Ground Breakers: Analysts are pumping up their price forecasts for 2022 as supercycle chatter gets louder

Supercharged commodity prices are prompting analysts to revise their forecasts upwards, with RBC Capital Markets the latest to take a more bullish view on the metals complex.

The Canadian investment bank has dropped its views and predictions for the Australian mining sector in 2022, and the headline is bright times ahead for a swag of key commodities.

Solid Chinese demand and tight base metals supply will play into the hands of producers, with RBC lifting its prices forecasts for a host of metals led by iron ore.

Analysts Kaan Peker, Alexander Barkley and Paul Wiggers de Vries see iron ore lifting from a previous 2022 estimate of US$75/t to US$99/t (still south of its current trading level at around US$128/t.)

The long-term outlook has also brightened, rising from US$65/t to US$75/t.

RBC has lifted its copper price forecast too from US$3.75/lb to US$4.25/lb, while nickel is up from US$8 to US$9/lb, met coal has moved from US$150/t to US$215/t and spodumene lithium prices are expected to lift from an estimate of US$1530/t to US$2125/t.

With the exchange rate expected to weaken from a previous estimate of US$0.72 to US$0.69 for every Aussie dollar, good times could be ahead in 2022 for Australian miners, Covid permitting.

“We increase our base, bulk and battery material commodity forecasts over 2022-24, and forecast most commodities to be trading above the ~95-100 percentile of the cost curve over 2022,” RBC wrote.

“High commodity prices, subdued capex and healthy balance sheets are likely to translate into strong FCF and dividends across the sector (despite cost pressures).

“All of these factors should continue to support near-term multiples and equity valuations.”

Goldman Sachs last week took a similarly positive view on big miners and commodities in general, with analysts led by Paul Young suggesting the up-cycle could extend longer than previous ones as demand from green investments lifts metals post 2025.

However, RBC’s analysts have issued a cautious note, saying Chinese growth and credit is a key risk for 2022 and 2023, and they remain averse to iron ore, saying that while they have adjusted first half prices up by US$40/t to US$122/t, their second half estimate of US$75/t has been maintained.

“Nevertheless, after the recent equity re-rate, we have seen valuation appeal diminish across our coverage,” they wrote.

“A key risk in 2022-23 is Chinese credit. Despite the recent loosening, 2022 will be a slower year of growth in China as the property and export sectors weaken and structural constraints loom larger.

“This cautious view is the basis of our aversion to iron ore. However, we continue to prefer miners, which besides presenting value, are leveraged to the: 1) broader global recovery, 2) electrification (copper, nickel and lithium), and 3) commodities supported by high energy prices (Aluminium, Alumina).”

Who’s hot in 2022?

RBC’s top picks in the major miners are BHP (ASX:BHP) ($52 price target), copper miner Sandfire Resources (ASX:SFR) ($8.75PT), and beaten down gold producers Northern Star Resources (ASX:NST) ($12.50PT) and Regis Resources (ASX:RRL) ($2.50PT), despite expecting gold to fall to US$1700/oz this year on rising interest rates and bank tapering.

Rio Tinto (ASX:RIO) (sector perform, $110PT) and Fortescue Metals Group (ASX:FMG) (underperform, $16PT) have seen $25 and $4 increases to their price targets, respectively, with the rising expectations of the iron ore price.

But RBC is yet another stock watcher expecting the enthusiasm around FMG and its twin green energy and iron ore strategy to wane as price discounts for its lower grade iron ore bite.

“We expect RIO to achieve updated CY21 production guidance as most were revised down in 3Q (iron ore, copper, bauxite and TiO2),” they said.

“We continue to flag pricing risk with elevated SP10 sales. CY22 production guidance to be announced and we expect YoY increases in iron ore, copper and bauxite.

“FMG – product discounts continue to increase QoQ and we also note a well flagged US$1bn tax payment resulting in higher QoQ net debt.”

RBC views mid-tier gold miners Oceanagold (ASX:OGC), Gold Road Resources (ASX:GOR) and Regis positively, with quarter on quarter gold production forecast to lift in the December quarter reporting season by 27%, 20% and 10%.

However, it is less positive on Evolution Mining (ASX:EVN) (underperform, $3.75PT) where production will likely be flat after the sale of Mt Carlton to Navarre Minerals (ASX:NML).

IGO (ASX:IGO), Ramelius (ASX:RMS) and St Barbara (ASX:SBM) are all rated as sector performs (RBC’s equivalent of a hold), but IGO’s price target has been lifted from $9.75 to $12 a share after running to record levels on soaring nickel and lithium prices in recent weeks.

RBC coverage share prices today:

South32 moves to next phase of development at Hermosa

BHP spinoff South32 (ASX:S32) is coming of age, rising to around record levels amid a wave of project development and M&A news in late 2021 and early 2022.

Shortly after announcing plans to restart its low emissions Alumar aluminium smelter in Brazil with partner Alcoa, South32 has progressed to the next stage on the development of its multi-decade Hermosa project in the United States.

A PFS on the massive zinc-lead-silver orebody at the Taylor deposit estimates it will cost US$1.23 billion in direct capital and US$470m in indirect capital to develop the mine, which will produce 111,000t of zinc, 138,000t of lead and 7.3Moz of silver a year over an initial 22-year life.

It is being pitched as a key project for the energy transition, with South32 making zinc’s role in renewable energy infrastructure such as solar and wind, silver’s use in solar panels and leads role in renewable energy storage systems its key selling points.

A feasibility study and final investment decision are due by mid-2023.

“The Taylor Deposit provides an important first development option for our Hermosa project in Arizona, USA. The project has the potential to sustainably produce the metals critical for a low carbon future across multiple decades from different deposits,” South32 CEO Graham Kerr said.

“Completing the pre-feasibility study for the Taylor Deposit is an important milestone that demonstrates its potential to be a globally-significant and sustainable producer of base and precious metals in the industry’s first cost quartile.

“Beyond Taylor, Clark offers the potential to realise further value from our investment in Hermosa through the production of battery-grade manganese, a mineral designated as critical in the United States.

“Additional exploration targets around Taylor and Clark are indicative of further upside while the broader land package contains highly prospective areas for polymetallic and copper mineralisation.

“We are designing the Taylor Deposit to be our first ‘next generation mine’, using automation and technology to minimise our impact on the environment and to target a carbon neutral operation in line with our goal of achieving net zero operational carbon emissions by 2050.

“The future development of Taylor provides a platform from which to realise Hermosa’s immense potential. It will further strengthen our portfolio and align with the already substantial growth in production of metals critical to a low carbon future that we have embedded in the portfolio over the past six months.”