Material Matters: Uranium, Silver And Copper

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: ERA

– Reasons to remain positive on uranium
– Silver price risk to the downside
– Short-Term slowdown possible in copper
– UBS cautious on commodities in general short-term

By Chris Shaw

Current sentiment towards uranium is unsurprisingly negative, especially given the ongoing issues at the Fukushima nuclear plant in Japan. Despite this, BA Merrill Lynch remains of the view an upside price bias will return more quickly than expected by the market.

BA-ML's view is based on the expectation supply-side shortfalls will continue thanks to ongoing question marks in relation to producers. As an example, the broker notes this week alone 5.4Mlb of forecast uranium supply this year has been removed by two major mines. One is Energy Resources of Australia's ((ERA)) Ranger mine, the total reduction representing 3.7% of forecast total global supply in 2011.

On the demand side, BA-ML notes comments by Kepco of South Korea that nuclear energy remains the best option in terms of cost, safety and environmental benefits which support the view demand for uranium will remain solid in coming years. 

RBS Australia has a similar view of the outlook for uranium demand, this driven by the expectation China will have to continue with its nuclear plans given expectations of significant growth in electricity demand over coming decades.

By 2020, RBS estimates Chinese nuclear power capacity will hit 80GW and 8% generation share. Allowing for a slowing of reactor builds in both China and Japan, along with the closure of some reactors in Germany and Japan, RBS has pushed out its predicted supply deficit for uranium by one year to 2019.

Given a little changed long-term view, RBS has made no changes to its stock specific views. This means the maintaining of a Hold rating on Paladin ((PDN)) and a Sell on ERA. RBS prefers exposure through more diversified plays such as Rio Tinto ((RIO)) and BHP Billiton ((BHP)), both of which are rated as Buys.

Turning to silver, RBS notes precious metals consultant GFMS has cautioned on silver prices in their latest “World Silver Survey 2011”. GFMS's concerns stem from the fact a fair proportion of recent money going into silver is speculative in nature, meaning it could just as quickly quit the silver market if conditions change.

GFMS is also concerned silver prices have moved strongly ahead of the gold price, as there appears little to justify a move to an even lower gold:silver ratio. Industrial demand will be a key indicator for silver, as GFMS suggests any sign this measure is faltering could trigger a major correction in the silver price. 

RBS shares this cautious view, suggesting price risk for silver at US$41 per ounce is firmly to the downside. As RBS notes, the silver market at present has a significant supply surplus, making the metal price reliant on sustained investment flows. 

Given silver prices have risen more than 130% since the middle of last year, RBS suggests investors are unlikely to be willing or indeed able to take up enough metal to push the silver price to even higher levels.

In base metals, Deutsche Bank sees scope for some downward pressure on copper prices in May and June given an expected summer slowdown in economic activity. As prices decline, re-stocking in China in particular should then drive a pick-up in prices during the September quarter.

Overall in 2011, Deutsche estimates copper will be in deficit to the tune of around 500,000 tonnes. This supports an average price forecast for the year of US$4.61 per pound, rising to an average of US$5.22 per pound in 2012. By 2015, Deutsche expects copper prices will step down to a level in-line with the broker's long-term forecast of US$2.27 per pound. 

With respect to the copper stocks in Deutsche's Australian coverage universe, value is seen in both Sandfire Resources ((SFR)) and PanAust ((PNA)). Both stocks are rated as Buys, Sandfire given the potential of the DeGrussa project, which will be one of the highest grade copper mines in Australia. 

PanAust is also set to create value by lifting production to around 100,000 tonnes of copper and 200,000 ounces of gold per annum by 2014, this as new projects such as Phu Kham and Ban Houayxai either come on-line or are expanded. 

Elsewhere in the sector, Deutsche rates Oz Minerals ((OZL)) and Discovery Metals ((DML)) as Holds, while the broker is restricted at present from offering a rating on Equinox ((EQN)). The FNArena database shows Sentiment Indicator readings of 1.0 for Sandfire, 0.8 for Discovery Metals, 0.4 for PanAust and Equinox and minus 0.3 for Oz Minerals.

While Deutsche Bank sees scope for some copper price weakness in the second quarter, UBS has extended this to a cautious view on commodity prices in general for the period. The combination of a global slowdown, tensions in the Middle East, a normalisation in Fed policy and the disruptions caused by the disaster in Japan are all factors threatening a pullback in what is already a benign market.

Relatively lacklustre demand from China is also likely in coming weeks, which implies potential for better buying opportunities during the northern summer. UBS maintains a structurally positive view on the commodities sector.

Taking a three-month view, UBS's order of preference is the precious metals and gold in particular, then bulks and especially thermal coal. Base metals are the broker's least preferred commodity class on such a timeframe.

A review has seen some modest changes to commodity price forecasts, UBS lowering base metal forecasts by an average of 5.0% and lifting bulk price forecasts slightly to reflect what has been a prolonged wet season in Australian producing regions.

The changes have flowed through to minor changes in earnings estimates for both Rio Tinto and BHP Billiton. Rio's estimates have been trimmed by 2-3% in 2012/13, while BHP's forecasts have come down by 3.3% in FY13. 

UBS rates both BHP and Rio Tinto as Buys, while the FNArena database shows respective Sentiment Indicator ratings for the two companies of 0.9 and 1.0.

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