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Material Matters: Silver, Lithium And Copper

Commodities | Jul 03 2020

This story features NEWCREST MINING LIMITED, and other companies. For more info SHARE ANALYSIS: NCM

Rebound in silver price led by investment demand; Electric vehicle battery demand to push up lithium prices; Copper markets to be in deficit by 2021.

-Strong investment demand to continue for both gold and silver
-Lithium supply glut a temporary blip
-Current iron ore prices may be unsustainable
-Favourable long-term outlook for copper

By Angelique Thakur

All that glitters is not gold (some of it is silver too)

TD Securities points to an increase in silver prices since the sell-off in March, driven by a rebound in industrial demand and central bank stimulus measures.

The analysts forecast the precious metal’s price to shoot to peak at US$22/oz before stabilising at US$20/oz in 2024.

Pandemic-disrupted production in Mexico and Peru forms about 35-40% of global production of silver and TD Securities estimates the lost supply at circa -40moz to-date.

Even as the mines resume functioning, many are yet to attain full capacity.

With Purchasing Managers' Indices (PMIs) on the rise globally, the broker forecasts industrial demand for silver to rebound by 6% in 2021, at a level similar to 2019.

Contrary to the relatively gradual increase in industrial demand, ETF holdings have increased by 25% year to date, to a record level of 765moz.

TD Securities predicts investment demand will remain strong for the next several years driven by the Fed’s quantitative easing measures (among other factors).

For investors worried about a resurgence of coronavirus cases, gold remains a key safe-haven investment.

ANZ Bank expects this to remain the case, with the uncertain macroeconomic outlook and stimulus measures helping gold’s cause.

UBS’s preferred pick in gold is Saracen Mineral Holdings ((SAR)) with its strong growth prospects in production, followed by Newcrest Mining ((NCM)) which is still seen as attractively valued.

The broker advocates a move away from Northern Star Resources ((NST)) and Evolution Mining ((EVN)), both rated Sell.


 

Lithium: Only a matter of time

Citi analysts are bearish on lithium in the short term and expect demand to drop -6% this year, led by a supply glut which is expected to last till 2024.

This situation, however, is considered unsustainable and Citi forecasts prices to improve, driven by the rising electric vehicle battery demand.

Over the medium-term, Citi forecasts a compounded annual growth in demand of 19% till 2025 while admitting there will be no re-run of the euphoria witnessed during 2016-18.

Even so, the broker believes It is only a question of when and not if for lithium demand to hit 1mtpa.

While this is expected to happen by around 2027, Citi highlights a price increase to US$9,000/t is needed in the long run to help achieve this level of supply.

Citi prefers Orocobre ((ORE)) and suggests a move away from Pilbara Minerals ((PLS)).

Base metals: Supply issues to remain for now

Contrary to UBS’s expectations, the second quarter did not see a decline in metal demand. Rather, the faster than expected recovery in China and production disruptions around the world kept the supply of metals tight.

This can be seen from the MSCI World Metals & Mining Index which was up 25% over the second quarter against the MSCI World Equity Index's 19%.

The ASX300 Metals & Mining Index was also up 27% in the second quarter (to June 24) versus the ASX 300, which was up just 18%.

For now, UBS prefers iron ore, although it does consider current prices (around US$100/t) unsustainable and forecasts a drop to below US$90/t before this calendar year is over.

This is corroborated by commodity analysts at ANZ Bank who feel that while iron ore supply remains vulnerable, the market may be overpricing the risk of supply disruptions.

UBS’s top picks are BHP Group ((BHP)) which is considered attractively valued with a diversified portfolio (will also be paying dividends), along with Alumina Ltd ((AWC)) and South32 ((S32)), both of which offer exposure to alumina.

Coronado Global Resources ((CRN)) is upgraded to Buy owing to its attractive valuation and exposure to metallurgical (coking) coal.

Production disruptions in South America coupled with a ban on ore exports by Indonesia have also hit nickel supply pretty hard. UBS expects the full impact to materialise by the end of 2020.

UBS suggests a recovery on the global front will support nickel prices and forecasts a recovery to US$7/lb in 2021.

While IGO ((IGO)) is UBS’s go-to stock for nickel, Western Areas ((WSA)) has been downgraded to Neutral from Buy.

Copper Conundrums

With the world moving towards electric vehicles that use about 80% more copper than a traditional internal combustion engine, copper is expected to play a crucial role in coming times.

Wilsons pegs the demand increase due to the new segment at roughly 20%.

Currently, the largest consumer of the industrial bellwether is China which consumes a little more than 50% of global demand.

The week ending June 19 saw copper prices on the London Metals Exchange (LME) trading above pre-pandemic levels.

In fact, the copper contracts were trading in backwardation – meaning spot price was higher than the future price – with premiums being paid for the prompt delivery of the metal.

This has led to global stockpiles falling to levels not seen in over a decade, observes Wilsons.

Copper stockpiles on the Shanghai Futures Exchange rose by three times to 380kt from 124kt between January and March, falling back to just 128kt, the speed astonishing many.

It is the same on the London Metal Exchange with inventories depleted materially, leading many to ask what exactly is going on?

Half the answer lies in a recovering China, with rising demand leading to an expansion in credit, automotive output, new property and investment in fixed assets (seen in May).

The other half can be explained by the pandemic-induced supply issues. This includes the scrap copper or recycled copper market with collection centres closing.

Wilsons reveals that even before the onset of the pandemic, copper markets were projected to be in deficit by 2021.

The pandemic only seems to have aggravated the situation, impacting new exploration projects for the metal, further increasing supply woes.

Today, copper has one of the tightest supply/demand outlooks of any base metal, points out Wilsons. Whereas UBS expects the copper market will move to a deficit of about -300kt in 2020 from the current surplus of around 900kt, and reach a balance in 2021. 

UBS expects copper prices to move in the US$3.20-US$3.30/lb range over the coming years, up from US$2.50-US$2.60/lb level, and remain well supported in the future.

Among the miners, Wilsons likes OZ Minerals ((OZL)) which is in process of doubling its production between 2019 and 2023 along with Rio Tinto ((RIO)) with 10% of earnings from copper and looking to increase its exposure to the metal.

UBS prefers Sandfire Resources ((SFR)) and rates it a Buy. Even more preferred is OZ Minerals owing to its longer mine life (more than 20 years) at Carrapateena.

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CHARTS

AWC BHP CRN EVN IGO NCM NST OZL PLS RIO S32 SFR

For more info SHARE ANALYSIS: AWC - ALUMINA LIMITED

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: CRN - CORONADO GLOBAL RESOURCES INC

For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED

For more info SHARE ANALYSIS: IGO - IGO LIMITED

For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED

For more info SHARE ANALYSIS: NST - NORTHERN STAR RESOURCES LIMITED

For more info SHARE ANALYSIS: OZL - OZ MINERALS LIMITED

For more info SHARE ANALYSIS: PLS - PILBARA MINERALS LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED

For more info SHARE ANALYSIS: SFR - SANDFIRE RESOURCES LIMITED