Material Matters: Oil, Coal, Lithium & Rare Earths

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A glance through the latest expert views and predictions about commodities: oil and gas price forecasts; undervalued coal shares, lithium & rare earths continued momentum.

-The price of oil to rise above US$150/bbl?
-Coal shares not capturing higher prices
-Preferred lithium exposures
-ASX-listed rare earths stocks in focus

By Mark Woodruff

Oil above US$150/bbl?

Jarden sees several credible scenarios whereby the price of Brent crude oil exceeds US$150/bbl.

This comes in the wake of Russia's invasion of Ukraine followed by large-scale economic sanctions. The broker cautions we are some time away from understanding the implications of these sanctions on oil and gas supply, as well as upon supply chains.

One catalyst for a further rise in prices is an extension of sanctions by the US to include oil and gas, explain the analysts. Another risk is that Russia curtails oil and gas sales as a reaction to sanctions, which could see prices spike much higher.

The broker raises its average Brent crude price forecast to US$100/bbl in 2022, up from US$83.75/bbl, with a high-side scenario of around US$130/bbl and low side of circa US$90/bbl. The long-term oil price assumption remains at US$70/bbl, but the oil price is not expected to dip to this level until 2025.

Forecasts for Japan-Korea marker (JKM) and European gas prices are also raised to an average US$34/mmbtu in 2022, up from US$22.50/mmbtu previously.

As a result, Jarden’s valuations for Santos ((STO)), Beach Energy ((BPT)) and Woodside Petroleum ((WPL)) increase by 4.3%, 5.8% and 12.2%, respectively. 

Among the large caps, Woodside Petroleum is preferred by the analysts over Santos due to a higher exposure to global gas and spot LNG prices. Moreover, Woodside has the capacity to undertake capital management in the second half of 2022 and pay higher dividends (9.2% fully franked this year) versus 3.7% unfranked for Santos.

Meanwhile, Beach Energy stays as the broker’s preferred oil exposure outside of the large caps.

Undervalued coal shares

Macquarie points out that while spot thermal coal prices and spot metallurgical coal prices have risen to US$355/t and US$396/t, the valuations of some ASX-listed coal equities have not captured these prices.

The broker estimates equities are currently pricing in US$100/t for thermal coal and US$200/t for met coal prices.

Apart from global energy demand outstripping supply, spot prices have risen in reaction to Russia-Ukraine tensions, which pose a risk to Russia’s seaborne supply of coal, explains the analyst. Additionally, it’s thought many European countries that rely heavily on gas from Russia will now turn to coal.

Macquarie has an Outperform rating for Whitehaven Coal ((WHC)), Coronado Global Resources ((CRN)) and New Hope Corp ((NHC)) noting that all three have free cash flow yields of more than 120% at current spot prices.

The broker estimates a 10% change in thermal coal prices drives a 30% change in earnings for Whitehaven Coal, 25% for New Hope Corp, and only 2% for Coronado Global Resources. Meanwhile, a 10% change for met coal prices elicits earnings changes of 25%, minimal change and 50%, respectively.

Lithium and rare earths pricing

Macquarie has materially upgraded its lithium and rare earths price forecasts to reflect the current strength in spot prices.

Production guidance from major lithium producers has fallen short of the broker’s expectations, while rare earth market fundamentals have also remained tight, despite higher year-on-year quotas from China.

Demand growth is outpacing the supply response for both markets. 

Macquarie-compiled electric vehicle data for January reveal strong year-on-year sales. This is despite the on-going semiconductor-related disruption to production, as well as a decline in subsidies. 

Rising global sales of electric vehicles underpin the strong demand outlook for Neodymium and Praseodymium (NdPr), explains Macquarie, with increasing capacity expansion of offshore windfarms also a key contributor.

Similarly, the strong demand for electric vehicles could more than offset accelerating supply for spodumene and brine, explains the analyst. In addition, a slower than expected production ramp-up could present further price upside in the very near term.

Macquarie raises its forecast for the regional lithium carbonate price by 100% for 2022 and 2023, while estimates for the spodumene price lift by 30-50%. Meanwhile, the NdPr price forecasts rise by 12-24% for 2022-2025.

Lithium and rare earth shares 

The lift in Macquarie’s lithium and rare earths price forecasts drives strong earnings upgrades for lithium and rare earths producers. 

Apart from IGO Ltd ((IGO)), which is under research restriction, (though received material forecast earnings upgrades), the broker has an Outperform rating for all the following stocks.

The preferred lithium plays are Pilbara Minerals ((PLS)) and Liontown Resources ((LTR)) and the broker lifts its target prices by 14% for both to $4.00 and $2.50, respectively. Pilbara Minerals has the greatest exposure to expected price rises for spodumene over the next few months.

Meanwhile, the target prices for Allkem ((AKE)) and Mineral Resources ((MIN)) rise by 16% and 9% to $16.30 and $76, respectively.

The price upgrades for rare earths lead to an 11% lift in Macquarie’s price target for Lynas Rare Earths ((LYC)) to $14, which is the only pure-play rare earth company under its coverage. 

Finally, the broker raises its target price for Iluka Resources ((ILU)) by 3% to $13. While the company is primarily a mineral sands company, its exposure to rare earths is increasing via the Eneabba monazite project in Western Australia. 

Four rare earth stocks

Petra Capital believes investors should hold at least one ASX-listed rare earth stock in their portfolios as geopolitical factors should see the industry outperform.

The world has learned the value of a stable supplier of resources like Australia from Europe’s current experience of being reliant upon Russia for gas, the broker posits.

Given China produces a vast majority of the world’s rare earths, Petra Capital believes companies and investors will increasingly factor-in geopolitical risk into purchase decisions.

Potentially, the pathway to construction for many ASX-listed rare earth developer has improved with companies seeking offtake agreements from non-China rare earth mines. In addition, government funding may become more supportive.

In particular, China dominates the supply of NdPr and production of magnets. NdPr oxide is a rare earth material and the main revenue source for rare earth producers in the broker’s coverage of the sector. Its main use is the magnet sector, which is experiencing strong demand growth.

Petra Capital has a Buy rating for all four stocks under its coverage in the rare earths sector.

Arafura Resources ((ARU)) is one of few development-ready projects of similar scale available globally, according to the analyst, who sets a $0.36 target price. The company is readying its fully permitted Nolans Rare Earth Project in the Northern Territory.

The point of difference compared to peers for Australian Strategic Materials ((ASM)) is low-cost downstream processing, explains the broker. The company intends to produce rare earth metals, and other critical materials including zirconia and titanium. A $10.98 target price is set.

While listed on the ASX, Peak Rare Earths ((PEK)) is developing its Ngualla rare earth mine in Tanzania and Teeside refinery in the UK. The former is a world-class deposit with a high-value NdPr mineral suite, according to the analyst. The target price is set at $1.39.

Finally, should investors be seeking near-term production, Petra Capital has set a $0.09 target price for Vital Metals ((VML)), which is developing its Nechalacho Rare Earth Project in the Northwest Territories of Canada.

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