Commodities | Jan 18 2013
– Molybdenum to push higher short-term, then possibly collapse
– Short and long-term copper prices lifted
– Goldman Sachs turns a bit sour on gold
– Platinum prices to push higher on falling supply
– Deutsche names its favourite unconventional energy plays
By Andrew Nelson
Let’s have a quick talk about Molybdenum, which is a common by-product of copper production and a key product for a number of primary producers. This element forms hard, stable carbides in alloys and the bulk of world production is put towards making numerous different types of steel alloys, including high strength alloys and superalloys.
Analysts from Macquarie note the past couple of years have not been good for molybdenum producers. Oxide prices have fallen from near US$18/lb to as low as US$10.70/lb in August 2012, with many primary producers losing money at current levels.
However, over the past few months prices have started to stage a steady, if slow rally, with current prices almost back up to US$12/lb. For that we can thank a downturn in lower priced Chinese exports, with the broker estimating Chinese costs in the range US$8-$13/lb.
Macquarie thinks the recent trend of rising prices can be maintained. The broker explains Molybdenum supply has been in surplus since 2007, back when the price averaged US$30/lb. However, it is starting to look like there will be an actual supply deficit in 2013 and 2014, which would be favourable for prices.
It’s not time to get too excited, as the broker notes there is still plenty of excess stock to be soaked up by the market. This has the broker expecting prices to be in the US$13-14/lb range by mid-year. However, this blip is expected to be short lived, with Macquarie seeing “storm clouds” on the medium-term horizon in the form of a large pick up in supply from the second half of 2014 onwards as higher production from a number of the world’s biggest copper mines ramps up.
In other words: there will be a limited window of opportunity.
From 2015 onwards, the picture is starting to look even uglier, with the broker noting the only hope is that booming Chinese demand will eventually push China into becoming not just a net, but large net importer.
Switching to gold and copper, a recent note from Goldman Sachs saw it lower its short-term to medium term gold prices forecasts. 2013 drops just a dollar to US$1810/oz, while 2014 is down to US$1750/oz from US$1811, while 2014 has been pulled back to US$1617/oz from US$1922.
The flow through for domestic producers is negative, of course, although the broker notes the fall in earnings through the forecast period on these lower prices won’t be enough to offset all of the gains from a higher long-term price, which has been lifted to US$1200/oz from $913. Still, given Goldman Sachs’ bearish view on mid-term gold prices, it has lowered its target gold stock multiple to 11.5x P/E, which is now in-line line with base metal stocks, with the de-rating in gold stocks over the past couple of years expected to continue.
The good news, if you want to call it that, is the broker also notes there is some significant volume growth on the cards for many companies over the next couple of years. This, at least, will offer some offset against the lower prices, otherwise target price cuts for gold stocks would be severe.
Conversely, the broker has lifted its near term copper price forecasts. The 2013 number is unchanged, but 2014 is up US11c to US$3.29/lb. 2015-17 forecasts see slight cuts, but the broker’s long-term price has been increased to US$347/lb from US$228. The sector impact is not as nearly straight forward, with the increases having varied impacts depending on current estimates of remaining mine life. Still, the broker notes that for companies guiding to earnings growth during 1HCY14, there would be a positive price target impact, which will help offset the lower price forecasts from 2015-17.
Switching our focus to platinum, Macquarie reports that the price ran up earlier this week after the world’s largest platinum producer, Anglo American Platinum, said it would cut platinum production by 400,000/oz a year. A cut was expected, but not what adds up to about 7% of global supply.
While there are a few political obstacles to overcome in South Africa before the plan can be implemented, once it is, the broker expects to see building supply deficits for the foreseeable future. Thus, the lost supply capacity turns the broker very bullish and it now forecasts average price of $1750/oz for platinum in 2013.
Macquarie also cautions to not get too carried away, noting Amplats' cut to production is because of weak platinum demand and prices. The broker sees a good chance the recent rally in risk assets could well fizzle out just like it did in 2012. And Europe, where most platinum ends up, doesn’t have a lot of cash to spare.
While 2012 might have been a pretty tough year for energy companies, with flattish crude forecasts for the year ahead not helping matters, analysts at Deutsche Bank still like the look of a few Australian “unconventional” energy plays. Last year, these unconventionals posted nice returns on strong production and reserve growth, but also on a de-risking of the emerging shale operations. With these concerns now lessened, the broker sees a good year ahead for Aurora Oil & Gas ((AUT)), Drillsearch Energy ((DLS)) and to a lesser extent Senex ((SXY)).
Aurora is the broker’s top unconventional sector pick. Deutsche is very positive on the company’s Eagle Ford position and expects it will help deliver sector-leading production growth and strong valuation accretion once down-spacing results are realised sometime early this year. The broker expects to see 123% production growth in CY13, with a good chance for more depending on well additions. And with partner Marathon Oil talking up the prospects, the broker sees a good chance.
In the number two spot is Drillsearch, with Deutsche expecting production growth in the range of 275% or better in FY13. Adding to the argument is some substantial reserve upside and a leading position in Cooper Basin shale. Senex is the third on the list, with the broker liking its Western Flank oil and southern Cooper unconventional exposures, but noting the upside potential on offer is already in the price at current levels.
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