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Mining
Rising inflation, interest rate hikes and Russia-Ukraine conflict has had global markets jittery of late, but fear not for Australia’s resource sector – at least three major investment houses are bullish on its ability to steer strongly through the global uncertainty storm.
Macquarie Group (ASX:MQG) has lifted exposure to Australia’s resources sector and domestic sector in its latest portfolio update, aptly which it promisingly titled The Bull case for Australia.
“Geopolitics favour Australia’s rich resources and stable democracy,” according to the report.
“Right now some resources offer value, growth, momentum and income.”
International investment giant Morgan Stanley reported it continues to see “Australian miners as screening cheap with a significant uplift to earnings”.
Morgan Stanley said if inflation persists, long term commodity estimates will need readjusting, especially with high energy input costs – especially alumina and zinc.
“We see Aussie miners reflecting good value with the sector trading ~1 std dev below its long term 12 mth fwd EV/EBITDA and EV/Rev,” Morgan Stanley reported.
And stockbroking and financial advisory firm Bell Potter is also bullish on Australia’s resources sector, including in its sights copper and gold producers.
Based on a study of past sanctions Macquarie reckons Russia sanctions could last many years, even if a peace deal is reached which could make Australian resources sector attractive.
“There will be investment to reduce reliance on Russia’s natural resources, and as countries look for sources of supply in stable democratic countries, Australia stands out,” the Macquarie report said.
Macquarie says this is likely why the AUD has risen 5% in the last month and based on where commodity prices are today forecasts it could go much higher.
“A basic model for the AUD using commodity prices and Australia-US bond yield differentials suggests the AUD should be 96 cents,” the report said.
Macquarie said the time has come to look deeply at the make-up of portfolios and reposition accordingly.
“Investors may need to reposition as if we are in a commodity boom, with a preference for resources and domestic as the AUD rises,” Macquarie said in its report.
“If we are in a commodity boom, this tends to mean lower returns for equities overall, but there is a shift in the relative performance of Australian equities relative to the US.”
Since 1970, the average annualised return from the Australian stocks (MSCI) is 10.5% during a commodity boom.
So, what Aussie resource companies are the big players increasing their weighting in and where do they see value?
Diversified miner South32 (ASX:32) has operations spread across the world in Australia, Southern Africa and South America.
It produces several different commodities including bauxite, alumina, aluminium, metallurgical coal, manganese, nickel, silver, lead and zinc.
Macquarie said the resources sector has 54% upside to FY23 earnings at spot prices. Diversified miners have a large upside to FY23 EPS at spot prices, including S32 at 74%.
Analyst Hayden Bairstow called out S32 with double digit FY23 FCF yields, roughly 60-80% upside to FY23 EPS and at spot prices and dividend yields of 7-8%.
S32 is also a top pick for Morgan Stanley with base metals and coal exposure.
“The majority of S32 assets are well positioned in the 1st or 2nd quartile of the global cost curve. Past operational issues have improved and we expect more consistency in the future,” Morgan Stanley said in its report.
“We expect operational improvement at Maules Creek and Narrabi. Longer-term value should become apparent with project approvals and development, particularly at the Vickery project.”
With the S32 share price up 84.29% in one year to $5.19, consensus seems to be it’s still good value with more room for growth.
Gold is a theme among the major investment firms in their latest picks as the price of the precious metal rises on the back of global uncertainty as a traditional safe haven for investors.
The gold price is hovering around US$1945.91 an ounce and is on track to break back above US$2000 an ounce.
Northern Star (ASX:NST) is a standout. Macquarie said gold stocks have 50% or more upside at spot, including NST at +98% with the miner Bairstow’s top gold pick.
Morgan Stanley also has a buy on Northern Star saying it provides “best earnings sensitivity, highest FCF and near term catalysts”.
The company has risen ~11% to $10.75 in the past year.
Bell Potter has DGO Gold (ASX:DGO) as a pick for investors. The company noted a market value disconnect compared with its ASX-listed investments, providing an opportunity to gain exposure to a quality portfolio of brownfield gold exploration companies at well below market prices and participate in potential exploration success across DGO’s wholly-owned tenements.
DGO with a market cap of $220m currently trades at a 19% discount to its listed investments including De Grey Mining (ASX:DEG) Dacian Gold (ASX:DCN) and Yandal Resources (ASX:YRL) , which have a current market value to ~$271 million, Bell Potter said.
