Commodities | Jul 12 2023
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Brokers look forward to miners and energy producers releasing quarterly updates, while also identifying their Best Ideas and sector favourites.
-Costs remain a key focus for the upcoming quarterly production updates by miners and energy producers
-Jarden believes supply cuts prevented Brent oil falling to US$50/bbl
-Expectations for the June quarter and FY24 guidance
-Evolution Mining nominated for gold performance and copper exposure
By Mark Woodruff
It has reached that time of year when brokers not only anticipate likely June quarterly updates for the Australian Resources sector, but equally await first time guidance by many for FY24.
The trajectory for costs across the industry is uppermost in the thinking of most analysts.
Despite the possibility of volume growth in FY24, Barrenjoey believes year-on-year costs will likely remain high for the sector, and UBS suggests investors should not expect a “step down" in forward looking cost guidance.
Across commodities, UBS remains structurally bullish on lithium and likes copper and aluminium for the medium-to long-term on increasingly attractive supply and demand fundamentals.
Despite a delay in expectations for global interest rate cuts, UBS remains positive on the gold sector though is selective in choosing equities given an ongoing challenging operating environment for the sector.
Regarding iron ore, UBS remains cautious into the second half of 2023 and sticks with its Sell ratings across its coverage on a growing market surplus and the likelihood China stimulus will not materially lift demand.
In reaction to a significant decline in neodymium and praseodymium (NdPr) prices so far in 2023, Barrenjoey lowers its own 2023-24 price forecasts, which means its EPS FY24 forecast for Lynas Rare Earths ((LYC)) is slashed by -49%.
Barrenjoey points out FY24 is a transition year for the company with the processing facility on the outskirts of Kalgoorlie ramping up and providing a more diversified industrial footprint.
To be forewarned is to be forearmed in equity matters, so FNArena reviews Barrenjoey’s potential beats and misses for June quarter results and FY24 guidance, with an overlay of commentary by both UBS and Morgan Stanley.
But first, let’s look at a separate review by Jarden on upcoming results for the Energy sector, stock picks and the outlook for both oil and LNG markets.
Jarden on the Energy sector
June quarter revenues across the Energy sector are set to be materially impacted by a combination of lower oil and LNG prices, on top of lower LNG production generally, explains Jarden.
The Brent oil price averaged US$78.0/bbl in the June 2023 quarter, down from US$82.2/bbl in the March quarter, while spot LNG prices trended lower through most of the first half of 2023.
Nonetheless, the broker forecasts higher future revenues due to higher demand for spot LNG leading into the next European winter, the continued support of OPEC-Plus (23 oil exporting countries including the 13 OPEC members) for oil markets and more normalised production levels.
Strong signals coming out of OPEC-Plus, suggest the group will do whatever it takes to maintain market stability and ensure prices remain in the US$80-90/bbl range. As a result, Jarden lowers its second half Brent oil price forecast to US$80/bbl from US$85/bbl.
It’s thought oil demand is struggling in the current economic environment given OPEC has withdrawn around -5% of global supply over the past eight months, yet prices are labouring to reach US$80/bbl.
Indeed, without OPEC-Plus cutting oil output, Brent oil prices may have slumped as low as US$50/bbl, in Jarden’s view.
There are two likely outcomes, suggests Jarden, both leading to higher FY24 oil prices. On one hand actions by OPEC-Plus so far will provide a boost, or the global economic outlook deteriorates further, and additional supply cuts will be announced.
The broker expects ongoing volatility for LNG prices with prices remaining elevated. An increase in spot LNG prices in the second half of 2023 is expected as Northern Hemisphere countries start the restocking process ahead of the coming winter.
After spot LNG prices rallied to a peak of US$80/mmbtu in late-2022, the analysts forecast spot LNG should average US$12.5/mmbtu and US$17.5/mmbtu in the September and December quarters, respectively, followed by an average of US$17.5/mmbtu for 2024.
From within its research coverage, Jarden prefers Santos ((STO)) over Woodside Energy ((WDS)) at current valuation levels in the large cap space, though acknowledges there's risk of a 2023 production guidance downgrade by Santos.
The broker forecasts 2023 production for Santos of 88.7mmboe, at the bottom end of management’s current 89-96mmboe range. As a result, any update to production guidance is expected to be either narrowing towards the lower end of the range or falling below the range.
Upstream production cost guidance could also be narrowed towards the upper end of the range given the impact of lower production, explain the analysts.
For Woodside, the broker’s forecast sits around the middle of current guidance for production in the range of 180-190mmboe.
Overweight-rated Santos is the most sensitive to a change in oil price due to its higher weighting of oil-linked price contracts relative to Woodside (Neutral), explains Jarden. The latter has more spot LNG price exposure in its portfolio than Santos.
Among the smaller caps the broker likes Karoon Energy ((KAR)) after the resolution of recent production challenges. Beach Energy ((BPT)) is also preferred for the ongoing development at the Waitsia Stage 2 project (onshore gas field in the Perth Basin) and expected start-up within the next 12 months.
