Tag Archives: Base Metals and Minerals

article 3 months old

Lithium Rising As Electric Vehicles Take Hold

By Sam Green, adviser at Options Education Centre, TradersCiricle

The New Year has started with an abundance of news from the Lithium industry, as a tangible shift in the mobile energy mix appears to be taking place.

Increasingly, stakeholders are expressing a view that electric motor vehicles will replace their internally combusting counterparts, with this trend likely to have major implications for the global economy over the next few decades.

In January, petroleum industry website, Gasbuddy, asked the provocative question, “Has US gasoline demand peaked?” which generated heated discussion across several economic news websites. The company estimated that US gasoline demand has topped out, and that ongoing demand for gasoline is in permanent decline. They blamed increasing oil prices, as well as the increasing prevalence (and declining cost) of electric vehicles as leading to the change.

This sentiment was echoed by the Imperial College London, in collaboration with the Carbon Tracker Initiative think tank, who estimated that 2 million barrels a day of oil demand could be replaced by electric vehicles by 2025. They furthered that such an outcome would be similar to the 10 percent loss of market share that caused the collapse of the U.S. coal mining industry. Indeed, even oil giant BP has also quietly admitted that electric vehicles could displace as much as 5 million barrels of oil demand over the next 20 years.

One of the big drivers of the uptake of electric vehicles has been the rapidly declining cost, with prices falling faster than the most optimistic of forecasts. If this trend continues, the price of electric vehicles will reach parity with internal combustion vehicles by 2020.

Leaders of the automakers Ford and Audi have also come out recently to express their view of the coming dominance of electrified vehicles, with the Ford CEO stating that “15 years from now, is that there are going to be more electrified offerings than there are internal combustion engines,”

Because of the growing prevalence of electric vehicles, consumers will increasingly be able to charge their batteries at retail gasoline outlets. Indeed, Shell, long known as a market leader in greener gasoline technologies, plans to leverage their existing service station infrastructure in the UK and the Netherlands to offer charging points for electric vehicles; with the first to be installed by the end of the year.

The revolution is not just happening in the private vehicle sector either. Tesla Motors has recently announced development of an electric truck called the Tesla-semi, which Tesla CEO Elon Musk states “will deliver a substantial reduction in the cost of cargo transport”. Commercial vehicle fleets have traditionally shied away from electric vehicles, due to concerns over range and cost; but this latest announcement from Tesla would indicate that these shortcomings are rapidly being overcome through advances in technology.

With all the ground being made by electric vehicles, manufacturers are increasingly struggling to source electric vehicle batteries, and the lithium which they contain. According to Thomas Sedran, VW’s head of group strategy, “The capacity is not there,” “Nobody has the capacity.”

Rich rewards already exist for those producing the lithium required for electric vehicle batteries, and this is only going to increase with the anticipated increase in demand for electric vehicles. In fact, Australian company Galaxy Resources ((GXY)) recently started lithium production from their Mt Caitlin facility, which sent shockwaves through their share price. Their stock rose from mid-30 cents per share, up to just below 70 cents per share, all within the space of a few weeks. This would be incredible performance for a microcap stock, but Galaxy is a billion dollar entity.

We have also seen some exiting new lithium explorers hitting capital markets over the recent period. Not least of which a company called Lithium Consolidated Minerals Exploration ((LI3)), which plans to explore an allotment of land next to the leading lithium production site in North America.

The wealth of the 20th Century was largely built on the back of the oil boom, which powered our means of transportation. In the 21st century, the means of transportation are becoming electrified, and the spoils are once again likely to go to those who power our technology.

Reprinted with permission of the publisher. Content included in this article is not by association the view of FNArena (see our disclaimer).


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The author of the article and Traders Circle Pty Ltd are Authorised Representatives of OzFinanical Pty Ltd, AFSL number 241041. Any advice provided in this article is general in nature and does not take into account your financial circumstances. Before making an investment decision, you need to consider whether the advice is appropriate for your own personal financial circumstances. This might mean that you seek personal advice from a representative authorised to provide such advice.  Trading Options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only act on our recommendations if you are confident that you fully understand what you are doing.  . It is important that you understand that past returns do not reflect future returns.

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article 3 months old

Material Matters: Oil, Nickel And Metals

A glance through the latest expert views and predictions about commodities. Macquarie eases oil and LNG price outlook; Philippines throws another spanner in nickel works; China's looming capacity reductions.

-Oil market likely to become over-supplied in 2018
-Spot LNG prices likely to struggle to rise
-Indonesia the wild card as nickel deficit expectations ratchet higher
-China's capacity reforms expected to ramp up this year


By Eva Brocklehurst

Oil And LNG

Macquarie's analysts have updated forecasts for oil and gas prices. They expect tighter balances in 2017 will lead to a return to surplus in 2018 and 2019. Brent is expected to average US$57/bbl, US$56/bbl and US$61/bbl in 2017, 2018 and 2019 respectively.

The broker suspects supply will be reduced by the cuts from OPEC, even assuming only 50% compliance from non-GCC members. The six GCC members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates.

This pricing stability has already allowed shale producers in the US to lock in hedges and capital. The broker calculates that as OPEC's cuts roll off, this will combine with US production to push the market into oversupply in 2018.

Macquarie lifts spot LNG forecasts for 2017 to around US$5.8/mmbtu from US$5/mmbtu to reflect a combination of market tightness and stronger demand. But this relief is short lived as the ripple effect of rising US oil production means greater gas volume must coincide with the completion of trains three and four at Sabine Pass and train one at Cove Point.

2017 will also mean the completion of the much-delayed LNG export facilities in Australia. With more supply entering the market the broker envisages spot LNG prices will struggle to be materially higher than US$5/MMBtu until the early 2020's.

In light of the reduced forecasts the broker believes those stocks at risk within the LNG market are those most exposed to contract re-negotiation. Lower oil and gas prices means reduced earnings across the board, and as a result Macquarie downgrades AWE Ltd ((AWE)) to Underperform.

The broker retains a preference for Oil Search ((OSH)) over Woodside Petroleum ((WPL)). The broker remains positive on Santos ((STO)), as it seeks to ramp up gas volumes from Roma into GLNG. Beach Energy ((BPT)) is expected to struggle to replace the decline within its PEL 91 and is the most exposed to oil of the stocks the broker covers.

Revisions to Macquarie's oil price outlook results in a 30 basis point reduction to Australian inflation forecasts. The broker now expects headline inflation to remain stuck below 2% until late 2018. A flatter petrol price outlook removes a headwind for discretionary spending in terms of consumers.

Outside of the energy sector, a lower oil price forecast should benefit energy input costs for companies, making budgets less strained. Lower oil prices will represent an avoidance of the transfer of income from oil consumers back to oil producers but non-oil energy export earnings could also be more modest, particular for LNG volumes, as the price is oil linked.


