Commodities | Sep 11 2006
By Greg Peel
The vacuum created in the wake of rising metal prices has sucked up another broker. For metals analysts, the dilemma continues. Once upon a time metal price forecasts remained relatively static for a good period of time – now it’s just not the case.
To raise price forecasts to match spot prices and forward curves would be to blow pure-play producers’ (and even large diversifieds’) valuations out to astronomical levels, and experience dictates supply should eventually catch up and demand should eventually find its point of resistance. But not yet.
Thus Merrill Lynch has shifted up its metal price forecasts once more. Most are relatively small shifts that would be expected, but the real movers are nickel and silver.
The analysts have increased their nickel price per pound by 46% in FY07 to US$12.25, by 55% in FY08 to US$9.25 and by 37% in FY09 to US$6.50. The current spot price is US$13.41.
The result is some significant profit forecast movements, highlighted by BHP Billiton (BHP) adding 6-9% across FY07-09, and by pure-play, unhedged Minara Resources (MRE) jumping by some extraordinary numbers.
Minara’s profit has been increased across 2006 to 2009 by 56%, 60%, 97%, and 52% respectively. Valuation increases by 26%.
Merrills highlights that Minara has had some production problems, but is looking better from here. On current multiples it looks cheap, the analysts suggest, but they have not increased their target price of $3.90. BHP’s target also remains steady at $35.00.
(Were the analysts to apply the current nickel forward curve, BHP’s profit would grow a further 20-50%).
The analysts believe the nickel story is now one of potentially five years of deficit. Over the metal spectrum, they are expecting a 1-2 month price squeeze due to a turnaround in Chinese demand that may spark further price revisions from the market. All part of the super cycle, but then that cycle will also experience down years as well, the analysts warn.
2007 may well be a down year, they say, but don’t get too worried yet. Slowing US housing and generally weaker global growth would be the catalysts. The analysts have not yet changed their bullish view.