Karoon is most sensitive to a change in oil price given it is a pure-play oil exposure.
Jarden forecasts FY24 production volumes for Beach Energy will be 23.2mmboe and estimates capital expenditure of -$1,090m.
Management guidance is not expected until August, and setting an accurate guidance range will be tricky, according to the broker, due to uncertainties around the timing of connecting the last two Thylacine wells in the Otway Basin and completion of Waitsia Stage 2.
For Karoon Energy, FY23 production is largely known, as guidance has been narrowed to a tight range following processing issues on board the floating production, storage and offloading facility (FPSO).
While Jarden forecasts 10mmbbl production in FY24, the FPSO performance issues may result in conservative production guidance by management in the 9.0-10.5mmbb range.
Barrenjoey’s beats and misses
Barrenjoey sees much lower guidance risks for Evolution Mining ((EVN)) relative to ASX-listed peers as management issued comprehensive FY24 guidance at its strategy day in June.
UBS agrees guidance is on track and is increasingly positive on Cowal (gold; NSW)/Ernest Henry (copper; QLD) in driving longer term value, following site tours last month.
The latter broker recently upgraded its rating for Evolution to Neutral from Sell noting the stock appeared inexpensive compared to gold sector peers, although Sandfire Resources remained its preferred stock for copper leverage.
Evolution does, however, present a copper option given the lack of available alternatives on the ASX, as more than 20% of near-term earnings are from the red metal, noted the analyst.
Morgan Stanley also sees potential for grade and production beats at the company’s Red Lake operations in northwestern Ontario. It’s felt underperformance may now be in the past and management guidance for Red Lake may be too conservative.
For Northern Star, the broker suggests consensus numbers for FY24 appear a little optimistic across production, costs and capex, and management’s upcoming guidance poses downside risk to these forecasts.
UBS is also cautious on Northern Star heading into fourth quarter results, as a significant 16% quarter-on-quarter lift in production is required to reach the bottom of FY23 guidance.
Morgan Stanley equally feels the Kalgoorlie Consolidated Gold Mines (KCGM) mill expansion and the potential development at the Fimiston underground operations are priced into the current share price. This broker lowers its target price to $12.25 from 13.15 and retains its Equal-weight rating.
The KCGM operations include the Fimiston Open Pit (Super Pit), Mt Charlotte Underground Mine and the Fimiston and Gidji Processing Plants.
Promisingly for Regis Resources, recent FY23 gold production slightly exceeded Morgan Stanley’s forecast (Duketon a slight beat; Tropicana a slight miss), though it was still within the range of management guidance.
FY24 production and cost guidance will be provided with the June quarter report on July 27, and Barrenjoey suggests FY24 consensus estimates are too high for production and too low for costs.
In late-June, UBS lowered its production outlook for Regis Resources and downgraded its rating to Neutral from Buy.
By contrast, a more upbeat and Overweight-rated Morgan Stanley expects FY24 capex to be significantly lower than for FY23, and suggests investors look out for updates to the feasibility study for the McPhillamys Gold project.
Gold Road Resources downgraded 2023 guidance in June, but has yet to update cost guidance, which Barrenjoey believes may be lifted at the upcoming quarterly result.
Significant rain in the June quarter at the Gruyere gold operations in Western Australia drove a downgrade in production at Gruyere for 2023, and a recovery plan is being worked through, explains Buy-rated UBS.
Another quarter of cash outflows is expected to push net debt for Alumina Ltd to US$267m (the analyst’s estimate) compared to the consensus forecast for US$191m.
For Deterra Royalties, Barrenjoey sits below consensus for royalty revenue and suggests the share market is too optimistic around capacity payments and is yet to reflect second quarter actuals.
The broker suspects soft operating numbers at 29Metals’ Golden Grove mine will add to the -$96m of cash burn in the June quarter, which partly resulted from Capricorn Copper remediation costs and a working capital unwind.
In relation to BHP Group ((BHP)), Barrenjoey sits above consensus expectations for iron ore shipments, with vessel tracking suggesting June quarter iron ore shipments of 73.3Mt, which is 3% above the consensus forecast for 71.4Mt.
The broker suggests FY24 guidance will be key, with the newly acquired OZ Minerals assets a likely focus. Morgan Stanley also expects OZ Minerals and Samarco (iron ore) synergy updates along with five-year guidance for the Escondida copper mine.
For UBS, there is a risk FY24 Escondida guidance is materially below its 1.16Mt forecast for copper volume, given pit wall stability issues reported in March.
But this Sell-rated broker remains positive for the near-term and believes BHP is on track to achieve the mid-to upper-end of FY23 iron ore production guidance of 278-290Mt, depending on fourth quarter inventory movements. The broker expects FY24 guidance will be in the range of 285-295Mt.
Regarding BHP's New South Wales Energy Coal (NSWEC) thermal coal sales, UBS sits below the consensus forecast, but expects a strong fourth quarter at BHP Mitsubishi Alliance (BMA) coal after a drier quarter in Queensland.
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