Material Matters: LNG, Taxes, Nickel And PGMs

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– LNG projects approaching critical decisions
– Global mining taxes a concern
– Citi updates metal views
– PGM upside

By Andrew Nelson

Last year was a tough one in the LNG space. There were five significant cost and/or schedule blowouts at major projects, while the Australian energy index fell 7%. Analysts from BA-ML admit that while at face value the outlook for the 2013 LNG market is just as challenging as last year, it does see some rays of hope.

The broker points out that there are currently five LNG projects that are approaching critical decisions and with the current capex mood amongst investors being quite restrictive, the broker sees a good chance of some project redirection, which could prove good news to both third party servicers and the project owners as well.

While the broker’s outlook for the US and Europe is less than constructive, the broker does see healthy growth still coming from emerging markets. China will remain a strong buyer, with the broker expecting a gas consumption lift towards 9.2Tcf/year by 2015. Ongoing manufacturing expansion in India, South Korea and Taiwan also bodes well for increasing energy demand, especially given India’s domestic supply issues and the likelihood developing Asia will continue to develop. Japan is also expected to provide support, with it likely to maintain its currently high levels of LNG demand.

Given these trends and the fact that the US and Europe will eventually come back to the market strongly, the broker expects LNG demand will grow by 6% a year out to 2020.

Yet despite LNG demand growth expected to remain healthy, the broker thinks Australian projects are looking a bit thin at best. These include Browse, Arrow, Equus, Scarborough and Sunrise. BA-ML thinks these lower quality projects need to start thinking about alternatives, or risk permanent deferral if they are bought out by big name competitors.

However, the broker also sees some good looking projects, noting PNG LNG T3 and Gorgon T4 are highly likely to progress to the next stages of development. BA-ML cites quality resources, solid  infrastructure synergies and sound economics as the driver.  The broker not only sees the projects as being the best amongst peers, but because of the tough year that 2012 was, the broker believes these projects remain well supported despite the prospect of US competition. 

The broker believes that the PNG LNG is the highest quality project in the region, which reinforces its preference for Oil Search ((OSH)) in the space. BA-ML sees return on capital lifting to 13.5% and then higher as further trains are added. Amongst the smaller plays the broker likes Roc Oil ((ROC)) given solid cashflow and expected production increases in the year ahead. Also, Horizon ((HZN)) is liked because of the catalysts provided by its PNG selldown, while Karoon Gas ((KAR)) is sitting on an increasingly valuable looking Poseidon.

Meanwhile, analysts from Goldman Sachs are becoming increasingly concerned about the moves afoot in a number of countries to increase taxes on the mining sector. Right now, the broker notes the average global royalty is around 4%, with iron ore at 7.7% and coal at 5.9% the most heavily taxed commodities.

Royalties are just part of it. Don’t forget profit sharing taxes and corporate taxes that add to the total tax payment. All up, Goldman’s estimates the average tax bill for miners is around 39%, with Australia above that at 44%. Countries like Mexico, Russia and Chile are far more favourable, but the broker sees a real risk these and others may move to bring their takes up towards the global average.

The good news is the broker notes Australian listed companies for the most part have fairly limited exposure to these regions. Rio Tinto ((RIO)) has the most at around 26% of revenue, while BHP Billiton ((BHP)) draws about 18% and Newcrest ((NCM)) around 15%.

However, there is another risk. The broker notes that the total tax payable by miners remains well below that of their oil peers and the government could well look to close that gap. This would imply 10%-15% increases.

Analysts at Citi have taken some time to revise a number of commodity price assumptions, with China expected to downshift to a lower-paced rate of growth, while extra product also hits the market from a number of long dated projects.

The big changes for 2013-14 forecasts are in nickel and gold, although there are also long term changes to platinum and palladium. After the revisions, Citi is bullish on palladium and nickel and bearish for silver, gold, copper and lead. As such, Citi has lifted its long term prices for palladium by 13.3% to US$680/oz and $775/oz for 2013.

However, the broker trims its nickel price assumptions by 8.6% to US$19,890/t for 2013 and by 7% to US$22,725/t for 2014. The reason Citi remains a fan of nickel despite the lower prices has to do with a plague of outages at major sites in Brazil like Vale's Onca Puma and Anglo American's Barro Alto plants. Citi also notes Vale continues to struggle in New Caledonia. The broker also notes supply issues at Lomo de Niquel in Venezuela and the closures of Nicaro in Cuba and the Yuzhuralnickel plant in Russia.

On a worst case scenario, the broker thinks we could see a 70-80 ktpa shortfall versus planned production for this year, depending on how things pan out. Also, stainless steel makers are thought to be quite short on nickel in Europe, North America and also China. Thus, the broker expect some level of restocking next month, with overall stainless production expected to lift by 5%-7% in 2013.

One of the main drivers of the broker’s preference for palladium is the expectation for an increasing deficit market, mainly due to growth in light vehicle production in China and the US. The broker notes the sheer size of these two markets combined point to a significant uplift in demand, despite a muted economic growth environment.

The broker has also upgraded its 2013-16 platinum price assumptions a little, but notes the current supply deficit should be short lived. What’s funny is the broker expects the higher platinum prices will actually be what leads to lower platinum prices.

Citi explains: 1) higher prices will weigh on price-elastic Chinese jewellery demand, thus higher prices equal less demand. 2) higher prices mean more catalyst recycling and thus more supply and lower prices. 3) higher prices see producers sell down stock piles, thus more supply again. Citi’s 2013 and 2014 prices are US$1700/oz and US$1775/oz.

The broker’s silver price forecasts remain unchanged, although gold price forecasts for 2013 and 2014 are cut by 4.2% to US$1675/oz and 0.2% to US$1653/oz respectively. Citi’s 2013 lead price forecasts are lifted a little to US$2115/t, while 2013 copper and aluminium forecast remain pretty much unchanged at US$7695/t and US$2100/t respectively.

Lastly, analysts at Deutsche have a tip for you. The broker is expecting a modest deficit in the lead market in 2013, while at the same time seeing a chance demand could unexpectedly lift given the prospect of adverse weather conditions in China. This has the broker thinking the lead market could be one of the more attractive long opportunities this year.  Buy on weakness, says Deutsche.
 

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