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Material Matters: Gold, Base Metals & Iron Ore

Commodities | Jul 01 2019

A glance through the latest expert views and predictions about commodities. Gold; base metals & miners; and iron ore.

-Gold stocks find support and now trading at significant premiums
-Copper price weakens despite improving fundamentals
-Nickel price recovers but not considered buoyant
-Aluminium surplus expected to wind down from 2020
-Fortescue Metals best performer on ASX 300 metals & mining index in March quarter


By Eva Brocklehurst


Credit Suisse increases near and medium-term gold price forecasts because of supportive macroeconomic and geopolitical factors. While the broker has been positive about gold since late 2018, forecasts for mid to late 2019 were proving conservative relative to spot and forward prices.

Credit Suisse now estimates gold prices will average US$1327/oz in 2019, rising to US$1350/oz in 2020, while long-term forecasts for US$1300/oz are unchanged. All gold stocks are trading at significant premiums to the broker's base case valuations with Newcrest Mining ((NCM)) the most expensive on a spot basis. Credit Suisse continues to assess Alacer Gold ((AQG)) is offering the most upside and it is the only Outperform

in the broker's gold coverage.

Base Metals

Citi is bullish on a three-month basis for base metal prices, assessing there are benefits from the "handshake" between US President Donald Trump and China's Xi Jinping. On a 12-month basis the broker envisages the highest upside is in copper. Credit Suisse revises forecasts for base metal prices, mostly lower, given deteriorating global economic conditions and tensions between the US and China. Copper is the most affected by sentiment because of its traditional use as an investment in global growth and the macro outlook is poor.

The copper price has weakened this year despite improving fundamentals from the emergence of a sizeable underlying deficit because of mine underperformance. From 2020, the broker expects mine expansions will exceed modest global consumption growth so copper should move back into surplus.

Credit Suisse forecasts a deficit in 2019 of around -500,000t, because of widespread reductions in copper production. Copper forecasts have been lifted, albeit modestly, and the broker forecasts US$6255/t in 2019 and US$6173/t in 2020, upgraded by 2% and 8% respectively.

Credit Suisse prefers OZ Minerals ((OZL)) over Sandfire Resources ((SFR)) although both are trading at premiums to value. Macquarie is forecasting a modest decline in output at Prominent Hill, although its 2019 forecasts for Oz Minerals remains within guidance. Progress on Carrapateena is likely to overshadow the June quarter production result. Sandfire is expected to report an improved production outcome at DeGrussa although the focus in the quarterly is likely to be the recent acquisition of MOD Resources.

Nickel prices have recovered from lows in late 2018 but these are also less buoyant. A glut of stainless steel sheet continues to put pressure on the market as China, which has high levels of inventory, reduces imports from Indonesia. Nickel now faces the challenge of rapid growth in Indonesian supply and a threat to global consumption arising from the US/China trade war.

UBS believes the opportunity in nickel remains intact although battery demand is still one-two years away. The broker does not necessarily believe that long-term nickel prices need to be higher, with new nickel units from Chinese facilities in Indonesia possibly not requiring super-high incentive prices.

Credit Suisse now delays an expected rise to US$6/lb to 2021, when the current wave of nickel plant developments may have slowed. In nickel, the broker prefers Western Areas ((WSA)) to Independence Group ((IGO)) on valuation and mine life.

Macquarie expects the upcoming quarterly reporting period will be positive for Independence Group and expects it to beat production guidance for FY19. Nova is expected to lift output of nickel and copper over the top end of the company's guidance ranges.

Western Areas has delivered consistent results, the broker observes, and production and cost guidance should be comfortably achieved. Macquarie retains a preference for both OZ Minerals and Independence Group, given strong operating margins and exposure to gold. Of interest, progress on the raise bore is critical to excess in Panoramic Resources' ((PAN)) higher-grade Savannah North project.

Aluminium prices have been reduced to the lowest levels since 2016. Credit Suisse highlights, as aluminium is not as widely used for investment as copper, a lot of the weakness may reflect fears about supply and demand. Large surpluses continue to be experienced in China.

From 2020, the broker expects the surplus should begin to wind down as China's domestic demand and exports weaken. The broker envisages little prospect of the aluminium price achieving and sustaining US$0.90/lb soon but maintains a more positive medium-term outlook amid steadily-rising Chinese capacity utilisation.

Credit Suisse reduces alumina forecasts as a return of Alunorte to full production has caused a swift retracement in prices, despite no tonnage having reached the market as yet. Citi agrees Alunorte's move to full production has reduced visibility on 2020 alumina prices and the pace of China's refinery re-starts will be key. The broker downgrades Alumina Ltd ((AWC)) to Neutral as the shares are near the target.

In 2020, Credit Suisse expects global trade flows of alumina will have been been re-established and the Australian price should average US$360/t, based on import price parity with Shanxi costs and an Australian premium of RMB70/t. Yet, even with a high alumina price, the broker suspects there will be insufficient bauxite supply in Shanxi.

Low inventory at exchange warehouses has supported the zinc price, while Credit Suisse suspects a shift to a surplus market has only been delayed. Much of the lack of refined material has been blamed on the curtailment of Chinese smelters, as opposed to a fundamental lack of supply. The broker remains cautious about prices, suspecting smelters are now incentivised to produce more. The broker expects increases in output to continue, lifting inventory and putting further pressure on zinc prices.

Iron Ore

Rio Tinto's recent guidance on output signals lower Pilbara fines supply from Australia over coming months, Citi observes. This could further tighten the high-grade iron ore market and support benchmark prices at higher levels than previously anticipated. Citi now forecasts benchmark prices of US$100/t and US$95/t in the September and December quarters of 2019. Tightness may also continue into 2020 if the company's grade issues persist.

UBS notes the best performer in the March quarter from the ASX 300 metals and mining index was Fortescue Metals ((FMG)), up 33%, followed by Iluka Resources ((ILU)), up 21%, and BHP Group ((BHP)) coming in third, up 7%. Citi has downgraded Iluka Resources to Neutral as a result of reaching the broker's target.

Laggards in the index were Galaxy Resources ((GXY)), down -30%, Syrah Resources ((SYR)), down -20%, and South32 ((S32)), down -13%, reflecting weak lithium and graphite prices over the quarter.

UBS finds the mining industry has continued to be disciplined over the period, repairing balance sheets, and shareholder returns should now be the focus. Key to base metals, in the broker's view, is a move towards resolution of the US/China trade conflict, while iron ore port stocks in China should be watched for signs of a more balanced market.

UBS has upgraded forecasts for metallurgical coal, gold and iron ore (2019 only) while reducing forecasts for base metals, thermal coal, lithium and graphite. The broker expects further price pressure in the latter two as additional supply enters the international market.

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