Material Matters: Energy, Copper & Iron ore

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Citi analysts view energy stocks as fairly priced at current levels; Macquarie remains positive on copper exposure while Ord Minnett thinks iron ore will remain strong heading into 2021

-Oil and LNG: New year, Higher prices
-Copper to continue to outperform in 2021
-Large-cap iron ore exposure preferred

By Angelique Thakur

Energy stocks: Potential for M&A activity going ahead

Citi’s commodity team believes energy stocks to be fairly priced at current levels even as the team has upgraded forecasts for its 2021 Brent Oil and LNG price decks.

Higher OPEC-Plus production cuts along with Saudi Arabia’s voluntary cut of -1mbpd may cause the oil price to hit US$59/bbl in 2021 with a peak of US$61/bbl in the first quarter of FY22, suggests Citi.

LNG is not far behind with Citi upgrading its 2021 JKM price forecast to US$9.6/mmBtu from the current US$4.9/mmBtu aided by an exceptionally cold first quarter (Asian winter) of 2021.

Irrespectively of these higher price forecasts, Citi analysts deem energy stocks to be priced fairly, with implied oil prices for pure E&P companies “tightly bunched in the mid-50s” range.

This is not to say there are no catalysts in the near-term. According to Citi, the energy sector is going to benefit from a number of factors working together, namely higher expected demand in a post-vaccine world coupled with low inventory and a lower US dollar.

Wait. There is more. These factors will likely induce higher flows into the sector which, asserts Citi, may become a hotbed of activity for mergers and acquisitions.

In the present environment, Citi prefers stocks strong enough to avoid raising equity at the time of making their final investment decision (FID) and consequently prefers Santos ((STO)) over Oil Search ((OSH)) although this does not stop the broker from downgrading Santos’s rating to Neutral from Buy over a lack of catalysts.

Another stock downgraded to Neutral over the lack of catalysts is Beach Energy ((BPT)). Woodside Petroleum’s ((WPL)) investment case isn’t so encouraging either, observes Citi, with uncertainties prevailing post a CEO change and the funding of its Pluto-2 project.

The sole E&P pure-play company left with a Buy rating from Citi is Senex Energy with its current share price considered too low for the now de-risked Western Surat and Project Atlas fields.

Copper: On an upward spiral

An outperformer in 2020 bolstered by government stimulus packages and green energy projects, copper is expected to continue its upward trajectory in 2021, asserts Macquarie, this time propelled by buoyant Chinese demand and more stimulus packages.

Copper had a volatile journey in 2020 with the difference between the base metal’s high and low price a staggering 72%.

Interestingly, copper was also the only base metal to see an average annual price rise of 3% in 2020 over 2019.

Macquarie is optimistic about copper's prospects and considers OZ Minerals ((OZL)) its preferred exposure to the base metal with the company boasting organic growth potential.

Another preferred pure-play is Sandfire Resources ((SFR)) with the development of the recently approved T3 Motheo project (Botswana) a crucial catalyst for the company.

Iron Ore: Strong market conditions

A marking to market exercise undertaken by Ord Minnett on its forward-curve-based commodity forecasts has led the broker to upgrade its nickel, gold, coal and steel price estimates by 7-10%. (Note: Ord Minnett white labels research conducted by JP Morgan).

Ord Minnett remains optimistic about the mining sector post-covid recovery. Market conditions for the iron ore sector are expected to remain strong heading into 2021.

Strong dividends and excess cash will be some key features of 2021, asserts Ord Minnett, helping to support capital management initiatives during the year.

The broker is especially positive about exposure to iron ore large caps like BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals Group ((FMG)).

Fortescue Metals Group has, in fact, been upgraded to Buy from Accumulate.

Gold: Under pressure

Gold started the year on a strong note but the jubilance was short-lived, with improving bond yield curves putting pressure on the precious metal. A higher AUD did nothing to help the situation and has led Ord Minnett to tone down its higher US$1,900/oz gold price forecast.

Even so, the broker highlights gold stocks have underperformed gold since November and consequently have lesser stretched valuations.

Among gold stocks, Ord Minnett likes Regis Resources ((RRL)), upgrading its rating to Buy from Hold while upgrading Evolution Mining ((EVN)) to Hold from Sell.

Some sector favourites include Gold Road Resources ((GOR)) and Newcrest Mining ((NCM)).

Lithium: Substantial upgrade over the medium term

lithium stocks have been having a field day on the increased demand outlook with shares of Pilbara Resources ((PLS)) rising by 200% since 1st November last year versus the ASX200 index’s puny 13%.

While increasing its medium-term prices by 24-30%, Ord Minnett prefers to keep its long-term prices unchanged.

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