The Philippines government has shocked the nickel market by announcing the suspension, or closure, of all mines it had previously suspended, as well as a vast bulk of mines into place under notice of suspension in October last year. The minister responsible has announced that the government is averse to any kind of mining operation in functional watersheds and said it was a mistake to have approved such mines in the past.

On Macquarie's calculations, the closures affect mines which produced around 165,000 tonnes of nickel in 2015. The decision is not final since all miners may appeal directly to the president. Nevertheless it goes against expectations that many of the mines would escape closure. At this stage the broker calculates up to -70,000 tonnes of nickel may not be available for export to Chinese nickel pig iron facilities.

The decision comes in the wake of the Indonesian government's move to allow a partial relaxation of its nickel ore export ban. It remains unclear how much Indonesia's ore quota will be and Macquarie suspects a deficit of -40,000 tonnes of nickel in 2017, and -50,000 tonnes per annum thereafter, may be on the low side.

Until there is more information from both countries the broker is reluctant to calculate a new supply/demand balance. However, the net loss in 2017 of around -70,000 tonnes of nickel, as a result of the Philippines announcement, could easily be offset by at least 20,000 tonnes of nickel from other sources.

After the reversal of the Indonesian ban on export ore Deutsche Bank retracted its expectations for a squeeze on the nickel price. While admitting its first half average price forecast of US$12,250/t and full year forecast of US$11,750/t may look optimistic, post the Philippines closures there could still be upside from today's spot prices.

The broker had expected miners in the Philippines would avoid closures as long as appropriate remediation plans were put in place. The latest news suggests that the shutdowns account for around 50% of the country's nickel ore output.

On a 2015 production basis, this would amount to around -200,000 tonnes but, given that many of the mines was suffering from grade decline, the broker estimates the loss is more like -175,000t of contained nickel. The broker agrees the tonnage of ore allowed out of Indonesia is still a matter of conjecture but assumes 10m tonnes of 1.4% grade, amounting to 90,000t of contained nickel.

The broker would expect upside risks to its export assumptions should prices rally but for now the net effect is seen removing 80-100,000 tonnes of nickel from the market and pushing up the 2017 deficit to -150,000t from -50,000t.

Metals China

China has emerged as a major producer of metals and now accounts for around 20% of global supply. Goldman Sachs believes that the government is determined to curtail capacity considerably and that the oversupply of China's commodities may be much more limited than widely perceived.

The country is ramping up its structural reform on the supply side by removing marginal capacity, amid reforms to increase industry concentration while restructuring zombie firms to prove quality and efficiency.

Aside from a continued focus on coal and steel, Goldman Sachs expects reforms to extend to cement and aluminium this year. If steel capacity curtailment overshoots - as it did with coal in 2016 - the broker envisages a risk the steel market may experience a shortage in the first half this year. Also the potential for aluminium capacity cuts should support aluminium prices.

Western miners are unable to pick up the slack as mining capital expenditure among the majors is at the lowest it has been in a decade and a lack of investment in new growth over the past three years has meant there is limited ability to flex volumes.

Goldman Sachs believes these factors should support commodity prices remaining elevated for longer, assuming demand remains intact. The broker cites a preference for Australian stocks Newcrest Mining ((NCM)) and South32 ((S32)) among its globally preferred mining stocks.

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article 3 months old

Manganese Is Energy Critical

By Richard (Rick) Mills

As a general rule, the most successful man in life is the man who has the best information

In 1917 the War Industries Board (WIB) noted that the United States was deficient in certain minerals of great importance to war making and self defense. A pre-World War II list of materials contained a total of 29 materials: 14 were strategic materials that ‘must be based entirely or in substantial part on sources outside the United States.’ There were 15 critical materials that would be easier to source, perhaps even domestically, than the strategic materials.

The 1939 Strategic Materials Act authorized US$100 million to purchase strategic raw materials for a stockpile of 42 strategic and critical materials needed for wartime production.

By May 1940, small quantities of certain materials – ie. chromite, manganese (Mn), rubber and tin (Sn) – had been procured under the Strategic Materials Act. The purchases certainly weren’t enough and all throughout the war effort these and other numerous materials had to be imported in large quantities.

By 1948 the WIB’s Munitions Board had developed a list of 51 required strategic and critical material groups. By 1950 the number of required strategic and critical materials had expanded to 54 groups, representing 75 specific commodities.

Let’s fast forward a few decades…

The Metallurgical Achilles' Heel of the United States  

A concise summary of U.S. mineral vulnerabilities was presented to the Industrial Readiness Panel of the House Armed Services Committee as early as 1980 by General Alton D. Slay, Commander Air Force Systems Command. General Slay pointed out that technological advances have increased the demand for exotic minerals at the same time that legislative and regulatory restrictions have been imposed on the U.S. mining industry.  

“The U.S. depends on southern Africa's minerals for about the fifty percent of the "big four". Thus, a long-term cutoff of any or all of these materials has the potential for an economic and strategic crisis of greater proportions than the oil crisis of the 1970s. An embargo of South African minerals to the U.S. would affect millions of American jobs in the steel, aerospace, and petroleum industries, and could in effect shut down those industry groups.” U.S. Strategic and Critical Materials Imports: Dependency and Vulnerability

The 1981 report  “A Congressional Handbook on U.S. Minerals Dependency/Vulnerability” singled out eight materials "for which the industrial health and defense of the United States is most vulnerable to potential supply disruptions" - chromium, cobalt, manganese, the platinum group of metals, titanium, bauxite/aluminum, columbium, and tantalum - the first five have been called "the metallurgical Achilles’ heel of our civilization."

In 1981, President Reagan announced a “major purchase program for the National Defense Stockpile, saying that it was widely recognized that our nation is vulnerable to sudden shortages in basic raw materials that are necessary to our defense production base.

In 1984 U.S. Marine Corps Major R.A. Hagerman wrote: “Since World War ll, the United States has become increasingly dependent on foreign sources for almost all non-fuel minerals. The availability of these minerals have an extremely important impact on American industry and, in turn, on U.S. defense capabilities. Without just a few critical minerals, such as cobalt, manganese, chromium and platinum, it would be virtually impossible to produce many defense products such as jet engine, missile components, electronic components, iron, steel, etc. This places the U.S. in a vulnerable position with a direct threat to our defense production capability if the supply of strategic minerals is disrupted by foreign powers.” 

In 1985, the secretary of the United States Army testified before Congress that America was more than 50 percent dependent on foreign sources for 23 of 40 critical materials essential to U.S. national security.

The 1988 article “United States Dependence On Imports Of Four Strategic And Critical Minerals: Implications And Policy Alternatives” by G. Kevin Jones was written in regards to what he thought are the most critical minerals upon which the United States is dependent for foreign sources of supply - chromium, cobalt, manganese and the platinum group metals (PGE).  These metals represent the "metallurgical Achilles' heel" of United States strategic mineral supply because their role in the economy is pervasive and they are vulnerable to supply interruption. 

