Bulk Buys: Are the bulks a buy? We asked Tribeca’s Todd Warren for his take
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Iron ore prices have led the ASX 200 on a merry dance in 2023 so far, running up to over US$130/t on exuberance around China’s reopening before trundling back to US$117/t yesterday as steam from that engine peters out.
Despite a global economic meltdown, Australia’s key stock index remains over 5% in the green, assisted by positive performances from BHP (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue Metals Group (ASX:FMG).
The balance sheets of the three resources giants largely, and in FMG’s case entirely, hinge on iron ore prices, and their large market caps make the sector one of the biggest levers on which the Australian bourse shifts.
It is worth remembering Australia’s headline commodity is looking a far sight healthier than it was before rare public protests ended China’s Covid Zero policy late last year, dipping below US$80/t on October 31.
But after a major run over the past six months, going well beyond the expectations of conservative analysts from the big banks, are Australia’s bulk miners still a buy?
Tribeca Investment Partners portfolio manager Todd Warren, who oversees the fundie’s decarbonisation focused Tribeca 2050 Strategy, says much of the value has been sapped out of the big iron ore miners on the back of the price run.
“I think in the immediate term we’ve probably seen the best of the low hanging fruit picked,” he told Stockhead.
With prices improving, iron ore stocks have held up well in 2023 so far against a poor global economic backdrop.
BHP is up 1.37% YTD, while Rio is 3.24% higher and FMG was 8.82% higher as of yesterday. Mineral Resources (ASX:MIN) is almost 5% stronger, though its lithium division currently drives stock sentiment.
Deterra Royalties (ASX:DRR), which derives its revenue from a royalty on BHP’s Mining Area C deposits including the new 80Mtpa South Flank mine, is also in the green.
However, the market is looking inconsistent. While the big dogs have kept control over their yard, mid-tier producers Grange Resources (ASX:GRR) and Champion Iron (ASX:CIA) are down year to date and Mount Gibson Iron (ASX:MGX) is up after overcoming production issues at its Koolan Island mine in WA.
“The big companies have clearly still got a significant exposure to the iron ore market, there’s no doubt about that, and that frankly is going to be difficult for them to change,” Warren said.
“With regards to obviously, what’s transpired to date, I think they’ve had movements in their share price, which is somewhat a function of the iron ore price staging a recovery with the China reopening trade.
“I think some of it is also though the fact that they are the large end of town and they attract investor interest as a function of being large, liquid, and as a consequence investors are able to change their mind.
“This is a market that is still building confidence and so the first place that the marginal buyer goes is the large caps before gradually trickling down to the smaller end of the market.”
Longer term Warren sees increasing differentials for high grade ores and advantages for companies who produce products suited to lower emissions steelmaking.
“In the longer term, I think we will see an increasing spread, an increasing differential, for quality,” he said.
“So higher grade, potentially even lower carbon footprint commodities, including in iron ore, will attract a premium over and above the lower grade products.
“That really comes down to the increasing demand for whether it’s green steel in the west or at least lower (CO2).
“In China, for example, it might be steel produced with a lower power intensity, so the value in use argument will increasingly be relevant and as a consequence, I think we’ll see more and more price differential open up over time.”
Warren suggested $3.5b capped Champion Iron, which is attempting to double production from its Bloom Lake complex in Canada to more than 15Mtpa and increase its magnetite concentrate grade to over 69% Fe (7% above the 62% Fe benchmark for Australian hematite), would see rising interest in its products.
“I think there are companies like (Brazil’s) Vale, or in Australia Champion Iron,” he said.
“Champion’s production is not in Australia, but they’re delivering a high grade product and indeed looking to increasingly take that delivered product grade up.
“I think that’s the sort of product that will be in increasing demand going forward.”
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Meanwhile, Warren says met coal has more longevity than thermal coal going forward, but acknowledges ‘there’ll be money made out of thermal coal’ in an environment where permitting new coal mines and expansions is getting harder and harder.
“(The thermal coal price has) come down from the somewhat silly levels that it was at. Now, going forward, clearly they’re still generating tremendous margins, even despite the price pullback that we’ve seen,” he said of major coal miners like Whitehaven (ASX:WHC) and Yancoal (ASX:YAL).
“And I guess to point forward the question is whether they invest in the potential for new supply or do they continue to undertake capital allocation decisions that would involve dividends or buybacks.
“That’s a more challenging decision for them to make. Ultimately, you can’t continue to just pay back all of your free cash and not reinvest in the ground at some point. So it’s a challenging one in an environment where it’s difficult to permit clearly any new mines, or expand existing ones even.
“But that’s one of the reasons why we’ve got a thermal coal price where it is today, because we haven’t seen any investment in significant new supply for years now. And where we are now seeing the fruits of our labour, so to speak.”
Front month futures for 6000kcal Newcastle thermal coal were at US$203.25/t yesterday, having run higher on lifting oil and gas prices in recent weeks, though prices are down almost 50% from the end of 2022.
Still well above historical norms, met coal prices have swung below US$300/t in recent days to US$289/t.
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Among the world’s biggest mining stocks, Warren likes the look of a couple of overseas majors above the rest of the market.
He pointed to Glencore and Teck, currently the subject of a hostile and apparently unwanted US$22.5 billion takeover bid by the former, as two top-tier choices in the monster cap space.
“Well, at the big end of town we still like Glencore and Teck. Both of those companies are utilising their free cash flow that they’re generating in Teck’s case from their metallurgical coal business,” Warren said.
“In Glencore’s case it’s investing in their nickel, cobalt and zinc businesses and in copper, for that matter.
“In Teck’s case it’s a very aggressive expansion of their copper portfolio, which is, frankly, one of the best going around in the big end of town.
“They’ve got the most upside prospectivity with their copper portfolio and indeed, that’s why Glencore are trying to take them over right now.”