Material Matters: Major Miners Upgraded

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A glance through the latest expert views and predictions about commodities: updated forecasts result in ratings changes for resources stocks and analysts review favoured exposures.

-Copper is Morgan Stanley’s key pick, BHP Group upgraded
-The broker’s long-term forecasts for copper and iron ore rise
-Rising gold equity valuations at Macquarie, Northern Star preferred
-UBS lowers oil forecasts, better gas outlook

By Mark Woodruff

In the past week, major miners in the iron ore space have received one or more ratings upgrades as Morgan Stanley and Macquarie review the outlook across the Resources sector more broadly.

Investor sentiment towards the commodity space remains volatile, observes Morgan Stanley, as markets focus on US economic data, the pace and extent of interest rate cuts, the US election, as well as the disappointing growth outlook for China.

While the price of “safe haven” gold is at an all-time high and is believed to have further upside, so far in the September quarter copper and iron ore prices have fallen by -3.5% and -14%, respectively,

Undeterred, Morgan Stanley raises most of its long-term commodity prices forecasts to reflect ongoing inflation.

Copper is the broker’s top pick as low prices begin to spur demand and refined supply growth will likely slow, driving inventory drawdowns. 

It’s also felt iron ore and metallurgical coal prices can lift, partly due to seasonal demand support.

On the other hand, thermal coal lacks catalysts into the shoulder season, with strong Indonesian and Australian supply keeping prices under pressure, explain the analysts.

In the case of lithium and nickel, demand remains challenged, but as prices cut into the cost curve supply cuts are being invoked. It’s felt equities reflect existing headwinds. The rating for Pilbara Minerals ((PLS)) is upgraded to Equal-weight from Underweight.

In contrasting stances, UBS remains Underweight the lithium sector, while Macquarie suggests the lithium price has found a bottom.

Lower lithium price forecasts at Macquarie have had a material impact on earnings and valuation across stocks under research coverage, resulting in lower targets for Mineral Resources ((MIN)), Arcadium Lithium ((LTM)) and IGO Ltd ((IGO)).

Macquarie analysts like Outperform-rated Patriot Battery Metals ((PMT)) for its corporate appeal.

On the uranium front, Morgan Stanley remains cautious due to weak contracting activity and supply restarts, but the analysts also contemplate upside risks should Russia restrict exports.

The highlights from Morgan Stanley’s updated long-term price forecasts are respective price rises for copper and iron ore of 20% and 6% to respectively US$9,500t and US$90t.

In contrast, Macquarie has lowered its 2024 and 2025 copper price forecasts by -5% and -4%, respectively, driven by 2024 demand cuts for China, North America, and the EU.

For the medium-term, this broker has an Underweight view, while holding the long-term price forecast at US$9,000t and keeping an Overweight stance for those who can bear shorter term weakness.

Preferred iron ore and copper exposures

Flow on effects of Morgan Stanley’s higher copper and iron ore forecasts include an upgrade to BHP Group’s ((BHP)) rating to Overweight after two years at Equal-weight.

BHP is a key beneficiary of the forecast copper price rise (with around 43% revenue coming from this source) which was a key driver behind the broker’s upgraded rating.

Fortescue is also upgraded: to Equal-weight from Underweight.

The broker prefers Rio Tinto ((RIO)) over BHP Group on better growth prospects but Mineral Resources trumps both in the space on anticipated balance sheet deleveraging from 2025.

The analysts at Macquarie forecast a medium-term market over-correction associated with peak production at the Simandou mine in Guinea (53%-owned by Rio Tinto) and the Onslow mine ramp-up, which is 40%-owned by Mineral Resources.

As a result, Macquarie has a medium-term Underweight view and long-term Neutral view on iron ore.

Despite a less-buoyant outlook, Macquarie analysts upgrade both Rio Tinto and BHP Group to Outperform, with a preference for the latter on valuation. Mineral Resources is also upgraded to Outperform (aided by the broker’s view the lithium price has reached a nadir), while Fortescue is kept at Underweight.

Macquarie lowers its 2024 iron ore price forecast by -4%, but a lower Australian dollar forecast across 2025 and 2026 helps mitigate earnings downside for all resource stocks under coverage.

Regarding copper, Morgan Stanley points out pure play ASX-listed copper opportunities are thin on the ground. Sandfire Resources’ ((SFR)) premium valuation justifies an unchanged Hold rating in the analysts’ view, with a rise in target to $8.25 from $7.95.

Including Morgan Stanley, there are five covering brokers in the FNArena database with Hold (or equivalent) ratings, while Macquarie is at Outperform. The average target of the six is $9.25, suggesting circa 6% upside to the latest share price.

Among the majors, Macquarie prefers South32 ((S32)) – despite lower EPS forecasts due to falling manganese price forecasts- over BHP Group followed by Rio Tinto and the Underperform-rated Fortescue.

In the last week, Macquarie’s target for Outperform-rated South32 has fallen to $4.15 from $4.25, while Morgan Stanley (Equal-weight) raised its target to $3.20 from $2.95.

Among mid-caps, Macquarie likes Capstone Copper ((CSC)) due to organic production growth, Coronado Global Resources ((CRN) for metallurgical coal and Nickel Industries ((NIC)).

