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Material Matters: Previews Qtr Updates Part 2

Commodities | Jan 16 2020

A glance through the latest expert views and predictions about commodities. Iron ore; oil & gas; gold; copper; nickel; and lithium.

-Iron ore: is Fortescue Metals overvalued?
-Oil price recovery buoys large producers
-No demand for risk in gold equity market
-Strong start for lithium in 2020

By Eva Brocklehurst

Stockbrokers are generally positive about the 2020 outlook for commodities.

JPMorgan believes global growth will accelerate throughout 2020, particularly in Asia, which bodes well for commodities demand and a continuation of positive momentum in prices.

However, many ASX-listed stocks are starting to look fully valued. Alumina Ltd ((AWC)), Woodside Petroleum ((WPL)), Santos ((STO)) and South32 ((S32)) have just provided market updates.

Iron Ore

Both Morgans and Macquarie view investor sentiment towards large-cap miners as positive, amid robust earnings and dividends. Morgans remains most confident about the iron ore miners for the December quarter, which is typically seasonally stronger ahead of the wet season.

While there were signs of record shipments at the finish of 2019, Macquarie notes shipping volumes for the majors have decreased markedly over the last week and a constrained supply outlook amid positive growth in steel production in China should should contribute to another deficit year in 2020, keeping prices above the industry cost curve.

Macquarie is equally well disposed to both BHP Group ((BHP)) and Rio Tinto ((RIO)), reiterating Outperform ratings and noting both are offering free cash flow yields of 8-10% at spot prices.

Morgans expects Rio Tinto to achieve its 2019 production guidance and, while the share price is testing recent highs, envisages fundamental support for the valuation. However, South32, which has no iron ore exposure, is likely to have a mixed quarter.

Fortescue Metals ((FMG)) remains Macquarie's preferred pure-play iron ore stock, with free cash flow yields of 12-15% at spot prices. Yet Morgans begs to differ, finding it hard to justify the share price on fundamentals.

Hence, the broker retains a Reduce rating and remains cautious about how the stock may trade if momentum in iron ore ebbs. JPMorgan has downgraded Fortescue Metals to Neutral, given the sharp increase in the share price over 2019.

As iron ore approaches US$100/t again the broker believes investors will be reluctant to chase the stock because of fears the market will become overheated. The broker acknowledges a strong dividend yield but considers the fair value estimate has been achieved.

Oil & Gas

Large oil & gas producers have been buoyed by a price recovery in oil. Still, oil stocks may find it harder to maintain support on any disappointing results, Morgans suggests, given the drop in the price of oil over the last week.

There is also improved optimism towards global growth in 2020. The broker expects another strong quarter from Woodside Petroleum and 2019 group production of 89.5mmboe, within guidance. Production for 2019 of 73mmboe is expected from Santos, with GLNG upstream and Cooper Basin the key areas of interest.

Morgans has downgraded Santos to Hold from Add, following the share price appreciation.

A recovery in LNG volumes for Oil Search ((OSH)) should mean production reaches the lower end of recent guidance. The broker continues to highlight the short-term downside risk for Oil Search that would eventuate from a failure to advance PNG expansion.

In terms of pricing, the December half beat expectations, as Brent averaged US$62.41/bbl and West Texas Intermediate US$56.93/bbl. Spot prices remain above consensus forecasts which should help oil & gas stocks for the first half of 2020.


Citi assesses the safe-haven appeal of gold is back in 2020 for the time being because of geopolitical issues and forecasts a rise in gold prices to US$1575/oz in 2020 will bode well for equities.

Nevertheless, Credit Suisse points out there is no demand for risk in the gold equity market. OceanaGold ((OGC)) stands out in this regard at a -40% discount from most of the gold equities under coverage.

Moreover, growth is coming at an unreasonable price at Northern Star Resources ((NST)), given, the broker assesses, a 20% premium for its production diversity, low risk from drought and a superior production profile. This overlooks the substantial creep up in costs.

Credit Suisse prefers Alacer Gold ((AQG)), which offers growth but at a fair price and a discount to spot valuation, although admittedly the company lacks production diversity.

Those stocks considered fair value include Evolution Mining ((EVN)), Newcrest Mining ((NCM)), Regis Resources ((RRL)) and St Barbara ((SBM)) but an unsustainable production outlook stems from drought and permit risk. Of this bunch, the broker prefers Evolution Mining for its low costs.

Citi notes both Evolution Mining and Resolute Mining ((RSG)) have pre-released soft headline results. The broker expects Saracen Resources ((SAR)) to report metrics for the Super Pit in its quarterly, which should inform the market view on how to interpret the cost breakdown.


Citi notes copper remains in favour and expects 5% upside to prices from December quarter levels. The broker advises investors should look for details in the quarterly update from OZ Minerals ((OZL)) on the drivers of the FY20 guidance at Carrapateena.

Credit Suisse has an Underperform rating for OZ Minerals, driven by premium pricing amid elevated risk. The broker also considers the medium-term outlook is less positive for Sandfire Resources ((SFR)), although retains an Outperform rating from a valuation-only standpoint.

Highlights from Sandfire Resources, in Citi's view, will be Black Butte permits and updates at T3 in Botswana.


Western Areas ((WSA)) screens better from a valuation perspective among nickel equities but Credit Suisse believes it lacks medium-term visibility. Independence Group ((IGO)) also lacks valuation support or evidence of any medium-term discovery that will extend the life at the fast-depleting Nova mine.

JPMorgan has also downgraded Independence Group to Underweight, believing base metal miners are fully valued.


JPMorgan also downgrades Orocobre ((ORE)) to Underweight believing a positive sector view has now been priced in. Lithium has had a strong start to 2020 and ASX-listed stocks are up around 20%, although Ord Minnett notes some laggards such as Ioneer ((INR)).

The broker suspects equities are pricing in the bottom of the lithium market, despite prices testing five-year lows. If the sector is actually re-rating, then Ioneer is overdue for catching up and there are a number of catalysts in the near term. The broker reiterates a Speculative Buy rating for the stock.

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