Commodities | Sep 26 2017
A glance through the latest expert views and predictions about commodities. Oil; miners; gold miners; and Comet Ridge.
-More balanced oil market probable in 2018
-Potential for miners to reintroduce a growth agenda
-Yet, question of value-adding M&A remains
-Mid-tier gold producers positioned to return cash
By Eva Brocklehurst
Crude markets appear to be more balanced heading into 2018 and Morgan Stanley modestly raises forecasts for oil prices. The main winners in the current market are refiners and the broker envisages value in margins and crack spreads. As seasonal demand accelerates and the northern winter gains traction the broker suspects the middle distillate balance could become even tighter.
Refiners are responding with higher runs and this is spilling over into demand for crude. Meanwhile, the market remains well supplied and, the broker observes, in absolute terms inventories remain high. Morgan Stanley expects West Texas Intermediate in a range of US$48-52/bbl will stabilise US rig count and balance the market in 2018.
An improving macro backdrop should help growth in demand over the next couple of quarters, although ANZ analysts suggest a rebalancing of the market may only occur if OPEC increases its adherence to production reductions. The analysts expect OPEC will extend its current agreement for at least six months and that oil prices will test higher levels by the end of this year.
The analysts acknowledge supply-side issues can still make a difference and a combination of restraint by OPEC and a gradual increase in US shale may mean the market does tighten substantially in coming months. OECD inventories are expected to fall to their five-year average by the end of the second quarter 2018.
Mining equities have performed strongly since June, as profitability and cash flow is strong. Morgan Stanley expects this will ensure an acceleration in capital management and the potential for reintroducing a growth agenda. Nevertheless, there are heightened risks and the broker adopts a more defensive stance while retaining a positive view on the industry.
The risks centre on geopolitical tensions and the imminent unwinding of the US Federal Reserve's balance sheet. Moreover, commodity prices are, on average, 14% above the broker's forecasts for 2018.
Morgan Stanley downgrades Fortescue Metals ((FMG)) and Whitehaven Coal ((WHC)) to Underweight, from Equal-weight and Overweight respectively, as both appear at risk of commodity price corrections by the end of this year. Moreover, there are specific concerns for the elevated 58% grade discount in the case of Fortescue.
The broker also downgrades Evolution Mining ((EVN)) to Underweight from Overweight on valuation grounds while on the same basis lifts Sandfire Resources ((SFR)) to Equal-weight from Underweight. Morgan Stanley retains a preference for South32 ((S32)), BHP Billiton ((BHP)) and Rio Tinto ((RIO)).
Robust gold prices, stable costs and limited reinvestment or growth commitments mean the balance sheets for most gold miners continue to strengthen. UBS notes dividends have been lifted and the market is now pondering whether acquisitions and mergers may be the next focus. Nevertheless, the reply the broker most often comes across is: what value can we add to justify a premium offer?
Hence, M&A activity may remain subdued for longer and capital returns continue to come to shareholders. The broker suggests benign interest rates, a softer US dollar and macro uncertainty supports a case for retaining gold exposure within a diversified portfolio.
Company-specific risk factors among Australia's gold miners have also improved and the broker believes upside can be found. Newcrest's ((NCM)) Cadia is in the final stages of returning to nameplate production, Northern Star¶ ((NST)) is expected to secure third-party tolling and Regis Resources ((RRL)) should deliver a definitive feasibility study for McPhillamys.
Deutsche Bank agrees the ASX gold sector is in a healthy position and the mid-tier producers are positioned to return cash, in addition to re-investing in the business. Evolution Mining presents a streamlined portfolio now, given the sale of Edna May, and management is focused on lifting asset quality and extending mine life.
The broker observes OceanaGold ((OGC)) demonstrates attractive production growth from the Haile development on top of the portfolio of high-quality producing assets. At the smaller end, Gold Road ((GOR)) is intent on further discoveries at Yamarna tenements and Breaker Resources ((BRB)) is in the early stages of exploration at Lake Roe in Western Australia. Similarly, Catalyst Metals ((CYL)) is pursuing greenfield targets in Victoria.
Canaccord Genuity believes Comet Ridge ((COI)) is a promising gas developer on Australia's east coast, through its 40% equity interest in the Mahalo CSG project. The company has replaced Santos ((STO)) as the operator of the exploration/appraisal phase, providing a far greater level of control and influence within the joint venture.
The broker envisages re-rating potential as an active appraisal program is underway and there is a successful proof-of-concept well. This is underpinned by an extremely tight gas market. A final investment decision is targeted in 2018. The broker initiates research coverage with a Speculative Buy rating and a $0.19 target.
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