Gold and preferences in the sector

Weaker macro-economic data and inflation falling to the US Federal Reserve’s target of 2% are signalling deeper interest rate cuts, suggested ANZ Bank only one day prior to the Federal Reserve delivering a higher-than-expected -50bps reduction.

Falling real rates and a weaker US dollar will push gold prices higher, in the bank’s opinion. It’s also noted silver prices (after a recent sell-off) are recovering too.

Providing a lift to gold equity valuations at Macquarie, the long-term price has been increased by 11% to US$2,000/oz, which is 5% ahead of the 2030 consensus forecast. Forecasts over 2024-26 rise by a more moderate 2-3%.

This broker now prefers Northern Star Resources ((NST)) due to its organic growth potential, while in the mid-caps space the preference sides with Perseus Mining ((PRU)), Capricorn Metals ((CMM), and Genesis Minerals ((GMD)).

While analysts at Morgan Stanley see gold doing well near-term, upside is seen as already priced into equities, and this broker has downgraded Evolution Mining ((EVN)) and Regis Resources ((RRL)) to Equal-weight from Overweight. Northern Star Resources ((NST)) is downgraded to Underweight from Equal-weight. All three rating downgrades are due to valuation.

UBS lowers oil forecasts, better gas outlook

Brent crude oil prices briefly dipped below US$70bbl in September, the lowest level since 2021, with demand weakness weighing on sentiment and price, explains Morgan Stanley.

Weak macro-economic data are deepening oil demand concerns, suggests ANZ Bank, while the end of peak summer demand is also weighing on market sentiment. Gas prices are easing as demand softens in Asian markets.

Reflecting weaker global oil demand due to slowing GDP growth, UBS has lowered its fourth quarter Brent crude forecast to US$75bbl from $83bbl, which reduces the projected 2024 average price by -US$4bbl to US$80bbl.

This broker’s 2025 and 2026 forecasts also fall by -US$5bbl to US$75bbl, in line with the long-term forecast.

OPEC-Plus the coalition of oil-producing countries that includes the 13 members of OPEC and 10 other oil producing nations, recently postponed a planned production increase. UBS believes the window to unwind production cuts is deferred to 2027/28 as weaker demand and sustained non-OPEC-Plus supply pushes the global market towards surplus.

In contrast to the broker’s oil price forecasts, the outlook for global gas is looking more promising.

For LNG, the analysts lift the fourth quarter Japan Korea Marker (JKM) price estimate by 4% to US$14.5mmbtu in the expectation of a higher risk premium given strength in prices over the third quarter. Geopolitical risks, including uncertainty of future Ukraine transit flows also contribute to the stronger forecast, explain the analysts.

UBS’s 2025 JKM forecast rises by 2% to US$12.8mmbtu due to ongoing tightness in the global gas market, driven by slower LNG supply growth due to construction and commissioning delays for new LNG liquefaction projects.

As a result of these new forecasts, the broker’s target prices for Woodside Energy ((WDS)) and Santos ((STO)) fall by around -8.5% and -1%, respectively, to $28.10 and $8.70. 

UBS’s target for Beach Energy ((BPT)) remains at $1.60, while Origin Energy’s ((ORG)) slips to $11.65 from $11.70.

The outlook for coal

While Macquarie has an Underweight stance on thermal coal and lowers its 2024 and 2024 price forecasts by -3% and -10%, respectively, medium-term and long-term (US$80t) forecasts are maintained.

For metallurgical coal, this broker continues to see medium-term upside across 2026 and 2027 to US$320/t. The long-term price forecast is unchanged at US$200/t.

This week, Macquarie raised its rating for Whitehaven Coal ((WHC)) to Outperform from Neutral (despite cuts to EPS forecasts) on valuation grounds following a post results season share price decline and left its $7.50 target unchanged.

Further background on iron ore and copper markets 

Brazilian iron ore company Vale recently increased 2024 volume guidance by 4%, and there has been a 3% year-on-year rise in exports from Australia and Brazil.

Barrenjoey considers these two announcements will have an insufficient supply impact to overwhelm demand via Chinese imports, which are on track for a 7% year-on-year increase in 2024.

The analysts forecast the iron ore price will average US$100/t this year and next.

For context, the iron ore price has averaged above US$100/t since 2018 and Barrenjoey expects this will continue until Simandou begins to ramp-up from early-2026, at which point market oversupply will be a consideration.

ANZ Bank expects the property crisis will roll-on in China given falling sales and contracting new starts, leaving little room for any significant recovery in steel demand.

Amid the previously mentioned strong imports from Australia and Brazil, iron ore inventories remain elevated, ANZ Bank points out.

Analysts at Morgan Stanley highlight Simandou’s development is of a different scale to the capacity surge of 2010-2015, and a return to the low level of industry margins experienced over the 2015-17 downturn is seen as unlikely as further capacity growth for projects is limited beyond Simandou.

For copper, ANZ Bank sees a few emerging positive demand signals with exchange inventories retreating and pushing spot premiums higher. However, contracting manufacturing activity presents a downside risk to the sector, with speculators liquidating positions.

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