Material Matters: Coal, Precious Metals, Copper And Uranium

This story features GREAT NORTHERN MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: GNM

– Lost production supporting coking coal prices
– Price forecasts revised higher
– Who do investors prefer direct precious metals exposure?
– Likely support for copper and uranium prices

By Chris Shaw

With the loss of some 10-15% of annual supplies in the first part of this year due to adverse weather conditions and strike action, hard coking coal contract prices for the second quarter of 2011 settled at all-time record highs of US$330 per tonne.

Credit Suisse expects the prices achieved in the second quarter will carry on through the third quarter, thanks to ongoing shipment issues in both Queensland and Canada. Queensland is the more important, as Australia accounts for about 55% of the global seaborne hard coking coal market. By the final quarter of the year prices are expected to drift back to around US$280 per tonne on Credit Suisse's numbers.

Looking ahead, Credit Suisse has lifted hard coking coal price forecasts by 30% in 2012 and 2013 and by 13% in 2014. Forecasts now stand at US$313 per tonne this year, US$248 per tonne in 2012 and US$225 per tonne in 2013. Price forecasts for the likes of PCI and thermal coal have also been lifted, but Credit Suisse has not increased numbers here by the same magnitude.

The move to lift price expectations makes sense according to Citi, given the view Australian coal exports remain at depressed levels thanks to production lost year-to-date when compared to last year. This production is unlikely to be made up, as Citi notes the system ran last year at near capacity levels.

Citi now expects Australian coking coal exports of 140Mt this year, down from 159Mt last year. This reduced tonnage should support prices, especially given demand is expected to pick up strongly. Citi therefore expects premium hard coking coal will remain at more than US$300 per tonne for the rest of 2011.

There are also reasons to be relatively bullish on thermal coal, Citi noting this market as well has some supply side constraints and is enjoying strong European demand. This should combine to push prices above US$130 per tonne in the second half of 2011 on Citi's numbers.

As with Credit Suisse, UBS has revised coal forecasts higher to factor in prices staying stronger for longer so far this year thanks to the disruptions in Queensland. For the third quarter UBS is now forecasting a hard coking coal price of US$280 per tonne, up from US$250. PCI for the period is now forecast to average US$225 per tonne and semi-soft coking coal US$220 per tonne, up from US$205 and US$200 per tonne respectively.

In terms of how best to gain exposure to coal, UBS suggests the developers are the preferred option at present as there continues to be volume risks associated with the coal producers. As a result, UBS rates Aston Resources ((AZT)), Bandanna Energy ((BND)), Gujarat NRE ((GNM)) and Whitehaven Coal ((WHC)) as Buys, while Coal and Allied ((CNA)), Gloucester Coal ((GCL)) and Macarthur Coal ((MCC)) are rated Neutral. Coal and Allied has been downgraded from Buy previously.

In contrast, Credit Suisse has upgraded Macarthur to an Outperform thanks to the expectation PCI coal prices will remain above US$230 per tonne for the rest of the year. Even if prices were to fall, a decline of around 35% in PCI prices would still see Macarthur fair value on Credit Suisse's numbers. 

Elsewhere in the sector, Credit Suisse rates New Hope Corporation ((NHC)), Aston, Cockatoo Coal ((COK)) and Bathurst Resources ((BTU)) as Outperform, while Coal and Allied, Whitehaven and Gloucester score Neutral ratings and Aquila Resources ((AQA)) is rated as Underperform. 

Turning to precious metals, Deutsche Bank notes while silver prices have risen by more than 32% so far this year, the share price of Fresnillo, one of the world's largest silver producers, has actually fallen so far in 2011.

In Deutsche's view there are a number of reasons why investors are not as eager to invest in precious metal equities as in the metals themselves. For gold specifically, general reasons include poor earnings and production growth, cost inflation, political and technical risks associated with individual projects and a history of producers hedging production.

But Deutsche goes further with this analysis and sees some other potential factors that limits the attraction of precious metal equities. One is the ability to gain investment exposure via alternatives such as physical or related derivative exposure and exchange traded funds (ETFs), while for many investors Deutsche suggests there is simply a preference to own the actual metal rather than the promise of some future delivery.

If this were in fact the case, Deutsche suggests it would be possible to form the view the gold market is actually quite tight at present. This is because strong physical and spot demand are being accompanied by an increasing discount for future metal via the de-rating of precious metal equities. 

Where gold and silver differ is while gold performance is hampered by the availability of government stockpiles, there are no such issues in the silver market. This leads Deutsche to suggest it will be interesting to follow the relationship between relative underperformance of silver equities and what appears to be a backwardated market going forward.

Macquarie suggests the recent Rio Tinto ((RIO)) production report contained a few surprises, the major ones being lower guidance for production for both copper and uranium. While the copper shortfall reflects lower grades at Escondida, what this means to Macquarie is year-to-date 42% of a forecast disruption allowance for copper output globally of 720,000 tonnes has been achieved in only about one-quarter of the year.

This is a positive for copper prices as this suggests the market will stay fundamentally tight, supporting Macquarie's view the copper price will be higher by the middle of the year than it is now.

Lower grades also impacted on Rio Tinto's uranium output and this shortfall in annual terms is estimated by Macquarie to be equal to around 8% of annual uranium spot market volume. As with copper, this shortfall reduces the estimated global surplus for 2011, Macquarie suggesting this means it is more likely China will be in deficit if it continues to import material at current rates.

Macquarie expects uranium prices will remain well supported in coming months, though longer-term the expectation China will fill its requirements suggests prices on a longer than one-year basis are still likely to drop sharply.

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