The May 1989 report “U.S. Strategic and Critical Materials Imports: Dependency and Vulnerability. The Latin American Alternative,” deals with over 90 materials identified in the Defense Material inventories as of September 1987. At least 15 of these minerals are considered “key minerals” because the US is over 50% import reliant. All these minerals are essential to domestic security and the national economy but four are referred to as the “first tier” or “big four” strategic materials because of their widespread role and vulnerability to supply disruptions – chromium, cobalt, manganese and platinum group metals.

In 1992 Congress directed that the bulk of the strategic and critical materials the U.S. had been able to accumulate in the National Defense Stockpile be sold.

According to the United States Geological Survey (USGS), in 1999 the United States was at least 50 percent dependent on a foreign source for 27 out of the 100 materials covered in its publication Mineral Commodity Summaries. By 2013, this number had grown to 41 materials out of 100.

The primary purpose of the National Defense Stockpile (NDS Program) is to decrease the risk of dependence on foreign suppliers or single suppliers on supply chains of strategic and critical materials used in defense, essential civilian, and essential industry applications. The NDS Program allows for decreasing risk by maintaining a domestically held inventory of necessary materials.

Section 12 (1) of the Stock Piling Act defines strategic and critical materials as materials that (A) would be needed to supply the military, industrial, and essential civilian needs of the United States during a national emergency and (B) are not found or produced in the United States in sufficient quantities to meet such need. Based on the results of the 2015 Requirements Report research, the NDS Program recommended new authorities for twelve of the 21 materials exhibiting a net shortfall:

  • aluminum oxide, fused crude
  • antimony
  • beryllium metal
  • carbon fiber (two types)
  • chlorosulfonated polyethylene
  • europium
  • germanium
  • lanthanum
  • magnesium
  • manganese metal, electrolytic
  • silicon carbide fiber, multifilament


Aside from iron manganese is the most essential mineral in the production of steel. You can’t produce steel without adding 10 to 20 lbs. of manganese per ton of iron. Which makes manganese the fourth largest traded metal commodity.

Both Canada and the United States have numerous and vast iron ore deposits, yet neither country produces manganese.

Fact – Manganese is a strategic mineral essential for the economy and defense of the United States.

Fact - Manganese cannot be sourced in adequate quantities from reliable and secure domestic suppliers.

Fact - There is no substitute for manganese, as a matter of fact manganese has itself become a substitute in certain alloy applications.

Security of supply 

Many minerals were recognized as critical and strategic almost a hundred years ago (manganese was identified among them). Some - referred to as the big four, the top tier or the metallurgical achilles heel of the U.S. - are more critical than others.

Chromium, cobalt, manganese and the platinum group metals (PGE) - are the basic building blocks any nation needs for its economic foundation.

The U.S. is dependent on South Africa, the politically unstable Democratic Republic of Congo (DRC) and an increasingly unreliable and aggressive China for over half of its supply of what it considers strategic or critical minerals.  

“As resource constraints tighten globally, countries that depend heavily on ecological services from other nations may find that their resource supply becomes insecure and unreliable. This has economic implications – in particular for countries that depend upon large amounts of ecological assets to power their key industries or to support their consumption patterns and lifestyles.” Dr. Mathis Wackernagel, President of the Global Footprint Network    

Critical materials, especially the ‘big four’ - chromium, cobalt, manganese and the platinum group - are the metallurgical Achilles’ heel of our civilization. Accessing a sustainable, and secure, supply of these raw materials is going to become the number one priority for all countries.

So why have I singled out manganese? Out of all the strategic or critical minerals I could have talked about I choose manganese. Yes, it’s been considered strategic for a century because of its use in steel making and alloys but something else is up with manganese that you, an intelligent well informed ahead of the herd investor should know about.

“the country (U.S. – editor) is devoid of any electrolytic manganese production, importing it all from — you guessed it — China, with lesser amounts from South Africa…

It is important to be clear we are talking about electrolytic manganese, not ferro-manganese or silico-manganese, which are produced in the US from manganese ores imported from Gabon, but mostly supplied as ferro-alloys imported from South Africa, China and elsewhere. Electrolytic manganese is used as an alloying element in aluminum and copper alloys, as a colorant in bricks, and combined with lithium or nickel in batteries. Indeed, its use in lithium-ion manganese batteries is its fastest and potentially most challenging application — if the US cannot access competitively priced and reliable supplies of manganese, a host of high-tech new applications will be lost to foreign competitors.

Although manganese has been used for years in conventional batteries, its use in the newest generation of batteries for electric vehicles is likely to grab the most attention.” Stuart Burns, U.S. Facing Supply Risk for Electrolytic Manganese Metal

Current tensions between the United States and China highlight the need for security of supply regarding the materials and minerals the U.S. considers strategic and critical.

Critical Materials

A strategic or critical material is a commodity whose lack of availability during a national emergency would seriously affect the economic, industrial, and defensive capability of a country. Manganese has met this criteria for over 100 years.

In its 2011, Critical Materials Strategy Report, the U.S. Department of Energy (DOE) focused on materials used in four clean energy technologies:

  • wind turbines - permanent magnets
  • electric vehicles - permanent magnets & advanced batteries
  • solar cells – thin film semi conductors
  • energy efficient lighting - phosphors

The DOE says they selected these particular components for two reasons:

  • Deployment of the clean energy technologies that use them is projected to increase, perhaps significantly, in the short, medium and long term
  • Each uses significant quantities of key materials

The DOE defines “criticality” as a measure that combines importance to the clean energy economy and risk of supply disruption.

A Report by the APS Panel on Public Affairs and the Materials Research Society coined the term “energy-critical element” (ECE) to describe a class of elements that currently appear critical to one or more new, energy related technologies – batteries certainly fit in here.


For the last couple of decades energy researchers have focused on capturing power from renewable sources and making our existing electric infrastructure as efficient as possible. Energy storage is the last vital piece, the still missing third link needed to wean the global economy off fossil fuels and enable widespread adoption of renewable clean energy and electric cars. 

We know the United States has long considered manganese a strategic material. We know the U.S. has no production of its own - instead relying on others to supply Mn ore and value added manganese products.

We also know energy storage is critical for renewable integration and electrification of the energy infrastructure. So, shouldn’t manganese suddenly becoming an “energy-critical element” be on all our radar screens?

Is manganese on your screen?

If not, it should be.

Richard (Rick) Mills


Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTReport, Vantagewire, Indiatimes, ninemsn, ibtimes and the Association of Mining Analysts.

