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.

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