Furthermore, Bell Potter sees minimal value being recognised for DGO’s greenfield exploration portfolio and significant upside leverage to any potential discoveries.
It has a speculative buy valuation of $4.41 per share on the stock, which is trading at ~$2.70.
It’s also good news for mid-tier copper-gold miner Aeris Resources (ASX:AIS) which has seen its shares rise ~27% in the past year to 13 cents but fallen over a six month period ~17%.
Aeris Resources’ primary assets are its 100% owned Tritton copper mine in central west NSW and its Gracow Gold operations in Queensland.
Aeris acquired Gracow from Evolution Mining (ASX:EVN) in 2020. Bell Potter noted the Tritton copper mine currently produces 20ktpa of copper concentrate from two active underground mines and the ~1.6Mtpa Tritton concentrator. With reserves of 5.3Mt @ 1.3 % Cu, supporting a 3-4 year life-of-mine.
Bell Potter has a buy target price of 22 cents per share.
“In our view AIS’ 3.0-4.0x P/E multiples signal that the market is pricing in a 4-5 year mine life,” Bell Potter reported.
“This significantly discounts what we views as a conservative ~7-year mine life outlook and in excess of 10 years when allowing for likely exploration success.
“That discount looks even greater in the context of what we expect to be a production profile rising towards ~25ktpa and potentially peaking above 30ktpa.”
Morgan Stanley is bullish on another copper and gold miner Sandfire Resources (ASX:SFR), which was recently handed the keys to its new US$1.85 b MATSA copper mining complex in Spain.
Long-time boss Karl Simich remains bullish about the operation’s long term exploration potential and high zinc prices, which should help generate by-product credits.
Morgan Stanley reported a 32% upside for Sandfire Resources, noting copper supply disruption and delayed supply growth for copper.
“We also like SFR (32% upside), with higher costs at MATSA now more than priced in,” Morgan Stanley noted.
The investing firm has put a target price $7.35 on the stock, which is currently up 11% for the past year at $5.74.
Macquarie’s Bairstow put an outperform signal and target price of $4 on lithium miner Pilbara Minerals (ASX:PLS) with a FY23 FCF yield of 16%.
Bairstow also noted at FY23 EPS of $38 and EPS spot at $33 with an upside of 15%.
Lithium continues to be one of the popular crowd in commodity markets, with surging EV demand and tight supplies sending prices to stratospheric levels.
The three main prices for lithium – carbonate and hydroxide (chemicals) and spodumene (hard rock lithium ore used to made hydroxide) – have generally been rising.
But there is starting to be some backlash from China to rising lithium prices. China’s lithium carbonate prices have fallen further over the past week due to buyers’ ongoing reluctance to purchase at high prices.
Pilbara Minerals investors who have held the shares for more than a year should be rejoicing as it’s risen a massive ~216% to be trading at $2.49.
With Australia producing some of the highest quality thermal coal in the world, reducing emissions and improving efficiencies, it’s no surprise to see producer Whitehaven Coal (ASX:WHC) on a buy list of the big guys.
Morgan Stanley has joined investors piling into Whitehaven Coal (ASX:WHC) with indications that countries are looking to replace coal coming from major producer Russia as it continues to invade neighbouring Ukraine.
Shares in Whitehaven have skyrocketed ~148% in the past year to ~$4.45 but Morgan Stanley thinks there is still room for further growth with a price target of .$5.45
Coal prices have come back off their recent highs earlier this month of $439 but there is still plenty of potential for the commodity to move upward.
“Met coal, while expected to normalise medium term, sees forecasts +70%/+72% in CY22/23e,” the Morgan Stanley report noted.
“With thermal coal expected higher for longer (+96%/+71% CY22/23e) WHC (31% upside) shows values.
“FY23e FCF and div yields of 50% and 14%.”
Global testing, inspection and certification business ALS (ASX:ALQ) has also attracted the attention of Macquarie. With miners splurging on explorations worldwide at record levels ALS is riding the drilling boom.
Investors have been buying up ALS with shares in the company up ~40.29% for the year at ~$13.04. Macquarie analyst John Purtell has put an outperform rating on ALS with a target price of $14.
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