If you're interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us at www.aheadoftheherd.com

Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

article 3 months old

More Copper, Less Gold For OZ Minerals

More copper and less gold production is expected from OZ Minerals in coming years and Carrapateena's imminent feasibility study could be a catalyst for the stock.

-Main risks in the trajectory of the copper price and AUD
-Production outlook materially improved at Prominent Hill
-Is the market overlooking the risks with Carrapateena?


By Eva Brocklehurst

Copper-gold miner, OZ Minerals ((OZL)), has revised its medium-term guidance for Prominent Hill, with more copper and less gold expected over the next three years. The Carrapateena feasibility study is expected early in the June quarter, and brokers expect this could be a catalyst for the stock.

The company's 2016 copper production of 116,900 tonnes beat guidance of 105-115,000 tonnes and gold production of 118,300 ounces was within the guidance range of 115-125,000 ounces. 2016 C1 cash costs of US 74.1c/lb were in line with expectations, despite the 15 days of power black-outs in South Australia. Management has confirmed the share buy-back will continue.

Citi forecasts higher milling and underground mining rates and raises its expectations for copper and gold grades in FY17-19. Accordingly, earnings per share estimates are increased for those years. Citi expects the news flow will now focus on Carrapateena, one of the world's largest undeveloped copper resources, and possibly include M&A, as the company seeks to acquire base metal and gold assets which can diversify its production footprint.

The main risks for the stock are in the copper price and the Australian dollar. Citi notes copper is highly geared to economic recovery and any change in economic activity has the potential to alter earnings assumptions and valuations for OZ Minerals.

Clearer Path For Prominent Hill

A revision to the mine plan at Prominent Hill has materially improved the production outlook for copper in 2018 and 2019, and Macquarie believes the focus on copper ore in changes to the open pit plan should mean a production rate close to 100,000 tonnes per annum is maintained through to 2019. The broker lifts copper production forecasts at Prominent Hill by 4% for 2017, 13% for 2018 and 53% for 2019 to match guidance.

The drive to produce more copper means the broker's gold production forecasts fall -10-20% over the next three years, while cost assumptions (AISC) rise 32% and 10% for 2017 and 2018 respectively. Factoring in the longer mine life at Prominent Hill means the broker's price target is raised 11% to $9.30.

Other brokers agree a clearer plan for Prominent Hill has now been established and the market's focus should shift back to Carrapateena, but both Morgans and Credit Suisse highlight the current share price appears to ignore the risks from the undeveloped project.

Morgans upgrades forecasts for earnings per share in line with higher copper price assumptions and the benefits to medium-term operating assumptions at Prominent Hill. The broker notes a significant portion of the upgrade to the Prominent Hill reserve in November was driven by reduction in the mining reserve cut-off grade, which the company believes to be sustainable.

Credit Suisse believes the greatest near-term opportunity is from the re-optimisation of the Prominent Hill underground mine, to progressively include additional resources which, while already defined, have an in-situ value that is too low relative to the cost base. Ultimately, the broker believes exploration success underground will need to be balanced by a cost structure that is more appropriate to the re-configured, lower underground-only milling rate.

The broker believes power availability in South Australia has impacted the company's decision on the configuration of the mill, with a steady power draw possibly more readily accommodated if supply is fragile in coming years.

Carrapateena The Catalyst

Morgans notes Carrapateena remains a technically complex project, where relatively small changes in key inputs can have large detrimental effects on value. The broker also lauds the company's agility during the October power outage in South Australia, as it mined more underground ore, maintaining its 2016 copper guidance. The company displaced lower-margin gold-only ore with higher-value copper ore.

Morgans suspects the recent rating upgrade of the stock has been driven by general demand for large, liquid and high-margin copper exposures amid rising copper prices. Such stocks are scarce on the ASX and this helps to explain the stock's premium. Still, with prices now well ahead of fundamentals the broker believes the market is overlooking inherent risks and downgrades to Reduce from Hold. Morgans retains a preference for Sandfire Resources ((SFR)) in copper.

Ord Minnett believes the risks to the share price are evenly skewed. The broker remains bearish about the near-term copper outlook, expecting prices will retrace towards US$2/lb in 2018. Ord Minnett maintains a Hold rating. The stock remains the key pick in the copper space for UBS, supported by its two long-life assets and a positive outlook towards copper. UBS has a Buy rating.

The broker notes investors are somewhat cautious regarding Carrapateena, with a view that the asset is marginal and the risk profile elevated. The broker expects the full feasibility study due by the end of the March quarter to deliver the details necessary to de-risk the asset further.

On FNArena's database there are two Buy ratings, three Hold and three Sell. The consensus target is $8.01, suggesting -10.4% downside to the last share price. Targets range from $5.80 (Morgan Stanley) to $10.50 (Citi).

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article 3 months old

Material Matters: Silver, Zinc And Coal

A glance through the latest expert views and predictions about commodities. Silver use in PV cells;  zinc markets; China's coal policies; dividend outlook for miners.

-Silver demand in solar cells likely to decline in the medium term
-High price of zinc relative to other metals will begin to destroy demand
-Coal output restrictions likely to return in China
-Morgan Stanley suspects relative underperformance in mining sector


By Eva Brocklehurst


Citi suspects demand for silver in the photovoltaic (PV) cells market may improve in 2018, based on optimistic estimates of global cell capacity. Demand for silver in solar cells is in a state of flux and likely to decline over the medium term, as 2017 becomes a year of de-stocking of capacity and global demand catches up with supply.

Demand for silver emanating from solar cells comprised 7% of total silver demand in 2016, according to industry estimates. It is believed, based on these estimates, that the volume of silver used within PV cells is declining around -5% every year, because of continued efforts to reduce costs.

In the event that silver prices rise rapidly, the broker believes companies may adopt more stringent cost-cutting programs, or invest in non-precious metal components altogether. Alternative technologies are still too expensive to displace existing solar cells but the risks of copper substitution within IBC solar cells could decrease the silver paste market share over the medium term.

Meanwhile, PV rooftop tiles may eventually improve end use in residential markets and grow the distributed energy network. The amount of silver used in roof tiles is not yet clearly evident. Much depends on whether the tile is a thin-film solar cell or a monocrystalline silicon. Hence, based on current arrangements, Citi approximates 100-120 mg of silver per tile could be in use. The broker expects both the efficiency and rising adoption rates will increase the penetration of PV cells among US households.

In the current market, where the Chinese government has clamped down on feed-in tariffs for solar PV systems, Citi believes only the lowest-cost manufacturers are likely to survive and possibly increase market share. Policy and subsidy changes may begin to slow down production and, while solar growth in China exceeded expectations in 2016, the broker question is whether the rate of growth is sustainable.


Chinese trade and smelter production data have confirmed that market tightness is yet to emerge. Nevertheless, zinc prices look robust in the high US$2000/t range, Macquarie asserts. Chinese smelters are now making minor reductions in output and the ex-China market is preparing for a marathon negotiating period for 2017 concentrates. Macquarie believes the wind is favouring sellers at this juncture.

