Material Matters: Gold, Iron Ore & Met Coal

This story features SILVER LAKE RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: SLR

-Resilient gold price expected to trade higher in 2024
-JP Morgan raises its iron ore price forecasts
-Reasons for the spike in metallurgical coal prices

By Mark Woodruff 

Gold price: resilient now, higher later

RBC Capital has raised its near-term and long-term gold price forecasts and now sees value emerging for ASX-listed gold stocks.

Costs and upcoming capex projections are expected to remain contained in FY24, resulting in reasonable cash flow across the sector. Investor appetite for projects and production growth should be supported by renewed faith in operational performance and a more bullish gold outlook, the analysts suggest.

The 2024 and long-term gold price forecasts by RBC increased by 16% and 6%, respectively, to US$1,960/oz and US$1,700/oz.

The new forecast sees gold hitting a low of US$1890/oz in the fourth quarter of 2023 due to ongoing restrictive monetary policy by the US Federal Reserve, before returning to above US$1900/oz before year’s end.

Prices are then expected to advance in 2024 following policy easing, courtesy of an economic growth slowdown.

ANZ Bank is equally positive on the precious metal's outlook and notes how resilient gold has been in the face of multiple headwinds.

The yellow metal’s investment appeal has been hampered by a stronger US dollar on rising US treasury yields due to strong US data and the higher-for-longer interest rate narrative, explains the bank.

In the second half of 2023, the 10-year benchmark treasury yield has risen by 30 basis points to 4.2%, raising the opportunity cost of owning gold.

It’s thought the US dollar is also being boosted by weakening economic growth prospects in Europe, along with falling confidence in the Chinese economy.

The impact of persistently high interest rates should be offset by strong central bank buying and a pickup in consumer demand, suggests ANZ, which expects gold to trade near US$2,000/oz by the end of 2023.

The bank highlights geopolitical tension is driving a structural shift in central bank purchases, while demand for physical gold is likely to recover in the fourth quarter of 2023 after a seasonal lull.

ANZ is not only predicting US dollar strength will wane in 2024 on interest rate cut expectations due to slowing economic growth, but also gold’s investment appeal will rise in response to macroeconomic uncertainty.

From among its coverage, RBC Capital has an Outperform rating for Silver Lake Resources ((SLR)), De Grey Mining ((DEG)), Regis Resources ((RRL)), Bellevue Gold ((BGL)) and Northern Star Resources ((NST)).

JP Morgan raises its iron ore price forecasts

JP Morgan has raised its 12-month target prices across its Australian iron ore coverage and upgraded ratings for both Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) to Overweight from Neutral.

The broker elevates iron ore miners to its preferred sub-sector within the Australian Metals & Mining space as valuations look undemanding and investors are generally underweight, just when when a consensus earnings upgrade cycle looms.

Resilient Chinese steel production is supporting iron ore prices, along with port restocking and recent policy easing, explain the analysts. 

The broker recently upgraded its 2024 and 2025 iron ore price forecasts by 13% and 17% respectively, to US$110/t and US$105/t, while the long-term real price forecast was raised by US$5 to US$80/t.

Rio Tinto displaces Overweight-rated BHP Group ((BHP)) as JP Morgan’s top pick on a slightly cheaper valuation. While Fortescue Metals is trading at a valuation discount to Rio Tinto and BHP, uncertainty around Fortescue Future Industries (FFI) keeps the company ranked behind both market leaders from an investment point of view.

Fortescue Metals is deeply under-held in Australia, according to the broker, primarily due to the uncertainty around the FFI project metrics and the associated medium-term heavy capex requirement.

Apart from FFI-related weakness, the current share price is thought to represent value following market concerns around a property slowdown in China and recent management turnover at the company.

In upgrading its rating to Overweight, the broker acknowledges its is going against the consensus view held by broking peers on Fortescue Metals.

By way of confirmation, FNArena’s daily monitoring consists of seven brokers with seven Sell (or equivalent) ratings for the company.

JP Morgan’s $23.50 target price compares to the $16.14 average target price for Fortescue Metals in the FNArena database. The share price was $21.11 at the time of writing.

While JP Morgan raises its target for Deterrra Royalties ((DDR)) to $5.10 from $4.70, the Neutral rating is kept.

Rising metallurgical coal prices

The Australian hard coking coal price has jumped by more than 20% since the end of June and Morgan Stanley expects the healthy demand outlook will likely persist.

However, given Chinese steel mill margins are close to zero, the broker sees a limit to how much more mills can pay for hard coking coal and iron ore.

The Australia Hard Coking Coal price is back up to US$280/t, while Chinese prices are approaching US$300/t.

Despite widespread expectations for steel production cuts in China, Morgan Stanley explains steel production has remained high as exports have offset weaker construction demand. Also, elevated blast oxygen furnace (BOF) utilisation versus electric arc furnaces (EAFs) has resulted in strong met coal demand.

In addition, India’s appetite for met coal has been stronger than the analysts’ expected during the monsoon season, due to below average rainfall allowing more construction activity.

Russia has also been sending a lot of pulverised coal for injection (PCI) to India, which needs to be blended with Australian premium mid-volatility (PMV) coking coal to maintain quality.

On the supply side, shipments out of Queensland have been weak as a result of both strikes and maintenance. This has a material impact on overall seaborne supply, explains Morgan Stanley, with Australia accounting for over 50% of supply in FY22.

Canada is the fourth biggest seaborne supplier after Australia, US and Mongolia, but wildfires and mine maintenance have recently impacted, notes the broker.

The analysts also highlight several mine accidents in China of late, which have resulted in enhanced safety inspections and suspended operations.

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