Material Matters: Price Forecasts, Base Metals And Gold Producers

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

-Large, diversified stocks remain key picks
-JP Morgan lowers base metal forecasts
-Favoured play among LMEs now lead and tin
-Gold costs remain a dominant theme
 

By Eva Brocklehurst

Citi is of the opinion that metal prices are now in a trading range and one that could last 1-2 years. Most commodity markets are likely to take a period of time to absorb the current excess supply because demand remains modest. Asset sales could be a feature which may provide upside for some stocks, but the broker observes there is some discrepancy between what the sellers want versus what buyers are willing to pay. The larger diversified stocks have downside support, based on dividend yields, while the pure base metals and gold stocks are the ones with limited downside protection. The broker believes earnings may be recovering generally but stock selection is important. Rio Tinto ((RIO)) remains the broker's top pick for UK-listed miners.

JP Morgan has revised the house outlook for base metals prices substantially lower. Copper price forecasts for 2013, 2014 and 2015 are lowered by 4.0%, 5.3% and 5.1% to US$3.34, US$3.30 and US$3.40 per pound, respectively. Aluminium price forecasts for the same three years are lowered 4.4%, 4.6% and 6.8% to US84c, US89c and US93c/lb respectively. In terms of nickel, forecasts are down 3.0%, 18% and 20% to US$6.82, US$6.21 and US$6.35/lb respectively.

Among Australian miners, the broker likes Fortescue Metals ((FMG)) and Rio Tinto as they are representative of the larger, quality, lower cost operators. Regis Resources ((RRL)) is the pick among gold stocks and PanAust ((PNA)) the preferred copper exposure. Over the next two years the broker believes copper prices will stay essentially flat, nickel will fall 7% and aluminium will rise 10%. There's been no change to the bulk commodity price forecasts, with iron ore price estimates for 2014/15 at US$115/105 per tonne.

JP Morgan has removed Iluka Resources ((ILU)) from the list of preferred stocks, given its recent strong run. The least preferred in the metals sector are Energy Resources of Australia ((ERA)), because of continued weakness in uranium prices, and Aquila Resources ((AQA)), where the economics under the brokers base case scenario for the West Pilbara project are found wanting. Alumina has been removed from the least preferred list as, while structural challenges continue, balance sheet issues are not considered problematic in the near term. Rex Minerals ((RXM)) has also been removed from this least preferred list as the risk weighting is reduced to reflect the recent signing of the MoU with a strategic player.

Meanwhile, Macquarie has polled investors at the LME base metals summit and was surprised that the metals favoured over a 12-month view were …lead and tin. Aluminium is the pick for short positioning, while copper, once favoured, has moved to account for one third of votes in the short category and zinc's share has fallen. The broker notes the general expectation is still for a commodity price recovery into 2014, with a little more conviction than in previous years. This signals to the broker that metals demand is keeping up, although there is more than enough supply to satisfy demand at present. The fact that participants in this year's survey expect some upside to prices highlights, for Macquarie, a confidence in the fundamental story that is persisting despite the growth in mine supply. Having said that, Macquarie points out that price expectations for copper, aluminium and nickel have been lowered while those for tin, lead and zinc have been raised.

Macquarie believes there's further upside for prices from 2015, when lack of investment will catch up with the sector. The broker had anticipated a slightly better mood running up to this year's summit but was surprised by the extent of bullishness. A recovery in developed world GDP is the main theme that underpins projections for stronger zinc, lead and tin. Nevertheless, a note of caution is warranted. Macquarie is mindful that, last year, prices were similarly expected to trade higher on a 12-month view and all but tin are currently trading lower.

Deutsche Bank believes the operating and capital costs among gold producers will remain the dominant theme in the upcoming September quarter production reports. Increased transparency should be in evidence as companies begin to report all-in cash costs, which give a better view on profitability. The broker expects Beadell Resources ((BDR)) Alacer Gold ((AQG)), Silver Lake Resources ((SLR)) and PanAust to deliver improvements while weakness is likely to be ongoing for Newcrest Mining ((NCM)), OZ Minerals ((OZL)), Medusa Mining ((MML)) and St Barbara ((SBM)). Among other miners, Western Areas' ((WSA)) grades are expected to improve over the next 2-3 years and the quarter should deliver a consistent report from the miner.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms