Material Matters: Precious Metals, Copper, Aluminium And Fertiliser

This story features SANDFIRE RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: SFR

-Short positions in silver, gold increase
-Copper stocks underperform metal
-Aluminium a buy on dips
-DAP pricing improves
 

By Eva Brocklehurst

Silver led a precious metals sell off over the past week. Underlying moves on the back of US jobs data and commentary by US Federal Reserve chairman Ben Bernanke have revealed a definite bearishness, Standard Bank maintains. Net speculative length in COMEX silver dropped 670.3 tonnes, or 19.7% in percentage terms over the week. There was an increase in speculative short positions which has taken the total to 2.5 times the 5-year average, at 3,153.1 tonnes. Standard Bank analysts believe the short positioning is not a case for prices to move up again but does indicate a crowded trade.

Gold also sustained an unwinding of speculative long positions and this was the hardest fall in longs since early December, according to the analysts. Speculative shorts were added, but at a less aggressive rate at 14 tonnes, as opposed to the 45.9 tonnes of longs which were unwound. In the week, net speculative length for COMEX gold dropped 59.9 tonnes, erasing the 49.1 tonnes in long positions gained the previous week. This doesn't mean there's a case now to go short. From a risk/return perspective, the analysts believe that the value in being short gold has declined substantially and that the largest part of the decline in the gold price has already happened.

Gold also did not respond well to the US payrolls number, which came in better than expected on Friday. The unemployment rate dropped to 7.7% from 7.9%. The gold price lost US$20/oz on the news before bouncing back to around US$1,580/oz. The analysts note there appears to be strong buying support from physical purchases in Asia.

CIMB has become positive on copper stocks as they have underperformed the Australian dollar metal price since mid February. Sandfire Resources ((SFR)) and OZ Minerals ((OZL)) are the key stocks, underperforming 7.5% and 10.6% respectively. Sandfire rebounded in the second half of February, to be up 10% since the start of March, but OZ Minerals didn't. The broker has now revised valuations and upgraded OZ Minerals to Buy.

Despite rating both stocks now a Buy the broker believes they offer different investment propositions. Sandfire represents a positive long-term investment case, with exploration success required to underpin a mine life extension at DeGrussa. Ultimately, CIMB is confident the exploration program will be successful, but this is likely to take around 12 months to play out. Sandfire will, therefore, outperform on a 12-month view. On the other hand, OZ Minerals is generating strong cash flow from the Prominent Hill mine, which could produce around $250m in cash flow per year over the remaining life of the asset – about five years for the Malu pit. The broker expects OZ Minerals is also a long way towards funding potential development of Carapateena, given the state of the balance sheet. As the share price has underperformed, CIMB believes the stock represents a shorter term investment opportunity.

Macquarie notes the time is ripe for buying aluminium on dips. The value in buying aluminium comes as Chinese producers are struggling at current prices. A bounce in Chinese aluminium prices has raised speculation that the State Reserve Bureau may be resuming purchases. The broker suspects this would not be an overly bullish development as prices are reaching a point where downside is limited because of production costs, both in China and elsewhere. Despite a surplus, Macquarie estimates 35% of Chinese smelters are loss-making at current prices and the SRB may be intent on financing inventory for smelters rather than building stockpiles. The Chinese consumer will begin to import more refined aluminium should the LME price drop under US$1900/t. Macquarie believes this would reduce the supply surplus outside of China at a time when overall demand is also improving.

Phosphate pricing is showing some improvement. Goldman Sachs notes diammonium phosphate (DAP) was up US$14 a tonne to US$495/t in the first week of March. A rally in soft commodities, improving terms of trade for the US farmer and robust phosphate demand in the US should skew the risk for prices to the upside. The pricing is still below the broker's current assumptions for Incitec Pivot ((IPL)) in FY13, of US$520/t. A 5% change in the broker's average FY13 realised DAP price assumption would result in a 5.4% change in the FY13 profit forecast for IPL. North American November DAP inventories increased 36% or 130,000t on the prior month. Nevertheless, DAP inventories are now 10.9% below their 5-year average for this time of year. In the case of urea Goldman notes prices weakened, with Middle East granular down US$10/t to US$430/t. 
 

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