Commodities | Dec 02 2022
This story features OZ MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: OZL
A glance through the latest expert views and predictions about commodities: critical minerals; 25 copper exposures and commodity indices.
-Lithium and other critical minerals
-25 copper exposures for the energy transition
-Rebalancing projections for commodity indices
By Mark Woodruff
Lithium and other critical minerals
The International Energy Agency estimates that demand for critical minerals will increase by more than 300% by 2030.
Critical minerals are essential metals and non-metals which include lithium, cobalt, copper, nickel, zinc and rare earth minerals.
Nickel and cobalt are important for long range electric vehicles (EVs), zinc is needed to build infrastructure for renewable energy generation and copper is pivotal in the electrification of energy systems, points out ANZ Bank.
As well as their importance for EVs and renewable energy generation, critical minerals are used in energy storage, transport, electronics, defence, agriculture and telecommunications.
ANZ points out Australia has an abundance of critical minerals and currently produces almost half of the world’s lithium supply, is the second largest producer of cobalt and the third largest producer of zinc.
Industry supply of lithium is limited, notes ANZ, in a demand environment where rechargeable batteries consume about three-quarters of world supply and EV battery demand has been rising sharply. Supply could be at risk not only due to scarcity but also from trade issues and other factors.
Despite a minor fall in lithium prices over the last few weeks on rumours of an EV production downgrade in China, ANZ observes prices are around record highs and should remain elevated, with perhaps some moderation.
By contrast, Morgan Stanley suggests a material lithium price correction is on the cards for 2023, due to decelerating demand growth. However, it’s thought a longer-term supply shortfall may become the bottleneck, which could ultimately slow the transition to EVs.
This broker raises its long-term lithium price forecast by 70%, to a still-below-consensus US$12,000/t, though the range of potential outcomes is wider than for any other commodity under Morgan Stanley’s coverage. Longer-term price risk is considered skewed to the upside, given the broker’s view of constrained supply.
Interestingly, the analysts suggest demand substitution is unlikely in the foreseeable future, as lithium remains the best metal to carry ions.
For the short term, Morgan Stanley expects a China carbonate price of US$67,500/t in the first half of 2023 and US$47,500/t in the second half, with the latter price suggesting -35% downside to the current spot price.
Apart from a general over-production of batteries in China, subsidies for battery electric vehicle (BEV) penetration will be partially phased out, which the broker expects will slow growth in 2023. Geopolitical and consumer affordability/inflationary issues are also expected to weigh.
Prima facie, current and potential projects suggest longer-term supply of lithium shouldn’t be an issue. However, Morgan Stanley points to complexities involved in extracting, and especially, processing lithium. Recent history has shown developing (greenfield) lithium brine/mineral projects is technically challenging and project delays have been quite common.
Apart from difficulties in unlocking supply in some first-time producing countries (notably Africa), the broker suggests headwinds may arise elsewhere from community pushbacks and permitting challenges. In addition, more projects will be run by inexperienced new entrants/junior miners, with sometimes unproven (at scale) extraction techniques.
Adjustments to older project data to incorporate lithium industry cost escalation also contributes to Morgan Stanley’s 70% upward revision to its long-term price forecast.
Underpinning Morgan Stanley’s supply shortfall thesis, its lithium supply forecast model indicates the global BEV market can only sustain a sales penetration rate of 33% versus the broker’s base case penetration estimate of 43%.
25 copper exposures for the energy transition
Canaccord Genuity sees structural demand growth potential for copper, driven by new energy technologies and the broader energy transition.
The broker highlights 17 emerging explorers/developers with exposure to this growth potential, but as yet do not fall under its research coverage.
For those companies within Canaccord’s coverage, readers may refer to the FNArena website for a summary of the broker’s latest research on producers OZ Minerals ((OZL)), Sandfire Resources ((SFR)) and 29Metals ((29M)).
Developers and explorers may also be found, and include Develop Global ((DVP)), Eagle Mountain ((EM2)), New World Resources ((NWC)), Peel Mining ((PEX)) and Titan Minerals ((TTM)).
Of the 17 emerging copper prospects identified by Canaccord, a research summary from other brokers may also be garnered via the FNArena website for AIC Mines ((A1M)), Coda Minerals ((COD)), Cyprium Metals ((CYM)), KGL Resources ((KGL)) and Sunstone Metals ((STM)).
The remaining companies identified by Canaccord are at different stages of development and may loosely be divided by region.
Those advancing existing projects domestically include Caravel Minerals ((CVV)) in WA and Carnaby Resources ((CNB)) near Mt Isa in Queensland. Hammer Metals ((HMM)) is also exploring around Mt Isa, where it has recently extended its flagship Kalman deposit.
