Material Matters: Oil, Copper, Gold And Gold Stocks

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-Stock trends in crude a concern
-Chinese demand dominates copper
-Crucial data ahead for gold
-Strong cash flows for Oz gold producers
 

By Eva Brocklehurst

Oil

Morgan Stanley suspects the market may be too excited over the early draw on US crude stocks. One-off draws can occur before May, which is the usual start of the seasonal drawdown. The broker observes features of the latest inventory draw which are unlikely to be repeated.

These include elevated refinery runs, low imports and abnormally low supply adjustments. Local demand in the US may not be enough to absorb the run-up in production, the broker contends. Meanwhile, a light refinery maintenance season should support production in north west Europe.

The temporary outage experienced in the North Sea, which caused a sharp rally in Brent spreads, does not necessarily imply upside for the price, or evidence of a faster recovery in the global imbalance, the broker maintains. Rather it reveals markets that are much more regionalised than many appreciate, even for a global benchmark like Brent.

Stock trends in Asia also worry the broker. Light distillate stocks remain elevated in many parts of Asia and China is increasingly running gasoline exports. Stocks have built counter seasonally and demand trends remain poor, Morgan Stanley observes.

Copper at CESCO

The annual copper conference in Chile turned out to be a bearish affair for brokers. The copper price was down 20% in 2015 and remains flat year to date with a lack of certainty over China's debt-led growth casting a pall over the event.

Morgan Stanley notes the main pitch was about cost reductions and the success to date. This is problematic in the broker's view, as most of the success was obtained from falling producer exchange rates and oil prices. Further cost reductions appear to be only achievable by large investments, which few can afford.

Morgan Stanley believes the miners need to do more to re-balance their market. As for China's growth outlook and what it means for copper, much depends on infrastructure investment by the Chinese government and not the property and consumer sectors.

The broker remains bullish on the copper price outlook, based on under-performing mine supply growth and subdued demand.

Macquarie agrees that Chinese demand dominated the discourse, with prevailing fears for further downside in prices. The broker notes the more bullish views were based on a tighter cathode market in Europe while the bears pointed to softening of spot concentrate terms.

There was much discussion at the conference about a large trading house selling a sizeable quantity of concentrate on the spot market. Concentrate terms have eased back following a surge of buying activity by Chinese smelters earlier in the year which caused terms to plunge.

Macquarie considers the spot treatment and refining charges (TCRCs) will be an important forward indicator of whether smaller mines are leaving the market because of low prices. Aside from a softening in spot TCRCs, there was no signals the broker could find for further weakness ahead.

Gold

The best outcome for gold, in Macquarie's view, would be for US data on inflation to be strong but China's data to be weak. US inflation data is due on Thursday and this figure, if higher, could be a potential catalyst for higher bullion prices. Attention will also be on China's March GDP and industrial production numbers.

The broker expects investors will increasingly look towards intermediate and junior producers for higher leverage to gold. With the Australian dollar gold price averaging $1,638/oz in the March quarter, Macquarie observes Saracen Minerals ((SAR)), Evolution Mining ((EVN)) and St Barbara ((SBM)) have all set the tone, reporting strong cash flow in preliminary production reports.

Commissioning continues at the Doray Minerals ((DRM)) Deflector project which is on track for first production in June. Saracen Minerals upgraded FY16 guidance for Thunderbox after better-than-expected production from the early stages of commissioning.

The fully quarterly is likely to be a meaningful catalyst for St Barbara, Macquarie maintains, as it will contain important upgrades on Gwalia deeps, the materials handling study and a review of Simberi, feeding into key decisions on the future direction of the business in 2016.

Canaccord Genuity has revised its forward pricing assumptions for gold, resulting in a material downgrade to Australian dollar gold price forecasts, with long-term price estimates falling by 7.0% to $1,799/oz.

The analysts note that the recent appreciation in the Australian dollar has not corresponded to a correction in equity valuations. Most stocks continue to trade at a meaningful premium to the broker's updated valuation.

Using a sector-relative approach to rating Australian dollar gold stocks the broker finds Beadell Resources ((BDR)), Northern Star Resources ((NST)), Regis Resources ((RRL)) and St Barbara all trade in line with its adjusted peer group average, justifying a Neutral rating.

Companies such as OceanaGold ((OGC)), Evolution Mining and Saracen Minerals all trade at a 9.0% premium to the average. The broker upgrades Evolution Mining to Hold from Sell and St Barbara is downgraded to Hold from Buy.
 

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