Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Brokers mixed on whether value lies in resource companies
Falling resource and commodities prices are worrying investors and resource companies have dropped sharply in price in July. Analysts are mixed on their outlook for resources companies, with some tipping energy companies to outperform while other experts favour diversified resources companies.
A slide in commodities prices has ranged from oil, gas and wheat, to base metals such as copper, aluminium and iron ore. Many of these commodities ended the June quarter near or lower than their March prices due to growing fears of a recession in the US and worldwide as interest rates rise.
According to analysts, weaker economic activity globally is expected to lower demand for iron ore, which is used in steel production, and other industrial metals such as aluminium and copper. Energy prices too are falling from their year highs and this week oil dropped below the key US$100 a barrel as investors worry about a global recession due to restrictive US monetary policy. Many analysts expect base metal prices to keep on falling as fears of recession grow.
As commodities have dropped, so too have prices for resource stocks. But according to investment bank UBS, Australian resources companies haven’t fallen to levels yet to encourage sector-wide buying.
Upcoming production and financial results in August are likely to show higher costs and possibly lower production, with reduced rates of investment spending, “all reasons to be cautious and selective on buying.”
UBS has a Neutral rating on BHP, Rio Tinto and Fortescue Metals Group. Strong earnings near term should support returns despite higher costs, but downside to spot iron ore, copper, met coal and nickel prices will likely weigh on equities,” said a recent UBS report, “Australian Resources Cheaper… But Not Cheap”.
In terms of other commodities exporter including copper and aluminium producers, UBS says that slowing demand growth into 2023 risks weaker commodity prices. “And while stocks have already fallen from recent cycle peaks, lower commodity prices would likely pressure equities lower still,” the investment bank says. UBS has downgraded its 2023 prices for aluminium given near-term demand weakness, though it has lifted prices for 2024 to 2026 taking into account likely higher energy prices, “which should lift aluminium’s cost support significantly.”
On copper, UBS says it has downgraded price forecasts given demand growth slowing and growing supply. But it remains positive on Australian gold producers as the sector has underperformed its global peers. UBS has Buy ratings on Northern Star, Evolution Mining, Gold Road Resource, De Grey Mining and SSR Mining.
Longer term bull at Goldman Sachs
According to a note from Goldman Sachs resources analyst Paul Young, investors are most positive on energy stocks including thermal coal and natural gas producers, and most bearish on steel, copper and aluminium companies given an expected global economic slowdown in the second half of 2022.
Young is expecting a drop in global commodities demand over the next 12 month in line with the fall in global economic indicators such as manufacturing indices. At the same time, cost inflation for the mining sector is accelerating with rising energy and labour costs, which will put pressure on profits.
However, over the medium to longer term, he remains positive on the mining sector. An expected recovery in China will list infrastructure and property construction while global decarbonisation and investment in renewable energy projects is expected to result in a shortage of base metals. Young believe the mining sector overall is undervalued despite headwinds coming from rising costs and sustaining capex.
Goldman Sachs has buy ratings on South32, BlueScope Steel, Mineral Resources, BHP, Rio Tinto, Champion Iron, Coronado Global Resources, and Whitehaven Coal.
Morgans sees BHP as remaining resilient despite lower iron ore prices given the diversified nature of its business. Analyst Andrew Tang views BHP as relatively low risk given greater diversification compared to its global mining peers. “We see BHP as holding an attractive combination of upside sensitivity, balance sheet strength and resilient dividend profile,” he says. Morgans’ Tang likes Santos too also because of its diversified earnings base which makes it best placed of energy companies to outperform.
Elsewhere, falling nickel, aluminium, copper and other base metal prices have dropped, but Bell Potter resources analysts say the outlook for Australia’s largest listed nickel producer Nickel Mines remains bright. Nickel prices are expected to edge higher in in third quarter of this year as Chinese stimulus measures improve the demand outlook and the Russia- Ukraine war continues to disrupt supply.
Ord Minnett is most upbeat on South32, which is its key sector preference based on strong valuation support, potential upside to medium-term aluminium and alumina prices due to cost curve support, and a high free cash flow (FCF) yield. It has maintained its Buy recommendation but trimmed its target price to $4.60 from $4.80 due to changes to its earnings forecasts.
