Material Matters: Philippines, Base Metals, Oil, And Stock Tips

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-Philippines ore ban unlikely near term
-Deutsche Bank finds copper compelling
-And highlights long-term plays
-Morgans seeks out oil prospects
-Bell Potter plugs Metals X
 

By Eva Brocklehursts

A ban on exporting nickel ore from the Philippines, similar to that which Indonesia imposed at the start of this year, is unlikely in the current congressional term in the view of those in the industry contacted by UBS. Elections are scheduled for March 2016. For legislation to be passed prior to this date it would require top priority listing by the President and there is no indication the current bill is being treated in this manner. UBS notes Indonesia's parliament gave the industry five years to become used to the idea before enacting the legislation, and the bill before the Philippines parliament proposes a five-year period of grace for investment.

China's imports of nickel ore from the Philippines have surged since the Indonesian ban and inventory at Chinese ports has held up. Given Philippines ore is generally lower grade than Indonesian ore, the contained nickel within the stockpiles is expected to decline over time. While the trade between the two continues to lift, UBS suspects the timing of nickel market tightness in early 2015 could be delayed. Still, further upside risk remains in place for the nickel price and UBS expects it to rise to US$10.00/lb in 2015.

Deutsche Bank's commodities team has run the ruler over long-term price forecasts for base metals. Capital intensity and real costs are expected to rise over the next 1-15 years as a result of declining grades, higher rent take, infrastructure challenges and increased project complexity. The analysts believe copper offers the most compelling fundamentals, with around 9mt of additional copper required to meet demand over the next 12 years. A 2.5-3.5% growth rate in nickel demand results in an additional requirement of 630-935,000 tonnes over the next 12 years. Long-term copper price forecasts are revised up 16%, zinc up 8% and nickel up 7%.

A number of companies under the broker's coverage either operate or plan to develop new projects which have long lives and therefore offer the most exposure to higher long-term prices. Deutsche Bank highlights OZ Minerals ((OZL)), PanAust ((PNA)), Newcrest ((NCM)), Sirius Resources ((SIR)) and Western Areas ((WSA)).

Morgans observes the mood was upbeat at this year's Good Oil Conference. The broker finds clear opportunities to invest in ASX-listed companies with assets in key hot spots both onshore and offshore and in conventional and unconventional projects. The hot spots most discussed were in Texas, offshore Western Australia, onshore Perth Basin WA, and offshore and onshore African projects, as well as the Australian east coast gas market. In the latter case, discussion centred around how companies are positioned to supply it.

Morgans' key oil picks which have upcoming developments which could be catalysts include Transerv ((TSV)), IPB Petroleum ((IPB)), New Standard Energy ((NSE)), Drillsearch Energy ((DLS)), FAR ((FAR)), Carnarvon Petroleum ((CVN)) and AWE ((AWE)). Energy sector services companies presenting at the conference were also upbeat, with most looking to expand and a number of European services providers intending to open offices in Australia to maintain a local presence. The broker considers Titan Energy Services ((TTN)) worth a peek, now that recent contract gains have enabled the company diversify outside of Queensland.

Metals X ((MLX)) has been a tin producer but is now set to become a significant gold producer through the ramp-up of both the South Kalgoorlie and Central Murchison projects. Bell Potter estimates earnings will grow by a compound 19% over the next three years and earnings and valuation are now most heavily leveraged to gold, accounting for around 73% of earnings in FY14 compared with nil in FY13. The Renison tin operations, re-commissioned in 2004, will taper capex requirements and the broker expects steady annual earnings of around $20-25m from Metal X's 50% share. The company's Wingellina nickel limonite project is being pursued, but Bell Potter considers the capital requirements will be a major hurdle to development and shareholder value could be best served by a sell down of the project.

Bell Potter retains a Buy rating and 30c target and believes there is potential for the stock to re-rate as it grows gold production to more than 350,000 ozs per annum from FY17, compared with FY14's 138,000 ozs.
 

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