Commodities | Mar 30 2021
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A glance through the latest expert views and predictions about commodities: bulks; gold; and lithium
-Strong momentum in major miners likely, even if iron ore eases
-Gold prices expected to strengthen longer term as inflation builds
-Recovery in lithium gaining momentum
By Eva Brocklehurst
Major commodity stocks are down -18% on average from their respective 52-week highs and JPMorgan envisages downside is now priced in. Importantly, reflation dynamics and a strong global recovery should underpin miners and the broker remains Overweight on the sector.
Moreover, JPMorgan suspects major mining stocks could perform despite headline commodity weakness, even though their correlation to iron ore remains high. Numerous episodes are cited where stock performance has diverged from the trajectory of the material.
Macquarie incorporates stronger demand and upgrades iron ore, manganese and thermal coal forecasts for 2021 by 18%, 22% and 17%, respectively. This has transformed the earnings outlook resulting in upgrades for South32 ((S32)), Jupiter Mines ((JMS)) and Mount Gibson Iron ((MGX)) to Outperform.
The broker also highlights the outlook for both aluminium and silver have transformed the cash flow prospects of South32, and this stock is now trading at a free cash flow yield of around 10%, although lacks the near-term earnings upside of the iron ore producers.
In iron ore, a buoyant pricing environment provides strong upgrade momentum although there is minimal upside now to the broker's FY21 forecasts under a spot price scenario.
For FY22 a spot price scenario generates 84% higher earnings for Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) and 55% higher for BHP Group ((BHP)) on the broker's numbers. Macquarie reiterates Outperform ratings on all three.
In the mid-cap bulk miners the broker prefers Mineral Resources ((MIN)) and Champion Iron ((CIA)), as both have upside risk at spot prices and are planning to double iron ore production. Mineral Resources also has exposure to lithium, as Kemerton is expected to start production in the next year.
Yet Morgan Stanley expects downside to forward iron ore prices, highlighting the asymmetric impact of China's steel production cuts. The broker believes China's environment-related curtailments could tighten the steel market, expecting production there to decline -0.3-2.3% in 2021, instead of another year of growth.
This will tighten the seaborne market significantly and require higher steel prices before producers outside of China lift production. In turn, Morgan Stanley anticipates headwinds for iron ore and forecasts a price of US$160/t in the second quarter and significantly lower at US$100/t in the fourth quarter of 2021.
With iron ore coming off a high the price of other steel making ingredients such as metallurgical (coking) coal remains relatively low. Morgan Stanley notes seaborne metallurgical coal is much more exposed to the market outside of China than iron ore.
A rebound in steel production ex-China should therefore push the price up from the current lows caused by China's import ban on Australian coal. The broker forecasts an Australian hard coking coal price of US$140/t in the fourth quarter.
In contrast, a weaker outlook for metallurgical coal prices drives a -61% reduction to the broker's 2021 earnings for Coronado Global Resources ((CRN)) while modest upgrades to 2022-25 estimates reflect a strong boost in thermal coal prices.
Macquarie also likes the sulphate of potash developers within its bulk commodities coverage, and in this regard Mineral Resources is the preferred pick. Furthermore, Salt Lake Potash ((SO4)) and Kalium Lakes ((KLL)) are fast approaching first production and there is material upside.
Credit Suisse has reduced its 2021 gold price forecasts to US$1,900/oz and 2022 to US$2,100/oz. A reduction in risk aversion has led to a drop in gold price expectations, although long-term structural support still exists.
Hence, Credit Suisse expects short-term gold prices could remain under pressure, amid expectations the US Federal Reserve will raise nominal rates before 2023. The US Treasury yield curve has steepened considerably in recent weeks despite the Fed's commentary signalling near-zero rates through to 2023.
Yet rates appear destined to be below money supply growth, given government fiscal deficits, which in turn will fuel inflation and boost demand for assets such as gold, in the broker's view.
The Fed anticipates 2021-23 inflation rates of around 2.0-2.2% and as a result Credit Suisse expects gold prices will strengthen as inflation builds, while bond rates are capped through Fed intervention.
The main risk is if the Fed suddenly becomes hawkish and actually raises rates. In the gold sector, Credit Suisse considers the most compelling value opportunity is Northern Star Resources ((NST)) which offers 27% upside to its base case valuation. In the middle of the sector Regis Resources ((RRL)) and St Barbara ((SBM)) offer the most attractive value.
Macquarie continues to prefer Evolution Mining ((EVN)) and Northern Star, as both offer superior production growth. Evolution Mining also has strong copper exposure, providing some insulation in a weak gold price environment.
The broker reduces earnings forecasts for the gold sector to reflect a stronger outlook for the Australian dollar and Capricorn Metals ((CMM)) is upgraded to Neutral following recent share price weakness while other recommendations are unchanged.
Morgan Stanley expects downside for gold and silver into 2022 and no longer anticipates a weaker US dollar, agreeing the risk is if real yields move higher into 2022 with potential upside to the US dollar as the US recovery outpaces other markets.
The broker suggests rising bond yields and a rebound in the US economy are putting pressure on the gold price along with strong equity markets and envisages ongoing support for gold in the US$1700-1750/oz range but also a likelihood it will drift lower over the rest of 2021.
Morgan Stanley expects silver could outperform relative to gold but there is ongoing risk to the downside over the rest of 2021 as a recent failure to break higher signals the gold price, real yields and the US dollar are dragging on silver.
JPMorgan assesses a recovery in lithium demand and price is gaining momentum. As the market tightens, sourcing lithium is being prioritised over grades. The broker envisages opportunities in the sector now that stock prices have pulled back.
The view is reinforced by the increasing importance of strategic supply and the carbon footprint of production for the electric vehicle industry. Moreover, JPMorgan suggests this has ramifications for all producers of EV raw materials such as lithium, copper, nickel, cobalt and graphite.
The broker's preference in the sector is IGO Ltd ((IGO)) while Galaxy Resources ((GXY)) and Orocobre ((ORE)) are upgraded to Overweight. Assessment of the former now includes James Bay and more battery grade at Sal de Vida.
JPMorgan is Neutral on Mineral Resources, ahead of developments on its iron ore projects, and Underweight on Pilbara Minerals ((PLS)), as its valuation appears stretched.
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