• Goldman Sachs is long on miners, saying markets are pricing some of the market’s biggest players at prices well below spot and long term commodity forecasts
  • The top 20 miners globally are now trading at 5.5x earnings, down from a 6x multiple they’ve averaged over the past 25 years
  • Some big stocks could present value … especially if they take a hit on short term concerns in the upcoming quarterly reporting season

Goldman Sachs has raised the ire of plenty of bag holders in recent times, sinking the boot into lithium prices with a sense of doom that turned out to be … appropriately cautious.

But its conviction in mining as an investment remains strong, saying a hit taken by the big miners so far this year has put them ‘back in value territory’.

That bullishness is particularly pronounced in the diversified miners, where analysts Paul Young, Caleb Heiner and Hugo Nicolaci say iron ore, met coal, copper and aluminium prices will power gains.

They think:

  • Iron ore has bottomed out in the vicinity of US$100/t after tumbling from over US$140/t at the start of the year “on seasonal supply/demand factors such as an expected modest pick-up in Chinese construction activity over April-May and constrained supply out of Australia and Brazil.”
  • Met coal “is good value at US$250/t based on supply/demand dynamics underpinned by Indian demand and a slow recovery in Australian exports.”
  • And green demand will see more than 10% lifts in copper and aluminium to US$4.50/lb and US$1.20/lb respectively.

Goldman say the mining sector is now ‘broadly attractive’, having sunk 6.2% this year so far against a 5.3% climb for the ASX 200 up to the end of March.

They think stock prices are now valuing in commodity prices well below both spot and long term forecasts.

That includes US$66/t and US$71/t for iron ore for BHP (ASX:BHP) and Rio Tinto (ASX:RIO), US$230/t alumina in South32 (ASX:S32) against Goldman’s long run forecast of US$340/t, Champion Iron (ASX:CIA) pricing in a US$71/t iron ore price and Iluka Resources (ASX:ILU) pricing in NdPr price of just US$40/kg and zircon price of US$1000/t.

Rare earths producer Lynas (ASX:LYC) is closer to spot prices, coming in at US$60/kg NdPr, while Coronado (ASX:CRN) is factoring in a met coal price of just US$170/t.

On the flipside, Goldman sees Mineral Resources (ASX:MIN) and Fortescue (ASX:FMG) as more fully valued at US$100/t and US$93/t iron ore, New Hope (ASX:NHC) at US$100/t thermal coal and Sandfire Resources (ASX:SFR) at US$4.70/lb copper.


How undervalued are those big miners really?

Young and his crew believe Rio and BHP are trading well below their historical average of 6-7x earnings, trading at 4.5x and 5.5x respectively, while South32 at 3.1x is below its long term average of 4.9x.

They say the top-20 miners globally are trading at 5.5x EBITDA, south of the 25 year historical average of 6x.

Goldman remains bearish on lithium, saying that even with 153,000t of incremental supply cuts a 150,000t surplus equalling 11% of global demand will still pervade in 2024 and cause pricing to eat into the cost curve.

Carbonate futures have been rising in recent days along with spodumene concentrate spot prices, but GS recently lowered its 12 month Chinese carbonate chemical price to US$10,000/t.

OK, so that’s the dire stuff.

On the flip side, GS says China’s commodity demand data looks decent for aluminium and copper, up 17% and 12% year on year to the end of February.

“This demand support has coincided with an increasing supply bind from sharply reduced mine supply, underpinned by low investment and fast approaching peak supply,” Young, Heiner and Nicolaci said.

“Going forward, the mine supply shock currently at play in the copper market and the impact from China’s capacity cap on aluminium supply, both frame a materially tighter balance path for these metals in 2024 versus 2023.

“With visible inventory levels at near multi-year lows for most industrial metals, we see little buffer in the system to limit greater competition for units and stickier upside ahead.”

They reckon there’s cost curve support for alumina with around 5% of supply — equivalent to five refineries — losing money at current prices.

Goldman continues to see iron ore prices averaging US$105-110/t for the rest of 2024 with a preference for high grade supply longer term amid a global decarbonisation push.

While a weak Chinese property sector has seen steel production disappoint and inventory build (MySteel sees port stocks hitting 150Mt by the end of July), GS thinks the June quarter will bring more supportive demand from Chinese steelmakers.


Who are buys and sells heading into reporting season

March quarter reporting season is nigh and Goldman is, understandably, positive on the diversified majors heading into the quarter given its conviction on value opportunities in the sector.

There’s not guarantee they’ll be winners in the short term and there could be disappointments. Early shipping data on the big three iron ore producers suggests their March output will be well down on numbers from a year earlier, GS noted.

“Pilbara iron ore shipments data (see Exhibit 20 & Exhibit 21) shows a weaker March Q than prior years; RIO (-12% QoQ and -9% YoY) and FMG (-9% QoQ, -5% YoY. GSe 190Mt for
FY24 vs. guidance of 192-197Mt), but relatively better for BHP (-5% QoQ &
unchanged YoY),” Young, Heiner and Nicolaci said.

“Qld coal port data implies ongoing challenges for BHP’s & CRN’s met coal shipments in the March Q due to ongoing wet weather impacts and high waste stripping programs.”

South32 was also impacted by a cyclone that shut its GEMCO manganese operations in the NT. That could create buying opportunities if shareholders punish the miners on short term impacts.

“Potential weak quarterlies from Buy rated stocks where we would see share price weakness as an increased buying opportunity are; RIO & BHP (weak Pilbara shipments), S32 due to a recent cyclone impacting Aus manganese production and wet weather impacting Cannington zinc/lead concentrate shipments, CIA due to negative provisional pricing impacts and scheduled maintenance at Bloom Lake and cold weather, and CRN due to wet
weather,” GS’ Aussie resources team say.

“We expect ILU to have a positive Q with GSe revenue of ~A$330mn above Visible Alpha Consensus Data of ~A$305mn due to higher zircon shipments.”

It is sell rated on FMG, MinRes and New Hope, with buy ratings on Lynas, Iluka, Champion Iron, Coronado, South32, BHP, Rio Tinto and BlueScope Steel (ASX:BSL).


Goldman Sachs diversified and bulk miner coverage