Resources Sector

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

11 April 2017, 12:54 PM

Sectors Covered:

Mining, Energy

Our Analysts covering the resource sector (myself, Tom Sartor and Tom Betlehem) have updated our forecasts for commodity prices.

Key points

• We expect the next phase of the recovery cycle will see bulks moderate while base metals and energy resources continue their gradual rise.
• Iron ore looks set to ease, with the restocking cycle maturing, steel prices cooling, and low-cost supply growth continuing.
• We believe the latest coal price spike will be relatively short-lived as seaborne supply recovers against an easing of the 2016 Chinese domestic constraints.
• We maintain an assertive view on copper pricing, forecasting steady gains out to a long-term incentive price of US$3.25/lb from 2020.
• The outlook for gold remains positive, and we forecast a long term average at US$1,400/oz. Ongoing geo-political uncertainties offer upside risk.

Don't underestimate the upgrade cycle

Twelve months into the resource sector recovery and the turnaround in the sector-wide earnings has been material. Against this backdrop, share prices have increased following:

1. the resurgence in sector profitability; and
2. the turnaround in sentiment as the sector enters its first upgrade cycle since 2011.

Initially this recovery phase was carried by a substantial improvement in bulk resources, with a more recent improvement in base metals and some energy resources. We expect this will be further supported by the inflation cycle we anticipate in the US.

Recovery starting to switch gears

We expect sector earnings to continue their recovery in coming years; however, their path is unlikely to be linear. Volatility is likely to remain a feature, with metal prices recovering at various speeds and degrees depending on each market's discrete fundamentals (and at times becoming overbought). Our base case scenarios for the major commodities assume:

1. the coal and iron ore rallies moderate but hold onto higher floor prices than originally expected;
2. a gradual firming of base metal markets (zinc already leading the charge); 
3. maintenance of a supportive price environment for gold; and
4. a continuation in the rise of battery-related materials.

Short-term winners in coal

We upgrade our FY17-19 coal prices due primarily to the disruptive influence of cyclone Debbie. The ex-Bowen basin exporters (Whitehaven, South32, New Hope) are short-term beneficiaries of a price spike, but we flag that higher prices are likely to be netted out by lower volumes for BHP Billiton. We advocate traders look to trim profits in Whitehaven (WHC) and South32 (S32) at either:

1. prices 10% above our fair values; or
2. at the first sign of a topping out in metallurgical coal prices, which we expect within the coming month.

Preferred sector exposures

Separate to coal, we make only slight changes to our house commodity price assumptions herein. Among the large-cap mining producers, our preferences remain with BHP Billiton (BHP) and Rio Tinto (RIO) for sector leading valuation support (downside protection). 

In gold we prefer Evolution Mining (EVN) for price leverage and Easter Goldfields (EGS) for development upside.

More information

Morgans clients can login to view our detailed Resources Sector report to view our updated price forecasts for all commodities and our summary of earnings and valuation changes for BHP, Rio Tinto, Fortescue, South32, Whitehaven New Hope, Oz Minerals, Sandfire Resources, Newcrest, Evolution Mining and Regis Resources. Alternatively, please contact your nearest Morgans office for access.

Disclaimer(s): Analysts may own shares in some or all of the companies mentioned.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.