Material Matters: Gold, Copper & Thermal Coal

Commodities | Sep 16 2020

A glance through the latest expert views and predictions about commodities. Gold; copper; iron ore; and thermal coal.

-Continued upward pressure on gold price underpins sector
-Copper supply risk may have peaked in 2020
-Steel output in China underpinned by infrastructure recovery
-Still, surplus may develop in seaborne iron ore
-High inventory keeping demand for thermal coal suppressed


By Eva Brocklehurst


JPMorgan expects a strong finish to 2020 for gold, anticipating prices of US$2000/oz in the fourth quarter and prefers Newcrest Mining ((NCM)), Alacer Gold ((AQG)) and Gold Road Resources ((GOR)) in the space.

Credit Suisse is also bullish and increases its 2021 gold price forecast to US$2500/oz, from US$1800/oz, and 2022 to US$2200/oz, from US$1650/oz. The upgrade is underpinned by a number of supportive macro economic factors, principally an expectation that yields on US Treasury Inflation-Protected Securities (TIPS) will fall to -2.5% amid further declines in the US dollar. The broker suggests a -5% decline in the US dollar equates to a 10% increase in the gold price.

Northern Star Resources ((NST)) is Credit Suisse's preferred ASX gold exposure on valuation grounds, offering superior 1-3 year production growth and free cash flow yield. Evolution Mining ((EVN)) is upgraded to Outperform with the broker lauding its position as the lowest cost, highest margin operator among peers.

Regis Resources ((RRL)) is also upgraded to Outperform while Perseus Mining ((PRU)) jumps two levels to Outperform from Underperform. In mid-caps Credit Suisse prefers St Barbara ((SBM)) which offers growth and optimisation opportunities.

Bellwether Newcrest is also appreciated for its superior resource base and long-term growth options although its weaker free cash flow yield and higher copper exposure is likely to mean it lags peers.

Base Metals

JPMorgan notes forward curves for copper, nickel and aluminium are up 4-16% through 2020-23 as the outlook for global growth improves. The broker remains bullish on both IGO Ltd ((IGO)) and Western Areas ((WSA)) for nickel and in copper prefers OZ Minerals ((OZL)) over Sandfire Resources ((SFR)).

UBS notes second quarter results have signalled that most copper miners in Latin America have adapted to social distancing, as mine supply recovers to pre-pandemic levels.

The concentrate market is tight, although the impact on smelter production has been limited so far. As the highest risk period for mine disruption from nationwide mobility restrictions has passed, the tightness in concentrate is likely to ease in coming months and disruptions to refined copper supply are likely to be less severe.

Nevertheless, while copper supply risk may have peaked in 2020, the broker continues to envisage risks to 2021/22, as project developments are more severely affected by the pandemic compared with operating mines, and the backlogs in stripping & maintenance increase the risk of unplanned outages/downgrades to guidance. Still, the broker is constructive on copper over the medium term.

Iron Ore

UBS quotes Mysteel, which assesses first half 2020 steel output has been under-reported and growth could be nearer to upside estimates. Steel demand has been well supported by a marked increase in special-purpose bond issuance, which has underwritten a strong recovery in infrastructure in China.

Mysteel also assesses China's options outside importing iron ore are limited as domestic output growth is capped and scrap supply will not keep up with the expected lift in demand.

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