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Material Matters: Iron Ore, Coal & Metals

Commodities | Jun 28 2018

A glance through the latest expert views and predictions about commodities. Iron ore; coal; alumina & aluminium; nickel; copper & gold.

-Limited downside expected for iron ore prices
-Strong demand underpinning coal prices
-Pending US sanctions on Rusal overhanging aluminium
-Base metals expected to hold up as supply growth is weak
-Macquarie downgrades major outperforming gold stocks


By Eva Brocklehurst

Iron Ore

The outlook for the iron ore market has picked up in recent weeks, ANZ analysts believe. Chinese economic data suggests steel and iron ore demand will remain constructive and supply outages have curtailed the surplus.

The expected surplus in 2018 has all but disappeared, the analysts observe, and they maintain a view that iron ore prices have limited downside and should push back towards US$69/t over the next few months.

Iron ore is among the most significant changes to Macquarie's forecasts as the resources upgrade cycle continues. The broker retains a positive view on Fortescue Metals ((FMG)) and an Outperform rating, with the miner's realised iron ore price expected to remain in a tight range around US$40-45/t.

The broker acknowledges there is downside risk to earnings forecasts for Fortescue under a spot price scenario. Macquarie also retains an Outperform rating for Mount Gibson ((MGX)), which is set to restart the high-grade Koolan Island mine in 2019 and provide unique exposure to premium iron ore production.

Iron ore exports from Port Hedland totalled 45.0mt in May. UBS observes Rio Tinto's ((RIO)) shipments lifted to 31.4mt, and in the year to date are up 16.3%. The annualised run rate suggests the company is on track to achieve 2018 guidance of 330-340mt.

BHP Billiton ((BHP)) was more subdued, with shipments up 11.1% in May, to 24.2mt but the run rate suggests a strong finish in line with guidance for FY18. Fortescue Metals shipped 15.3mt in the month, down -4.6%. The run rate in June indicates FY18 shipments of 169.5mt are possible against guidance of 170mt.Coal

ANZ analysts observe strong demand across Asia has lifted international benchmark prices for thermal coal and the Newcastle spot price recently rose above US$115/t. Coal-fired power demand in China has been supported by better economic data in 2018.

At the same time Chinese domestic production has been subdued, which comes at a time when growth in supply on the international market is constrained.

Coal miners Whitehaven Coal ((WHC)) and New Hope Corp ((NHC)) benefit from the near-term upgrades to Macquarie's thermal coal price forecasts, with FY19 earnings estimates rising 35% and 25% respectively.

The ANZ analysts suggest the outlook for the coking coal market is dictated by supply-side issues and risks are mounting around Australian supply. New environmental checks in China may impact demand  in the September quarter although the analysts believe the impact will be relatively short lived.

This should mean prices are well supported around current levels of US$200/t. Macquarie upgrades earnings estimates for South32 ((S32)) as it benefits from increases to short-term coking coal and alumina prices. Further benefits exist from medium to longer-term upgrades to nickel, manganese ore and alumina prices.

Alumina & Aluminium

Macquarie upgrades its outlook for alumina prices which transforms the earnings profile for Alumina Ltd ((AWC)). 2018 and 2019 earnings forecasts rise 39% and 29% respectively.

Pending US sanctions on Rusal hang over the aluminium market and this could compound an already tight situation. ANZ's analysts suspect vetting a new owner of Rusal could extend well into next year, which will create uncertainty and hinder trade. Even assuming no loss of Russian output, aluminium is expected to push into deficit this year.


The ANZ analysts prefer commodities that a more supply constrained than demand driven and this means base metals should hold up relatively well as inventory is falling and supply growth is anaemic.

Higher prices are expected to incentivise production across all metals but not enough to push the market into positive in 2018. Therefore, the analysts suggest further drawing down of inventory is in place for another year.

Macquarie notes all base metal stocks appear cheaper on FY19 multiples and incorporating strong upgrades to nickel prices translates into significant earnings upgrades for Independence Group ((IGO)) and Western Areas ((WSA)).

The broker retains a preference for Western Areas, reflecting the strong organic growth options through the development of Cosmos and life extension potential at Forrestania.

Macquarie remains concerned that Independence Group will miss production and cash cost guidance for Nova in the fourth quarter yet forecasts are lifted by 12% for FY18 and 41% in FY19. Material increases are made to Western Areas earnings, up 24% for FY18 and up 88% for FY19.

Copper & Gold

ANZ analysts envisage a high risk of supply disruptions in the copper market, centred on labour negotiations at Escondida, the world's largest copper mine. If no agreement is reached by July the flow-on impact could be significant, with over 4.2mt of copper mine supply at risk, and this may push the market into a sizeable deficit in 2018.

Macquarie upgrades FY19 earnings estimates for copper/gold producer Sandfire Resources ((SFR)) and increases the exploration option value given recent success at DeGrussa.

The broker's preferred stocks in copper are OZ Minerals ((OZL)) and Metals X ((MLX)). OZ Minerals is expected to provide clarity on its development plans later this year and the broker's Outperform rating on Metals X reflects confidence in the ramp up of Nifty.

The ANZ analysts note the resurgent US dollar over the past few months has been a significant headwind for precious metals. Nevertheless, gold is benefiting from rising geopolitical risks.

The analysts expect risks are skewed to the upside in terms of investor demand for gold, while coin and bar investment should now recover after falling for the last three years.

Macquarie notes the performance of the large more liquid ASX gold equities has been mixed in 2018. Saracen Minerals ((SAR)), Evolution Mining ((EVN)) and St Barbara ((SBM)) have stood out, with the stocks up 34%, 31% and 28% in the year to date, respectively.

Saracen Minerals and St Barbara are downgraded to Neutral, as both stocks have rallied around 30% in 2018 and comfortably outperformed the gold price and the benchmark ASX200. Regis Resources ((RRL)) is also downgraded to Neutral, having risen 19%.

Only Newcrest Mining ((NCM)) underperformed both the ASX200 and the gold price, amid ongoing concerns around Cadia. Meanwhile, Perseus Mining ((PRU)) is upgraded to Outperform, as it demonstrates stronger leverage to gold prices.

Macquarie is surprised by the underperformance of Dacian Gold ((DCN)), which is down -9% despite pouring its first gold bar in March. The broker suspects the weakness reflects concerns over cash costs, which will not be revealed until 2019 as the company is capitalising production costs in 2018.

West African Resources ((WAF)) was the most disappointing of the gold stocks in 2018 and a funding overhang is the most likely reason, in the broker's view.

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