Material Matters: Crude Oil And Five Gold Miners

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Weakening demand amidst strong supply of commodities; OPEC to update oil production quotas; Moelis initiates coverage of five Australian gold miners.

-Global demand for commodities easing, supply strong
-OPEC production decision critical for oil prices
-Moelis initiates coverage of Australian gold miners

By Greg Peel

Supply Exceeding Demand

The market balance across commodity sectors is easing, Citi notes, due to strong supply and weakening demand. The broker suggests this trend is likely to continue until demand picks up in the June quarter of 2024.

Narrowing refinery margins are keeping oil processing volumes low, and China’s apparent oil demand moderated in October. Despite these recent declines, Citi notes demand growth for 2023 looks robust at 2.3mb/d. Record US oil production of 13.2mb/d is partially mitigating OPEC-Plus output losses. For LNG, ample inventories in Europe and Asia are capping the upside for prices.

Gold is benefitting from the tailwinds of heightened geopolitical risk, a weaker US dollar and retreating US bond yields.

Softer economic activity in developed markets, stronger supply and geopolitical issues are keeping industrial metals on a weaker footing. Refined supply is increasing for copper and aluminium in China.

Prices for the battery metals, lithium and cobalt, continue to fall, as demand remains weak despite stronger electric vehicle (EV) sales (although sales growth is weakening). An oversupply of batteries is keeping demand weak.

Iron ore prices are rising on expectations of more stimulus aimed at reviving China’s property markets, Citi notes, but the impact of those measures is yet to show up in any property indicators. Depleting inventories in China and declining exports from Brazil and Australia are expected to continue to support the price.

Oil and OPEC

OPEC production decisions are important for the oil market, Morgan Stanley notes, but they are especially critical now. In the end, the broker expects OPEC-Plus to continue to restrain production and stabilise oil inventories broadly at current levels. That still supports Brent crude in the mid-US$80s per barrel, Morgan Stanley estimates.

Looking ahead, much depends on OPEC's upcoming production decisions, the broker points out. Demand growth this year has been strong at 2.2 mb/d, and demand grew well above the historical trend rate. However, this is likely to slow down in 2024 – Morgan Stanley pegs next year's growth at 1.2 mb/d.

As an aside, there appears to be dissent among smaller OPEC members with regard ongoing production cut quotas. A production meeting due for Sunday was last night delayed for four days.

This implies a risk OPEC-Plus production might increase, unless the Saudis and Russia, who have carried the bulk of the production burden so far, cut further to maintain prices.

Notwithstanding a significant slowdown in US shale output in 2024, non-OPEC production will likely still grow by 1.4 mb/d, Morgan Stanley suggests. That’s less than growth of 2.2 mb/d in 2023 but would still be sufficient to meet all global demand growth.

This does not necessarily change in 2025 or 2026 either. Despite low levels of upstream capex in 2020/21, the pipeline of non-OPEC projects alone appears sufficient to meet all global demand growth in the next few years at least, the broker believes.

Taken together, this leaves little room in the oil market for additional OPEC oil.

Initiating on Gold Miners

Moelis has initiated coverage of five Australian gold miners.

Mining assets are naturally in a constant state of decline, thus Moelis prefers companies with improving output, margins and mine lives. Valuation alone is not enough to be constructive, so the broker also looks for cash flow inflection and catalysts.

Moelis adopts blended valuation methodology to reflect both long and short-term value duration, being net asset value to assess long-term cash generating potential, and price to adjusted cash flow to aid in identifying inflection points.

Alkane Resources ((ALK)) scores a Buy (target $1.05). Delivery of its current growth project will underpin significant volume, earnings and cash flow growth into FY25, the broker suggests.

Genesis Minerals ((GMD)) is also a Buy (target $2.00). Genesis is reassembling the tenement package around Leonora in WA to re-optimise the operating strategy at Gwalia and Mt Morgans.

Silver Lake Resources ((SLR)) is the third Buy (target $1.45). This company is operating two gold mines in WA (Deflector and Mt Monger), with a third development project in Canada, boasts a strong balance sheet and is motivated for further strategic growth. Silver Lake also has a significant holding in Red 5 ((RED)).

Red 5 itself scores a Hold (target 35c). This miner recently commissioned the long-life King of the Hills mine near Leonora, which Moelis notes is strategically significant, but considers the shares fairly valued following the recent run-up. Cash flow is muted near term, while debt is repaid and hedging impacts realised prices.

Finally, Gold Road Resources ((GOR)) is also a Hold (target $1.90). This miner has 50% ownership (non-operating) of the large-scale Gruyere deposit and strong cash flow generation, but offers limited growth and is fully valued, Moelis believes.

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