Material Matters: Iron Ore, Oil & Preferred Small-Cap Gold Stocks

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A glance through the latest expert views and predictions about commodities: Upside for large-cap iron ore miners; a potential turning point for oil prices, and preferred ASX gold developers and explorers.

-Positive catalysts for large-cap iron ore shares
-Citi sees a turning point for high oil prices
-Preferred ASX-listed gold developers and explorers
 

By Mark Woodruff

Positive catalysts for large-cap iron ore shares

Citi prefers iron ore exposures over base metals in the short term and believes large-cap ASX-listed iron ore miners can outperform.

The preference for iron ore is based upon a range of factors including different monetary settings in the US and China. 

While the US (self-sufficient in iron ore) is facing tight monetary conditions, China’s monetary policy is easing and is set to ease further, which will ultimately benefit steel production/consumption and iron ore demand, assesses the broker. China accounts for nearly 70% of seaborne iron ore demand.

China port inventories of iron ore have fallen from recent highs, note the analysts, and represent a relatively low 3.4 weeks of steel production cover.

Despite recent property woes, Citi also points to a positive turn in China’s property demand-supply rate of change, which has historically been a good lead indicator of iron ore pricing. Additionally, the broker’s China Monetary Conditions Indicator, a good six-month lead indicator for China’s broad-based industrial activity, registered 18% growth in June.

Moreover, Citi strategists point to a breakdown of the historical correlation between the Australian dollar and commodity prices, whereby the exchange rate is currently around -20% below where it would typically trade. 

On top of this currency tailwind for Australian mining companies, the strategists forecast a lower oil price for the fourth quarter of 2022 of US$73/bbl, which is expected to help moderate cost pressures. Over the same time period, iron ore prices are expected to rally back to US$125/t.

Due to an overall correction in commodity prices in July, Citi points out the Resources sector, dominated by Buy-rated BHP Group ((BHP) and Rio Tinto ((RIO)), along with the Neutral-rated Fortescue Metals Group ((FMG)), underperformed the Australian stockmarket in July.

South32 ((S32)) has been sold down given its lack of “defensive” iron ore exposure, and Citi suggests the company is now trading on an attractive multiple. Last week the broker set a $4.60 target price, while retaining its Buy rating.

Citi sees a turning point for high oil prices

Citi sees a potential turning point for low oil inventories and currently high oil prices.

Both Brent and WTI crude prices have been coming off, and the broker expects ongoing supply growth for the remainder of the year to outpace weak demand, and drive inventories higher.

After a fall in production in reaction to the outbreak of war in the Ukraine, Russian oil production looks to be rising again, and exports of crude and products are holding up longer than Citi had expected. This recovery reflects ongoing adjustment to new trade routes, such as Russian oil moving en masse to China and India, or, for example, diesel moving to Brazil.

Moreover, the second half of 2022 should see new drilling reassert itself in aggregate US oil production numbers, while OPEC is continuing to add supply, observe the analysts.

Non-OPEC growth is also adding to the broker's overall forecast production in 2022 and 2023, via contributions from Argentina, Brazil, Canada, Colombia, Guyana, Mexico, and Norway.

The macroeconomic backdrop and high prices are cratering gasoline demand, as the northern summer driving season hasn’t materialised, explain the analysts. Meanwhile, jet fuel demand has been suppressed by aviation bottlenecks, and diesel demand has softened in-line with reduced economic activity.

However, the return of high volatility and higher prices is only ever a few incidents away. Citi notes forecasts for an abnormally active US hurricane season, which could disrupt oil production, while internal politics could hamper supply for the so-called “Fragile Five”, namely Libya, Iran, Iraq, Nigeria, and Venezuela.

Canaccord slashes valuations for gold explorers and developers 

Twelve-month price targets for ASX-listed gold developers and explorers under Canaccord Genuity’s coverage have dropped on average by -24% and -26%, respectively.

These revisions follow the broker’s lower overall US gold price and Australian dollar forecasts, as well as changed cost and timeline assumptions for the developers and explorers, taking into account current inflationary pressures, supply chain constraints and labour shortages.

Higher capex estimates, higher operational costs and construction/production delays have emanated from a number of sources. 

By way of example, Cannacord lists a 60% rise over FY22 for the diesel price in Western Australia. Additionally, steel prices have risen 60% over 12 months, the cost to freight materials globally has climbed 400%, while drilling costs have increased by 15-20% in recent months.

For developers, the broker increases capital expenditure forecasts by 22% on average and life of mine (LOM) all-in sustaining costs (AISC) rise by 8%. 

From among six developer stocks under Canaccord’s coverage, Bellevue Gold ((BGL)) is considered a top pick with liquidity of $351m in the March quarter compared to remaining capex commitments of $248m. 

A low forecast AISC is also expected to help mitigate the impacts of any further potential cost pressures once operations are underway. The analyst forecasts first production will commence for Bellevue in the first half of FY24 and sets a $1.45 target price for the Speculative-Buy rated stock. 

The broker assigns the same rating to De Grey Mining ((DEG)) and likes the recent 25% increase for the Hemi resource at the Mallina Gold Project in Western Australia’s Pilbara region. Other developer stocks under coverage with a Speculative Buy rating are, Kingston Resources ((KSN)), OreCorp ((ORR)), Tietto Minerals ((TIE)) and Tulla Resources ((TUL)).

While the nine explorers under Canaccord’s coverage are labouring under increased drilling costs and a shortfall in skilled employees, they are each rated Speculative Buys. Foremost in the broker’s estimations is Predictive Discovery ((PDI)), with the Bankan Gold resource in north-east Guinea tipped to be on its way to becoming a Tier 1 project.

The broker’s remaining eight explorer stocks under coverage are Auteco Minerals ((AUT)), Breaker Resources ((BRB)), Challenger Exploration ((CEL)), Matador Mining ((MZZ)), Musgrave Minerals ((MGV)), Oklo Resources ((OKU)), Rox Resources ((RXL)) and Titan Minerals ((TTM)).

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