The miners have had a good run lately, but Ord Minnett continues to see value in selected exposures. The sector is in the best shape we have seen from a balance sheet perspective, with a large part of our coverage either net cash or close to ungeared. This means capital management is likely to stay on the agenda.
In addition, we believe consensus estimates remain too low following the broad-based rally in commodities. Broadly speaking, we don’t believe valuations are looking too stretched yet. We are wary, however, that current prices sit above cost-curve support and may prove an incentive for incremental supply, which could take away pricing tension. Despite this, we still see room for the sector to grind higher in the short term and continue to recommend investors have exposure.
Our preferred stocks in the sector remain Rio Tinto (Accumulate), Fortescue Metals (FMG, Accumulate), South32 (S32, Buy) and Alumina Ltd (AWC, Accumulate). Following our recent review of the sector, we have downgraded our recommendations on Iluka Resources (ILU) and Regis Resources (RRL) to Hold from Accumulate, and Alacer Gold (AQG) to Hold from Speculative Buy.
Iron ore prices – Chinese demand remains positive, although fixed asset investment growth of 8.3% in July is down from recent highs. Supply moderated in July, with non-traditional imports, and combined Port Hedland and Brazil volume down on June levels. Prices continue to surprise on the upside with spot just below US$80/t, buoyed by constructive supply-demand dynamics and positive sentiment. We have upgraded our second-half 2017 price estimate to US$71/t, up from US$60/t previously. Our 2018 estimate remains unchanged at US$65/t.
Coal prices – Our global coal view has been enhanced significantly, with prices essentially marked to market. This has driven upgrades to hard coking coal prices of 14% to US$180/t in 2017 and 26% to US$151/t in 2018, with thermal coal prices up 11% to US$78/t in 2017 and 12% to US$70/t in 2018.
Metals prices – We recently tweaked our metals forecasts higher, with the key change being a 7% increase in the 2018 aluminium price to US$0.90/lb. With the exception of aluminum, we still see fundamentally weaker base metal markets in the second half of the year and into 2018.
Currency – Offsetting our positive view on commodities from an earnings perspective for the Australian miners, our global economics team has raised its AUD/USD rate forecasts to US$0.76 from US$0.74 in 2017, and to US$0.73 from US$0.69 in 2018.