A Change of View

Ord Minnett’s commodities team has raised its near-term base-metal price forecasts due to positive sentiment, supply disruptions and strong demand growth, with the major changes being increases of 15% and 26% for our copper price estimates in CY17 and CY18, respectively, and increases in our estimates for aluminium of 21% and 15% in the same periods.

 

The team now expects prices to broadly remain around spot levels, before easing slightly into CY18, moving away from the previous bearish view.

 

Our top picks remain as follows: Fortescue Metals Group (FMG); Rio Tinto (RIO); Whitehaven Coal (WHC); Alumina (AWC); and Regis Resources (RRL); on all of which we maintain an Accumulate recommendation. Our least-preferred stocks are Iluka Resources (ILU) and Newcrest Mining (NCM); on both of which we maintain a Lighten recommendation.

 

Material upgrades in copper (CY17 now US$2.60 a pound), and aluminium (now US$0.89 a pound) have been driven by the combination of strong demand, supply disruptions, and positive sentiment. We see metal prices broadly at spot levels this year, before softening slightly in CY18, moving away from our previous bearish view. Our gold price forecasts are largely unchanged at US$1211 an ounce in CY17.

 

The combination of ongoing strength in Chinese economic data (PMI at two-year highs, property and infrastructure sectors strong, buoyant steel margins), the curtailment of inefficient capacity/production across a range of sectors, and ongoing strength in global PMI data, leads us to remain bullish on the mining sector from a top-down perspective.

 

Bottom-up, we still see value, with many of our key stock picks trading well below net present value and on attractive earnings multiples. Balance sheets are also rapidly degearing, suggesting significant capacity to increase shareholder returns via dividends and/or buybacks with the August results season. Finally, we still believe the consensus upgrade cycle will last a while longer, providing a positive tailwind for the sector.

 

Our preference is for bulk commodity exposure over the base-metal names given more favourable valuation metrics, higher near-term free cash flow yields and greater capacity for street expectations to change (the market is overly bearish on the iron ore outlook, in our view). Gold is our least-preferred exposure, with valuations continuing to screen more expensive and our commodity view essentially flat in the medium term.

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