The broker agrees continued price strength suggests prices will be above US$3000/t by the end of the year. After that, the trajectory is less certain. Glencore's shuttered mines are likely to return to production at some point while new projects are being accelerated.

The price of zinc relative to other materials such as aluminium will begin to destroy demand the longer the price remains high. In 2018 the broker expects continued shortages of metal but also a subsiding of demand growth. Macquarie's current base case rests on a re-start of the Glencore mines in mid 2017. A combination of these changes is likely to dampen prices before more concrete physical market re-balancing arrives in 2019/20 to bring zinc prices back down to earth.


China is expected to underpin the global coal market in the near term. If prices continue to slide, Macquarie expect some form of output restrictions will come back, such as the 276 days policy, which was suspended in November until the end of the first quarter. The government recently outlined a thermal coal price target around the annual contract price of RMB535/t.

Supply intervention now appears only likely if prices are above RMB600/t or below RMB470/t. The Chinese government's pronouncements may be enough to prevent prices trading outside this range and the broker's confidence in this scenario is one of the main factors underpinning its recent upgrades to coal price forecasts.

The broker also contemplates a scenario where China will pull back from its readiness to accept coal imports, as an alternative measure to support domestic coal prices, particularly as the policy goal is to support domestic mining.

Macquarie notes Beijing's ability to strongly intervene in domestic supply renders traditional supply and demand analysis for coal largely obsolete. It is possible the government could make further adjustments to import taxes and/or coal quality cut-off levels, in an effort to dissuade imports and provide more assistance to domestic coal mines.

This is not Macquarie's base case. Nonetheless, the broker believes it is a risk worth highlighting, as if this was to happen it would clearly provide downside risks to seaborne coal price forecast.


The potential for the mining sector to re-rate on structural changes in dividend policies is a key debate, Morgan Stanley observes. Yet, analysis indicates the mining sector is unlikely to re-rate on a shift to dividends, based on pay-out ratios.

Analysis of long-term dividend trends suggest there is a modest historical correlation between dividend yield and relative performance, except at extreme levels. The broker warns the market is currently close to such an outlier and, historically, this has driven 2% relative underperformance in the following 12 months.

The broker believes dividend signals are not as strong as the debate suggests and the market is currently close to such a level which is not helpful for sector performance. The broker notes a switch from progressive dividends to pay-out ratios reduces the risk of over-investment during periods of high cash flows. On average, Morgan Stanley calculates companies are targeting 50% pay-out ratios.

This compares to 42% and 44% for Rio Tinto ((RIO)) and BHP Billiton ((BHP)) respectively. The pay-out ratio dropped to 26% and 32% respectively during the super cycle, as progressive dividend policies encouraged more re-investment in growth relative to dividends. In the pre-super cycle period pay-out ratios reconcile neatly with the new dividend policies, the broker asserts.

Considering the outlook for volume growth across commodities Morgan Stanley believes it will be hard to replicate double-digit rates of growth. On a base case estimate the broker's forecasts imply 3% and 2% growth in dividends per share for Rio Tinto and BHP Billiton, respectively, for the 10 year period 2017-27.

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article 3 months old

Material Matters: Iron Ore, Oil And Tin

A glance through the latest expert views and predictions about commodities. Iron ore optimism; oil market re-balancing; and a rally in tin.

-tight steel market expected to support iron ore prices
-observable down-trends in oil production and inventory needed
-semiconductor growth sees demand for tin surge


By Eva Brocklehurst

Iron Ore

Optimism in China's steel industry is the main driver of iron ore prices over the short term but the domestic iron ore industry could also have an impact on prices, keeping these around current levels in 2017, ANZ analysts contend. Iron ore is expected to be affected by the country's policy on industrial over-capacity. China's State Council announced last year it would reduce steel production capacity by 150m tonnes by 2020.

China is also intent on eradicating illegal steel making capacity as it battles pollution and emissions in its major cities. Hence, tightness in the steel market should support iron ore prices and the analysts expect underlying Chinese steel demand to remain robust in 2017. Steel production growth is expected to contract this year, although be matched by a similar fall in growth the net exports from the major exporters.

Growth in exports of iron ore from the Australian producers, Rio Tinto ((RIO)), BHP Billiton ((BHP)) and Fortescue Metals ((FMG)) is expected to fall to its lowest level in five years. Another indicator underscoring this expectation is the forecast from Australia's Bureau of Meteorology for an above-average number of cyclones during the local season, which lasts from November to April. This, the analysts suspect, could impact exports by as much as 15% quarter on quarter.

Still, the main potential game changer for iron ore is the Chinese domestic industry. Since iron ore price highs of US$180/t were encountered in 2009-14 Chinese output has fallen by more than 60%, as the high cost producers shut down when the price fell below US$100/t.

As iron ore prices have pushed above US$80/t in recent weeks, the analysts observe this raises the possibility of a recovery in Chinese iron ore production. If supply pushes up to when prices were last at this level, another 50mt of iron ore capacity could potentially be reactivated in China, in turn sending prices back below US$60/t.

Yet, the analysts believe the probability of this occurring is relatively low, as exporters have established strong relationships with buyers in China and now provide nearly 90% of the country's total iron ore consumption.


UBS has reduced its long-term oil price assumption to US$70/bbl from US$75/bbl. This reflects a view regarding the cost of developing a marginal barrel outside of the US, although the ultimate range could vary from US$60-80/bbl. Assuming reasonable compliance with OPEC output cuts, the physical oil market appears under-supplied for the second quarter of 2017.

The speed of a US response to the OPEC production cuts suggests significant tightening is most likely a 2018 event. The main uncertainties, the broker envisages, revolve around US shale and its capacity to ramp up quickly and be the marginal producer as conventional supplies decline globally. Other variables include the return of Nigerian supply and whether annual demand continues to grow at over 1mmbbl/d.

The reduction in long-term oil prices has reduced the broker's forecasts for earnings per share for the oil stocks. The broker expects oil companies to be conservative regarding organic investment in 2017 and mergers and acquisitions are again likely to feature.

UBS retains a preference for Woodside Petroleum (( WPL)) with its modest gearing and low-cost LNG production as well as Origin Energy ((ORG)), with its ramp-up of APLNG and and rising electricity prices. The broker has reduced its rating on Santos ((STO)) to Neutral after the recent equity raising and and downgraded Horizon Oil ((HZN)) to Neutral after a 35% rally in the share price.

Shaw and Partners also expects the market to rebalance if OPEC delivers on its supply cuts. The trends are already under way with non-OPEC supply falling and demand remaining robust. If OPEC delivers then this should underpin an oil price recovery in 2017. The analysts note inventory levels are still near historical highs and, without OPEC cuts, it would take around two years for the oil market to rebalance.

