Material Matters: Base Metals, Nickel, Tin And Iron Ore

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-Nickel deficit pushed out
-OZL a top pick in copper
-Myanmar tin supply grows
-Testing break-even in iron ore
 

By Eva Brocklehurst

Base Metals

On the back of softer US dollar nickel forecasts for 2015, down 9.4% to average US$23,875/tonne, Citi is still bullish on nickel. The Indonesian ban on exports did not lead to an immediate drop in nickel inventories nor the price spike that was expected in 2014. The expected deficit in nickel has now been pushed further into the future. In copper, lead and zinc, Citi's forecasts are relatively unchanged. The broker remains relatively bullish on copper and lead. There is currency relief at hand for domestic Australian producers from FY15, given higher Australian dollar base metal prices compared with the broker's previous estimates.

Citi has upgraded Sirius Resources ((SIR)) to Buy from Neutral on valuation, after its shares fell 30% from their six months highs on the back of the declining nickel price, creating significant value. The company's first concentrate from Nova is expected to coincide with an Australian dollar nickel price peak in 2017. Independence Group ((IGO)) is liked for its exposure to a diverse portfolio, including the broker's only coverage on lead and zinc -and it generates cash. OZ Minerals ((OZL)) remains the broker's top pick in copper. Western Areas ((WSA)) is the preferred nickel exposure.

Morgans believes fundamental value is emerging in OZ Minerals and Sandfire Resources ((SFR)). OZ Minerals has the necessary high quality and well managed assets, with low operating costs and a mine life beyond 2020, enabling it to withstand the current market turmoil. Morgans retains an Add rating on OZ Minerals, a positive aspect being the development of Carrapateena as prospects are strong for a sale of a stake in the first half of 2015. The broker finds early signs of a potential loosening of the supply-demand balance in copper but acknowledges the market is tight.

Despite a declining trend in China, demand growth rates continue to outstrip supply, while inventories are at multi-year lows. While retaining a preference for OZ Minerals, Morgans notes Sandfire is also now more attractive. The company was under some production pressure following recent water inflow into DeGrussa underground but the sell off in its shares has now offered a value opportunity.

Nickel

Nickel laterite ore output in the Philippines has surprised on the upside following the raw material export ban from Indonesia. Credit Suisse's base case is predicated on China sustainably producing 350,000tpa of nickel in nickel pig iron, supported by Filipino mining for at least five years. This would ensure a balanced nickel market in 2015 and modest deficits in 2016 and 2017. Given higher costs for treating the Filipino ore, Credit Suisse estimates a mid-term nickel floor price of US$18,000/t for China. The deficits may drive prices higher eventually, to US$20,000/t in 2016. One caveat to the broker's base case is that Chinese customs data may be incorrect and there is a risk that imports are higher than reported. A 30% uplift in Filipino imports would eliminate the broker's base case deficits.

Tin

The focus of the tin investment seminar in London was on the challenges the market faces in the short term. Participants were cautiously positive in the longer term. Discussion was centred on the sharp increase in supply coming from Myanmar over the past two years. This has pushed back expectations for when new mine supply will be required. China has been taking a large and growing supply of raw material from Myanmar, which Macquarie believes has boosted Chinese production of metal.

The majority of tin mining in Myanmar is in the north, near the Chinese border, where government controls are limited. Macquarie assumes the Chinese are the sole buyers of this output and are likely to be getting a good deal. Traders report some of the material might not even be assayed before shipment but simply priced on sight. One area where output is likely to fall is Indonesia, as export controls tighten, but Macquarie suspects some of the larger projections about the size of this reduction are optimistic. On the demand side, the broker notes conditions are positive and consumption of tin is expected to grow at a compound 2% over the next five years.

Iron Ore

Bell Potter is estimating break-even pricing for Australia's junior iron ore miners will be tested in FY15. Typical seasonality has persisted in recent months, exacerbated by an increase in supply from the major miners. There is yet no sign of Chinese re-stocking. Chinese port inventories have trended down, which supports a recovery, while domestic iron ore output is likely to fall in the short term from seasonal factors. Steel inventories at major centres are low. Bell Potter has downgraded iron ore prices estimates to US$80/t for 2015-17. With break-even for the remainder of FY15 at US$77/t for BC Iron ((BCI)) and US$82/t for Atlas Iron ((AGO)) the broker assumes these two are now cash flow negative. Bell Potter downgrades BC Iron to Hold, Speculative and adds a Speculative risk rating to Atlas Iron's Sell rating as well.
 

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