Material Matters: Gold Miners, Nickel And Oil

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– Australian gold producers relative to global peers
– Credit Suisse lifts nickel price forecasts
– Oil price estimates from Macquarie and JP Morgan revised lower

By Chris Shaw

Given recent volatility in gold prices, UBS has attempted to assess where Australian gold producers sit relative to global peers based on expectations for production, growth and costs. The analysis centres on producers with annual output of more than 250,000 ounces.

In terms of current year production Newcrest ((NCM)) is the Australian standout as the world's fifth largest producer, while the remaining Australian producers such as Alacer Gold ((AQG)) and St Barbara ((SBM)) make up a large portion of the tail.

The situation changes a little when production growth profiles are assessed, as Alacer jumps to near the head of the pack. This reflects an expected growth profile of 19% based on expectations of annual output of 800,000 ounces by 2015.

In contrast Newcrest's production should grow by around 9% annually through the next four years, which UBS notes is a little above the 7% average of the top-5 global producers by volume. UBS points out the risk is Newcrest delivers stronger growth than this estimate implies, as no potential production from the Wafi-Golpu project has been factored into assumptions.

Looking at costs, UBS notes Newcrest is on the right side of the ledger given it is one of the world's lower cost producers. UBS estimates cash costs for Newcrest of US$375-$425 per ounce in coming years, well below the average of US$575 per ounce. The other Australian producers in this analysis sit above this average.

From a capex perspective the bulk of the producers in this group are spending between US$60-$80 per ounce on exploration. Among the Australian plays, Alacer is above this at US$88 per ounce on UBS's numbers, while Resolute Mining ((RSG)) is below the range at US$50 per ounce.

To compare the global producers UBS has assumed flat pricing of US$1,900 per ounce for gold and US$40 per ounce for silver. Under such a scenario Newcrest comes in slightly above average, Alacer and Adamus Resources ((ADU) are trading broadly in line and Perseus Mining ((PRU)) and Beadell Resources ((BDR)) are trading below average. UBS notes this is due to the fact they are yet to commence commercial production.

From a global viewpoint UBS suggests that with Newcrest priced in-line with key global peers at present despite some ramp-up risks at projects such as Hidden Valley, Cadia East and Lihir Island, there is little scope for outperformance in the short to medium-term. This leads UBS to conclude Alacer should outperform Newcrest across such a timeframe, though both stocks are given Buy ratings.

In the nickel market, Credit Suisse is now more positive on the likelihood of a price recovery from early in 2012 given rising Chinese nickel pig iron costs and expansion projects outside of China falling short of original targets. As well, excessive production of stainless steel in China has now been redressed, so current consumption better reflects actual demand.

Nickel pig iron production in China is the key swing factor according to Credit Suisse, as this sector of the market is most affected by recent price falls. At the same time costs are rising, which could impact on production levels going forward.

From the perspective of market dynamics, Credit Suisse expects a modest nickel market surplus in 2012. Indonesia's decision to ban ore shipments from 2014 supports a more positive long-term view on the nickel price.

To reflect this, Credit Suisse has adjusted both shorter-term and long-term nickel price estimates. Forecasts for 2012 increase by 5% to US$9.75 per pound, for 2013 by 18% to US$10.60 per pound and for 2014 by 28% to US$10.90 per pound. The broker's long-term price forecast has increased to US$9.00 per pound from US$7.50 per pound previously.

The changes to nickel price estimates impact on earnings for Australian nickel producers, Credit Suisse lifting earnings estimates by an average of 50% in FY13-FY14 for Western Areas ((WSA)), PanAust ((PNA)), Mirabela Nickel ((MBN)) and Independence Group ((IGO)). Estimates for FY12 have fallen by an average of 14% as very short-term estimates for nickel prices have been lowered given current weak market sentiment.

The changes to earnings have impacted on valuations, which have risen on average for the four companies by 24%. Price targets have also been adjusted accordingly. With nickel equities having sold off heavily in the past few months Credit Suisse sees value in the sector, rating all four stocks as Outperform. 

These ratings are unchanged with the exception of Western Areas, which Credit Suisse has upgraded from Neutral previously given the new earnings assumptions imply valuation upside of around 30% from current levels. 

By way of comparison, the FNArena database shows Sentiment Indicator readings for the four stocks of 0.8 for Independence, PanAust and Mirabela and 0.5 for Western Areas. 

Turning to energy, both JP Morgan and Macquarie have lowered price forecasts in the sector to reflect both short-term market headwinds and changes to foreign exchange assumptions. For JP Morgan, short-term assumptions for the Australian dollar against the US dollar have been trimmed to US$1.07 for 4Q11 from US$1.09 previously and to an average of US$1.08 through 2012 from US$1.10 previously.

From the final quarter of next year the revisions have been in favour of a stronger Australian dollar, such that the average exchange rate forecast for 2013 has increased to US$1.05 from US$1.03.

In terms of changes to oil price assumptions, JP Morgan now expects Brent crude will trade in a range of US$100-$120 per barrel from the final quarter of this year through 2012. This sees the broker's forecast for 2012 fall to an average of US$115 per barrel, down from US$124 per barrel previously.

The change reflects weaker projections for economic activity levels and some positive political developments in Libya in coming months. In 2013 JP Morgan has lowered its Brent crude forecast to US$121 per barrel from US$130 per barrel previously. 

The changes to its oil price numbers has seen JP Morgan adjust earnings estimates across the energy sector, with appropriate changes to price targets. There are no changes in ratings, JP Morgan retaining Overweight recommendations on Santos ((STO)) and Australian Worldwide Exploration ((AWE)), Neutral recommendations on Oil Search ((OSH)) and Beach ((BPT)) and Underweight recommendations on Woodside ((WPL)) and Roc Oil ((ROC)).

For Macquarie, Brent crude estimates have been cut by 18% in 2012 to US$98 per barrel and in 2013 by 20% to U$95 per barrel. Forecasts for West Texas Intermediate have been adjusted lower by similar percentages.

The changes reflect Macquarie's view the global economic outlook has become more clouded in recent weeks, which is causing a flight to the US dollar. Oil demand growth should remain solid, but Macquarie now doesn't see a need for scarcity pricing to bring the oil market into balance.

Longer-term Macquarie expects the oil market will remain reasonably tight, with spare capacity at around 5% of demand. This is enough to see the broker maintain a long-term oil price forecast of US$88 per barrel for Brent crude.

As with JP Morgan, the changes by Macquarie mean adjustments to earnings estimates across the Australian energy sector. The changes have ranged from modest for the likes of BHP Billiton and Origin Energy ((ORG)) to more significant for the higher cost producers such as Roc Oil. 

In most cases target prices have been retained, though Macquarie has trimmed targets for the likes of Beach, Molopo ((MPO)) and Woodside. Ratings are unchanged with Nexus ((NXS)) scoring a Neutral recommendation and all other stocks under coverage being ascribed Outperform recommendations. 

Santos and Oil Search are Macquarie's preferred exposures among the large cap Australian energy plays. Among mid-cap plays Macquarie continues to see relative value in Horizon Oil ((HZN)), Carnarvon Petroleum ((CVN)) and Tap Oil ((TAP)). All three stocks are rated as Outperform. 

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