With oversupply, the value of marginal production is zero, and there is no reason to spot prices to rally. The analysts believe, for the current rally to continue, observable down-trends in production and inventory data are needed. OPEC and non-OPEC cuts, if delivered, should eliminate up to 1.8m bpd of supply and result in deficits through 2017.

The analyst expect this would result in meaningful reductions in inventories throughout the year, for the first time in four years. Assuming demand remains robust the market should "normalise" by the end of the year, Shaw and Partners estimates.


The lowest volume metal of the base metals traded on the London Metal Exchange, tin, was second only to zinc in terms of its recovery in 2016, rallying 45% to trade at US$21,000/t by the end of the year, Macquarie notes. Refined stocks of the metal in warehouses are at low levels, although producer inventories have lifted and mine supply appears to be improving, notably in Indonesia.

Key reasons behind the recovery in the tin price include low visible levels of stock on exchanges and reduced export volumes from key producer Indonesia, as well as lower production in China and Myanmar. The broker estimates Indonesian mine production was down 13% in 2016 after price-related mine closures at the start of the year.

While Indonesian production looks to be improving, Macquarie suspects Myanmar production growth is slowing. Meanwhile, Chinese metal output was affected from July by environmental shut-downs and data up to October implies there has been no real recovery.

The supply developments are not that dynamic and the broker concludes the 2016 rally was mostly driven by one factor that did change dramatically, demand. There was a surge in end-use semiconductor shipments in the second half of 2016 while tinplate production was boosted by stronger-than-anticipated demand from the Chinese steel sector. Together these two features account for around two thirds of global demand.

Moreover, Macquarie's semiconductor analysts are projecting global sales growth of 9% in 2017 on a continued recovery in the sector, particularly with wafer fabrication capacity being added aggressively. The broker upgrades its outlook for demand, which should push tin into a deeper deficit over the next few years. Accordingly, price forecasts are raised on average by 5-21% out to the end of the decade.

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article 3 months old

Nickel Downside Risk

Indonesia’s decision to overturn its nickel export ban may have dire consequences for the nickel price, although uncertainty reigns.

- Indonesia lifts nickel export ban
- Downside nickel price risk may be material
- Impact is difficult to quantify

By Greg Peel

Last year the Indonesian government decided that the country’s exports of large amounts of low grade nickel to, in particular, the Chinese nickel pig iron industry, left Indonesia with a low margin industry and handed over the value-add to China. In order to secure the value-add for its own economy, the government instigated a ban on nickel ore exports in order to encourage the development of a local smelting industry.

The ban came as a blessed relief to global nickel miners given the world was facing a substantial nickel surplus, which had been placing significant downward pressure on the nickel price.

Enter Indonesia’s partly state-owned nickel miner and processor, PT Antam. Back in September, the miner appealed to the government to lift the ban given the company was stockpiling ore of a grade too low to suit its own processing, but sufficient for export to the Chinese. With revenue going begging, the relevant Minister was set to accede to PT Antam when in stepped members of Indonesia’s Smelting Associations, who pointed out a lifting of the ban would derail the development of Indonesia’s smelting industry, make Indonesia appear an unreliable jurisdiction into which to invest, and specifically threaten investment already made by Chinese companies in the country.

In the latter case, Chinese stainless steel company Tsingshan has spent US$6bn to date on building a smelter, port and power station in Indonesia, on the assumption the law would not be changed.

The minister thus backed down. As far as commodities analysts were concerned, that was the end of the story. In the meantime, the new Philippines government also instigated a ban on nickel ore exports by companies deemed to be environmentally damaging. It all looked good for the nickel price heading into 2017, and for the share prices of nickel miners. At the very least, the bans would serve to clear out the global nickel surplus and bring the market back into balance.

While the news out of the Philippines was positive, the reality is that the environmental audit being undertaken by the government is proving a slow process. Until shut down, “dirty” Filipino nickel miners continue to export. While this had provided some strain on the nickel price recovery, nobody was prepared for what was to transpire last week.

Indonesian Flip-Flop

The Indonesian government has changed its mind, again. Nickel ore exports will be allowed to resume, but only from those companies who can satisfy strict requirements regarding the planning of and progress towards the construction of smelting facilities on the ground in Indonesia. PT Antam has won the day. As have Chinese nickel pig iron smelters, who since the bans have all but been shut down by a lack of global ore supply. One saving grace for Tsingshan is that it, too, can export to its own smelters in China. Indonesia’s Smelting Associations are not happy.

So what does this mean for the nickel price? Analysts are unsure, other than to note there is no upside unless the Indonesian government again changes its mind. As to the extent of downside, analysts agree this could be material, but it will depend on certain factors.

Just how much nickel will suddenly be released onto the market? This depends on how many Indonesian producers can or will satisfy the government’s rigorous smelter investment requirements. PT Antam alone, analysts note, has the capacity to release enough nickel ore onto the market to restart the Chinese pig iron industry and severely damage the price of processed nickel. But is this in PT Antam’s interest?

It is more feasible that the company would drip-feed ore onto the market in order to restrain price falls, lest it shoot itself in the foot by losing on the price swing the revenue it gains on the export roundabout.

Focus On Downside Risks

Analysts are therefore in a difficult position, and as yet reluctant to definitively adjust nickel price forecasts until more is clear. One thing is for certain nonetheless – those adjustments will be to the downside, and perhaps materially so. Prior bullish theses are now out the window.

To date, only Macquarie (among the eight major brokers in the FNArena database) has downgraded its recommendation and target prices for Australia’s two leading listed nickel miners, Western Areas ((WSA)) and Independence Group ((IGO)), cutting each to Neutral from Outperform pending greater clarity.

Among the database brokers, Macquarie had been decidedly bullish on the nickel price, while other brokers had otherwise decided the nickel price had run too far, too fast.

Citi and UBS both already had Neutral ratings on Independence Group, with Deutsche Bank on Sell. Credit Suisse upgraded Independence to Outperform last month on increased reserves at the company's Tropicana mine but will no doubt now reassess.

As for Western Areas, all of Citi, UBS, Deutsche Bank and Ord Minnett (Lighten) had Sell ratings in place prior, with Credit Suisse having downgraded to Neutral last month.

The share prices of both stocks took a hammering on Friday when the Indonesian government made its announcement. Western Areas fell -19% and Independence -10% and fell again yesterday before finding some support later in the session.

As to where to from here, that is unclear.

It should be noted, however, that as of late last year Western Areas was the third most shorted stock on the ASX, at over 13%, and Independence was also heavily shorted, in excess of 8%. Short-covering, therefore, may well be in play as the share prices of both companies currently consolidate.

