the hawkish comments by US Federal Reserve officials probably only triggered a temporary correction in metals prices during the recent sell-off.

As a US interest rate hike appeared a certainty, the broker also upgrades its emerging markets rating to Overweight, with the preferred country exposures being China and Brazil.

Mining Capex

On the subject of mining capital expenditure, Goldman Sachs believes global reductions are over after four years of declines. Strong prices have driven a rise in cash flow that it is signalling rising expenditure. The broker has raised forecasts for capital expenditure in 2017 by US$5bn, or 8%, and now expects this year will show the first year-on-year expenditure increase since 2012.

The first phase of an increased capital expenditure budget is usually put to rectifying the liabilities that have been generated in recent years. This includes normalisation of strip ratios, maintenance expenditure and exploration. The broker believes this is a positive phase for explosives, contractors and services companies.

Goldman Sachs observes miners are now spending almost as much on dividends as they are on capital expenditure. This may signal a period of improved returns for shareholders but the sustainability of only limited investment in medium-term growth is questionable. New greenfield project growth, whilst not yet on the mining radar, is expected to return over the next two years, reducing the potential for additional capital returns from miners in coming years, in the broker's view.

Upside For Miners?

While commodities may be moving lower, many are still priced above Morgan Stanley's forecasts. The broker believes there is still upside for miners if prices retrace at a slower-than-projected rate. Mark-to-market upside is intact for most of the key commodities versus the broker's price deck. Morgan Stanley believes the industry is now giving up some of its gains, which reflects momentum-style investment re-positioning.

The sector has also moved towards utilising excess cash and away from the debt reduction emphasis witnessed 12 months ago. The broker does not believe that cash accumulation or potential re-investment is being factored into many equities at this point.

In view of the revisions, Morgan Stanley upgrades Fortescue Metals ((FMG)) to Equal-weight and Resolute Mining ((RSG)) to Overweight. Morgan Stanley has contrarian views to consensus on BHP Billiton ((BHP)), Newcrest Mining ((NCM)), Sandfire Resources ((SFR)) and Syrah Resources ((SYR)).


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