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Material Matters: Previews Quarterly Updates

Commodities | Jan 15 2020

A glance through the latest expert views and predictions about commodities producers' upcoming quarterly production reports. Featuring are bulks; copper; aluminium/alumina; nickel; and gold.

-Bulk commodities production expected to be strong in the December quarter
-While bullish on copper in 2020, Goldman Sachs is negative on Oz copper stocks
-Balanced nickel market in 2020 expected to give way to a deficit in 2021

By Eva Brocklehurst

Bulks

Goldman Sachs is forecasting strong steel demand in China, along with another deficit in iron ore in 2020. The broker maintains a Buy rating for both BHP Group ((BHP)) and Rio Tinto ((RIO)), but prefers BHP Group for its oil, coking coal and copper exposure.

UBS expects BHP Group to deliver a sequentially stronger quarter in December, marking the first production update for the new CEO, Mike Henry.

BHP Group is due to report its December production on January 21. Rio Tinto is expected to hit its 2019 guidance targets but suspects mineral sands may be a risk because of the closure of Richards Bay. Rio Tinto will report its December production results on January 17.

The December quarter is generally a strong quarter for bulk commodities, as the companies tend to push up volumes ahead of seasonal weakness from weather events in the March quarter.

UBS assesses there is a risk for price realisation for Fortescue Metals ((FMG)), given discounts have blown out almost -25%. Yet the pay-out ratio has been lifted to 80% from 60% because of strong free cash flow in the absence of other opportunities.

Goldman Sachs retains a Neutral setting on Fortescue Metals, noting capital management for all three iron ore majors could be to be a positive catalyst stemming from the reporting season in February.

Coronado Resources ((CRN)) should also benefit from a rebound in Chinese and Indian coking coal imports in the first half. UBS expects the company to report salable production of 5.2mt, up 6% year-on-year. Volume is likely to lift sequentially at both Curragh and Logan and the broker will be on the lookout for the marketing strategy for the US product, considering the challenging environment.

If prices for coal remain above US$130/t the company is expected to profitably sell its Buchanan product into China, while if the price falls below that level a build up in inventory is preferred.

Copper

Goldman Sachs is bullish on copper in 2020 but remains negative on copper-focused stocks OZ Minerals ((OZL)) and Sandfire Resources ((SFR)). The broker downgrades Sandfire Resources to Sell, noting the DeGrussa mine has a short life at 2.5 years and growth projects imply low returns.

Goldman Sachs rates OZ Minerals as a Sell too, because of the commissioning risk at Carrapateena, and estimates minimal free cash flow over the next three years. UBS also forecast higher capital expenditure at Carrapateena of $200m in 2020, vs guidance of $120m and assesses this guidance is the largest risk factor for the company.

Aluminium/Alumina

Both aluminium and alumina are in surplus in 2020 on Goldman Sachs' models, while cost curves are easing. The broker retains Neutral ratings for both South32 ((S32)) and Alumina Ltd ((AWC)).

Meanwhile, Shaw and Partners has only one miner in the Sell camp, Alumina Ltd, as the business continues to trade at odds with the broker's assessment of typical correlations.

Nickel

Shaw and Partners likes nickel for its exposure to stainless steel demand as the supply impact will accelerate during 2020 from Indonesia's re-setting of nickel concentrate pricing. As a battery metal, demand for nickel (and copper) is expected to rise between 2020 and 2025 and the current oversupply to slowly reduce.

Morgan Stanley assesses the nickel price is struggling currently because of rising exchange inventory and weak demand. Over 100,000t of metal has been delivered to exchanges since the beginning of December, taking global stocks back above five weeks of consumption.

This is occurring during a time when many stainless steel mills are undergoing maintenance and delays from the impact of Indonesia's ban on ore exports which came into force in the New Year. January and February are always weak months for the stainless steel industry.

China remains well supplied with the raw material, having built a substantial inventory. Morgan Stanley expects Chinese nickel pig iron output will total around 450,000t in 2020 vs 600,000t in 2019.

Together with refined nickel production/imports, a draw down of inventory as well as imported product from Indonesia there should be sufficient supply to meet China's demand for 1.2mt of nickel through 2020. The broker expects a balanced market in 2020 before a persistent deficit develops from 2021.

Morgan Stanley also notes Indonesia's government has granted environmental approval to a proposed battery materials plant. As demand for electric vehicles grows, Indonesia's HPAL operations are expected to be a critical source of supply.

Gold

Evolution Mining ((EVN)) has pre-reported December quarter production, because of downward revisions to the resource/reserve at Mount Carlton. The orebody is now narrower than the company had modelled. The production downgrade has driven a -5% downgrade to UBS' net profit estimates for FY20 and a -1% downgrade to valuation. Still, the broker considers value is emerging as the stock is now trading at a discount to peers.

UBS expects OceanaGold ((OGC)) production will be 107,800 ounces in the December quarter amid an all-in sustainable cost (AISC) of US$980/oz. With Didipio production halted because of blockade, the spotlight will be on Haile, where the performance is expected to improve. UBS notes the latter mine is now much better equipped to deal with water issues as more pits have been opened.

Northern Star ((NST)) is expected to reveal a large lift in gold production at Pogo in the December quarter. Newcrest Mining's ((NCM)) production is also expected to lift, although there will be scheduled maintenance impacting Lihir.

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CHARTS

AWC BHP CRN EVN FMG NCM NST OGC OZL RIO S32 SFR