Rex Minerals ((REX)) has one of the largest mineral resources among ASX-listed developers at its Hillside project in South Australia, while Hillgrove Resources ((HGO)) is developing its Kanmantoo copper-gold just 55kms from Adelaide.
Also in SA, Havilah Resources ((HAV)) owns the Kalkaroo and Mutooroo projects, while over in NSW, Magmatic Resources ((MAG)) is an early-stage explorer, which recently had success in discovering its Corvette prospect.
Heading off overseas, Canaccord notes exploration efforts by Alvo Minerals ((ALV)) in Brazil and the three projects being advanced by American West Metals ((AW1)) in North America. Cobra ((CBE)) has also recently uncovered copper mineralisation at its Ngami project in Botswana.
Xanadu Mines ((XAN)) has two advanced exploration projects in Mongolia, while Cobra ((CBE)) recently uncovered copper mineralisation in Botswana.
If you prefer Hot Chili ((HCH)), the company is undertaking a pre-feasibility study for its top-ten undeveloped global copper resource, the Costa Fuego project in Santiago, Chile.
Rebalancing projections for commodity indices
Citi plans to rerun its calculations of target weights for the Bloomberg Commodity (BCOM) Index and the S&P GSCI Index in January 2023, closer to rebalancing time, though makes some preliminary forecasts on flow impacts.
The BCOM index is a financial benchmark that reflects commodity futures price movements, while the GSCI index also serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time.
From an investor perspective, these types of futures tracking commodity funds are a cheap solution to gain exposure to commodities. During the rebalancing in January gainers will be sold and losers bought in order to reset the target weights.
Crude oil should have the largest target weight in the BCOM index in 2023 (at 15% for Brent and WTI combined), according to the analysts, followed by gold (14.85%) and Henry Hub natural gas (7.94%).
As natural gas has seen outsized gains, and thus has much higher live weights in both indices, Henry Hub natural gas will require a gigantic outflow of -$8.7bn to bring down its weights to be in line with the targets, notes Citi.
Meanwhile, Brent and WTI should see inflows of $2.7bn and $2.2bn, respectively.
The energy sector target weights for the GSCI Index should gain 8.8% year-on-year, offset by lower weights for all other commodity sectors, predicts the broker. This is not considered surprising as energy prices have been significantly outperforming all other commodity sectors, and target weights for the index are calculated on production value.
Industrial and precious metals, the two worst performing commodity sectors this year, should see the largest rebalancing inflows to bring weights back in line with target levels for both indices.
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For more info SHARE ANALYSIS: 29M - 29METALS LIMITED
For more info SHARE ANALYSIS: A1M - AIC MINES LIMITED
For more info SHARE ANALYSIS: ALV - ALVO MINERALS LIMITED
For more info SHARE ANALYSIS: AW1 - AMERICAN WEST METALS LIMITED
For more info SHARE ANALYSIS: CBE - COBRE LIMITED
For more info SHARE ANALYSIS: CNB - CARNABY RESOURCES LIMITED
For more info SHARE ANALYSIS: COD - CODA MINERALS LIMITED
For more info SHARE ANALYSIS: CVV - CARAVEL MINERALS LIMITED
For more info SHARE ANALYSIS: CYM - CYPRIUM METALS LIMITED
For more info SHARE ANALYSIS: DVP - DEVELOP GLOBAL LIMITED
For more info SHARE ANALYSIS: EM2 - EAGLE MOUNTAIN MINING LIMITED
For more info SHARE ANALYSIS: HAV - HAVILAH RESOURCES LIMITED
For more info SHARE ANALYSIS: HCH - HOT CHILI LIMITED
For more info SHARE ANALYSIS: HGO - HILLGROVE RESOURCES LIMITED
For more info SHARE ANALYSIS: KGL - KGL RESOURCES LIMITED
For more info SHARE ANALYSIS: MAG - MAGMATIC RESOURCES LIMITED
For more info SHARE ANALYSIS: NWC - NEW WORLD RESOURCES LIMITED
For more info SHARE ANALYSIS: OZL - OZ MINERALS LIMITED
For more info SHARE ANALYSIS: PEX - PEEL MINING LIMITED
For more info SHARE ANALYSIS: REX - REGIONAL EXPRESS HOLDINGS LIMITED
For more info SHARE ANALYSIS: SFR - SANDFIRE RESOURCES LIMITED
For more info SHARE ANALYSIS: STM - SUNSTONE METALS LIMITED
For more info SHARE ANALYSIS: TTM - TITAN MINERALS LIMITED