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article 3 months old

Independence Group: Focus Shifts To Nickel

Independence Group has released an interim report from its Long Island study, which should de-risk the Tropicana gold project. The focus is expected to return to the upside potential at Nova.

-Significant upgrade to Tropicana resources and improved production outlook
-Challenge to keep unit costs down with increased material movement
-Nickel to account for 50% of the company's revenue from FY18


By Eva Brocklehurst

Independence Group ((IGO)) has released preliminary findings from its Long Island study, which is optimising the production and cost profile at the Tropicana project (30% owned by Independence). Results include a significant upgrade to resources and an improved production outlook through to 2019. The study should be completed by mid 2017.

UBS was expecting a full update but notes management has cited recent drilling results have meant that estimates needed to be updated. Hence, the full release is subsequently delayed. Production is to grow slightly to over 450,000 ounces by FY18, supported by increased milling rates to 7.9mtpa as well as higher grades. Annual material movements are expected to increase to 80mtpa. In this regard, the broker notes the challenge will be in keeping unit costs down.

The company is expecting costs to be reduced by 25-30% from 2019, when a bulk mining approach will be fully utilised. UBS believes this latest announcement will help to de-risk Tropicana and investors will again renew their focus on the upside potential at Nova, which is on track for nameplate production by the end of FY17.

Nova will shift the company's revenue split towards nickel and away from gold. By FY18, nickel will account for around 50% of revenue, up from less than 15% in FY16. Tropicana accounts for around 60% of the broker's group net present value and, while it has genuine mine life, UBS suspects the market will view the stock as more a nickel producer rather than gold producer going forward.

Canaccord Genuity expects the longer-term production profile at Tropicana to average 400-450,000 ozs per annum and updates its model in accordance with the company's guidance, extending mine life by two years to capture the enlarged reserve base and potential for further upgrades. The broker, not one of the eight monitored daily in the FNArena database, has a Hold rating and $4.05 target.

The company has announced a return to grade streaming, preferentially stockpiling lower grade ore, which will mean head grade increases to 2.3g/t from 1.8g/t. The broker notes, while FY17 guidance is unchanged, the company expects costs will be at the high-end of the range of $1150-1250/oz as a result of accelerated mining rates and increased capitalised stripping expenditure.

Ore reserves are increased by 58% to 60mt at 1.97g/t for 3.8m ozs. The company has foreshadowed further resource/reserve upgrades for the Havana South and Boston Shaker pits in the first half of 2017. Canaccord Genuity now assumes production at Tropicana up to FY27, implying a 10-year mine life.

The so-called value enhancement update for Tropicana is well named, in Citi's opinion, given it is a blend of reserve and resource increases, higher mill grades and an increasing production. The next milestone is finalising the strip mining strategy in the first half of 2017. The broker retains a Neutral rating on the stock, based on valuation. The increase in gold production from Tropicana means higher earnings in FY17-19 and this increases Citi's target to $4.50.

The broker also notes that nickel will dominate the company's profile once Nova is in full production in 2017. The company has three other operating assets: 100% of the Long Nickel and Jaguar Bentley underground mines and a 30% stake in Tropicana, with the latter and Nova being the drivers of value.

Macquarie found the study slightly better than it anticipated but considers most of the upside is already captured in its price target of $5.10. The broker retains an Outperform rating. The continued ramp up of Nova, which appears to be running ahead of guidance, remains the next major potential catalyst.

The broker makes some changes to assumptions to incorporate the updated estimates and only a minor adjustment to assumptions regarding the mining inventory, having already expected a major upgrade to reserves.

Macquarie also expects resources at Boston Shaker and Havana South will be upgraded next year. FY17 gold production forecasts rise by 4% for Tropicana, to 431,000 ozs. The broker's earnings estimates are largely unchanged for FY17, while FY18 and FY19 are raised by 7% and 12% respectively.

The database has two Buy ratings, three Hold and one Sell (Deutsche Bank). The consensus target is $4.28, suggesting 6.0% upside to the last share price. Targets range from $3.70 (Deutsche Bank, Morgan Stanley) to $5.10 (Macquarie).

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article 3 months old

Material Matters: Oil, Coal, Copper And Steel

Oil outlook; copper demand; coking coal contracts; steel pricing.

-Positive news priced into oil sector
-Favourable trends to continue for copper
-Macquarie upgrades BHP, S32 on coking coal contract pricing
-Overall outlook bullish for miners, balance sheets in good shape
-Steel stocks expected to outperform


By Eva Brocklehurst

Oil & Gas

Oil prices are expected to recover in coming years, and signs of accelerating cost deflation in offshore and further productivity gains in US onshore compress Citi's oil cost curve. The broker calculates that the incentive price to meet future demand has reduced to US$55-65/bbl, down from US$70/bbl. Hence, long-term oil price forecasts are reduced to US$65/bbl.

Citi does not believe the sector is cheap any more. While Santos ((STO)), AWE ((AWE)) and Sino Oil & Gas ((SEH)) remain Buy rated, the broker downgrades Woodside Petroleum ((WPL)) and Senex Energy ((SXY)) to Neutral. Beach Energy ((BPT)) and Origin Energy ((ORG)) are downgraded to Sell.

The agreement reached among non-OPEC producers was more favourable than Macquarie expected. Cuts of a total of 582,000 barrels per day have been agreed, spread across 12 countries. After a near 25% increase in the spot West Texas Intermediate price since the recent low of US$43.32/bbl recently, the broker believes the majority of positive news is priced into both spot and forward prices.

Macquarie is not inclined to initiate any net short position until spot prices reach US$60/bbl, although acknowledges the risk/reward proposition of being long falls away above US$55/bbl. Negative news is expected to be limited until both execution and compliance with the new cuts are visible in January 2017 and the second quarter of 2017 respectively.

While the inclusion of several countries with natural declines has rightly brought the non-OPEC deal into question, Macquarie's analysis indicates that even after adjusting for these producers, it is still meaningful

. Nevertheless, the broker's modelling indicates the US shale response will be massive. Macquarie estimates exit-rate production growth of 300,000bpd at the current rig count, 600,000bpd at US$55/bbl and 1.1m bpd at $60/bbl.


The outlook for copper demand has transformed this year and Citi believes a favourable trend will hold up even over the long term. The three channels offering sizeable growth potential for copper are urbanisation, electrification and transport over the next 10-15 years.

Greater disposable income in China and India is likely to spur demand for consumer goods that tend to be copper intensive. Growing awareness and investment in non-fossil fuel power generation is expected to define the pace at which copper demand benefits from increased utility in this sector.

Asia remains at the forefront of copper demand, and the broker estimates consumption is likely to stabilise at around 16m tonnes per annum with further potential to improve over the next 10 years.

Coking Coal

Reports indicate the March quarter hard coking coal contract between Glencore and Nippon Steel has settled at US$285/t, which is US$100/t higher than Macquarie forecast. This comes despite spot prices falling to US$270/t from over US$300/t in just over a week.

The broker incorporates the contract price into its estimates for BHP Billiton ((BHP)) and South 32 ((S32)) which results in material upgrades to earnings forecasts for FY17 of 10% and 12% respectively.

The settlement price is the highest since the December quarter of 2011. Macquarie understands that the appetite of Japanese mills to push a hard bargain was lessened because increased more materials prices can be used as leverage with their steel customers.

Macquarie expects spot coking coal prices to fall further as the Chinese government has announced production-loosening measures and disruptions at key seaborne suppliers are being resolved.

Morgan Stanley has turned bullish on the outlook for coking coal, revising its 2017 price forecast up by 58%. Forecasts are also revised up 36% for thermal coal, 16% for iron ore, 13% for copper and 10% for aluminium. BHP and Rio Tinto ((RIO)) are both set to benefit and the broker retains an Overweight rating on the two, preferring BHP.

The positive industry view combines better-than-anticipated prices and ongoing productivity gains, which should deliver better-than-expected cash flow, debt reduction and potential returns.

A general expectation that commodity prices will move lower means most miners are reluctant to add supply capacity, and the broker suspects that this, in turn, may mean prices hold at better-than-expected levels for longer than expected. Ultimately, if there is enough incentive there will be a supply response but until then the likes of BHP and RIO should generate strong margins.

The broker notes large miners typically outperform during a reflationary period and rotation in the industry. The metrics look compelling if even half the spot price upside is captured, the broker asserts.

Ord Minnett also believes the outlook is bullish for the miners. The gap between 2017 spot earnings and consensus forecast remains large, suggesting the consensus upgrade cycle should continue in the near term.

Meanwhile, balance sheets are in good shape across the sector which means reporting season should witness a return of higher dividends and/or capital management.

Also, Chinese economic data remain supportive of commodity demand and buoyant prices. In considering these factors many investors that are underweight the sector are expected to neutralise this position heading into January/February, and this is another re-rating catalyst.


Morgan Stanley believes supply-side reforms in China will create more favourable pricing for steel worldwide. The broker is more confident that China can achieve its permanent capacity reductions of 150mt by 2020. The merger between Baosteel and Wuhan Iron & Steel also shows that the industry continues to consolidate, pointing to improved fundamentals over the next 3-5 years.

Morgan Stanley believes China's steel exports will stay in a range of 100-120mt over the next few years. While this will improve the fundamentals of the global steel industry overall, the broker expects steel stocks in China, Australia, Latin America, India, Japan and North America will outperform as the benefits of supply-side reforms are not fully priced in.

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article 3 months old

Iluka Raises Rutile Profile, But Will It Pay?

Mineral sands producer Iluka Resources has raised its profile in global rutile production. Brokers emphasise higher prices are required to make the acquisition pay.

-Benefits to come from improved plant recoveries and a reduction in unit costs
-Expanding Sierra Leone operations would allow more work to be done on the hydrology mining concept
-Growth options within funding capacity but dividend may be suspended


By Eva Brocklehurst

Mineral sands producer Iluka Resources ((ILU)) has completed the acquisition of Sierra Rutile, an African-based miner, adding scale and long life to its portfolio.

This is a counter-cyclical investment which provides an additional 140,000tpa of rutile production. Iluka is proposing a number of changes to the operations, which could boost production to over 240,000tpa and lower unit costs to under US$500/t.

Even after factoring in improvements, Deutsche Bank considers the Sierra Rutile deal is value neutral at a long-run rutile price of US$1000/t (current spot US$750). Moreover, the mines require over US$200m in capital expenditure to expand production, and will be negative on free cash flow until 2020.

The broker also notes the mines are relatively low grade, in a remote part of Sierra Leone and 100% reliant on fuel oil as a power source. Deutsche Bank assumes some benefit in improved plant recoveries and a reduction in unit costs.

The deposits have a high heavy mineral grade of 6% but the valuable heavy mineral component is just 45%. The acquisition will provide a greater share of the high-grade rutile market for Iluka, and investing in the expansion of these operations would allow the company more work on the hydrology mining concept to be tested at Balranald.

The broker continues to rate the stock a Sell and expects realised zircon prices will continue to disappoint, as sales are now more skewed to lower-priced standard zircon and concentrate. Meanwhile, sales of synthetic rutile, two thirds of the company's feedstock sales, are largely fixed at around US$700/t.

Including spending on the $250-280m Cataby project, Deutsche Bank has Iluka trading on a free cash flow yield of 6% in 2017. Cataby should have a 7-8 year life and produce around 200,000t of synthetic rutile, 50,000t of zircon and 30,000t of rutile.

Incorporating the operations into forecasts results in a number of changes to Macquarie's estimates. After accounting for increased net debt of $180m the broker's sum-of-the-parts valuation increases 5%. The total cost of $473m will be funded through existing debt facilities.

Given planned expenditure at the Sierra Leone operations, and the likely construction of the Cataby project in Western Australia in 2018, Macquarie expects gearing to peak at 31% in 2017/2018.

Whilst believing the necessary growth options are within the company's funding capacity, Macquarie suspects that without a significant uplift in mineral sands prices, the dividend could potentially be suspended during the construction of new projects.

Nevertheless, the success of the bid cements the company's position as the dominant player in the global chloride titanium dioxide marketplace. It also skews the resource base further away from the predominantly sulphate Chinese pigment market.

As titanium dioxide is apparently the growth sector in mineral sands, the broker suggests that how the company addresses the other 50% of global demand represented by the Chinese market remains to be seen.

Macquarie upgrades to Neutral and believes improvements in mineral sands pricing and the Chinese property segment sentiment will be the key catalysts ahead.

Credit Suisse adjusts its cash cost structure as indicated by the company's guidance, including transaction fees, and lowers its Iluka corporate cost assumptions. The net impact is a 17% reduction in earnings for 2016. 2017 earnings estimates increase by 5%.

The broker considers the merger a positive development that should be earnings accretive and provide greater production options, allowing, perhaps, the deferral of Balranald.

When the deal was first announced in August, UBS estimated earnings per share accretion at 17% in 2017. Since then, the broker factors in a much lower earnings base for Iluka and has revised down earnings forecasts in 2017 to $41m from $158m.

On this basis, the broker expects accretion to be substantially more, perhaps around 70-80%. The acquisition adds scale and long life to the company's portfolio, although Iluka acknowledges the transaction requires feedstock prices to lift over coming years to justify the investment. UBS retains a Buy rating.

FNArena's database shows three Buy ratings, three Hold and one Sell (Deutsche Bank). The consensus target is $6.86, suggesting 5.1% downside to the last share price. Targets range from $5.30 (Deutsche Bank) to $8.10 (Citi, yet to update on completion of the acquisition).

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