• Iron ore’s prolonged run has BHP, RIO, FMG and the whole materials sector singing as Jewish New Year kicks off
  • JP Morgan ups iron ore forecast for 2024 to US$110/t, promotes Rio and FMG to overweight
  • Goldman Sachs on the numbers behind a potential US$8 billion expansion at BHP and Rio’s Escondida

You’ve heard about January 1 and the Lunar New Year, both of which are critical times in the resources game.

You may be less well apprised of the Jewish New Year, which starts tonight, runs for two days and has no real effect on the markets unless you’re really overweight on Israeli tech stocks (who probably aren’t working Saturdays anyway).

Aside from extremely aesthetic bread, the holiday is known for its celebration of sweetness.

It’s main delicacy is the very simplistic approach to candy of dipping slices of apple in honey.

That is the nature of the run in resources stocks today as well, a sickly sweet celebration of some good recent news for commodity stocks with little thought of the potential roadblocks to come.

All the major forecasters seem to see iron ore falling to the US$100/t mark in the months ahead, with Chinese steelmakers still thought likely to curb output ahead of Christmas (and Hannukah and Kwanzaa to be inclusive).

But we’re back at five month highs, with Singapore’s 62% Fe index sliding like Tom Cruise in Risky Business to US$121/t and above.

“Chinese steel mills are said to have increased their operating rates while molten iron output rose in August,” ANZ’s Felix Ryan said in a note.

“Nevertheless, steel consumption has seen the same growth, with data showing steel stockpiles increase in early September compared with August.”

MySteel said consumption of iron ore sintering fines from 64 steelmakers it monitors rose 2.1% on the week to 555,100t per day on average over September 7-13, as steel output lifted to 2.48Mt a day among 247 blast furnaces tracked.

That has the materials index up 2.73% today and it’s the big boys taking the reins.

Weighed down by management turmoil and executive turnover in recent weeks, Fortescue (ASX:FMG) is back in the good books, up 3.67% this morn.

Not far behind are BHP (ASX:BHP) and Rio Tinto (ASX:RIO), both up more than 3% with coal miner Whitehaven (ASX:WHC), iron ore and lithium miner Mineral Resources (ASX:MIN) and rare earths producer Lynas (ASX:LYC).


BHP, Rio targets up

It’s all seen JP Morgan ratchet up price targets for Rio and BHP, saying iron ore and steel demand from infrastructure was offsetting weak property sector demand in China (the traditional source of strength in the steel market over there).

Exports were also making up for gaps in onshore needs, they said.

A new note on Thursday ramped up its 2024 projections to US$110/t.

Analyst Lyndon Fagan upgraded Rio Tinto to overweight alongside BHP and became one of the few analysts to move overweight on Fortescue, which has been in the doghouse with sell-siders in Australia due to its executive turnover and confusion on how to value its emerging green energy business Fortescue Energy.


The US$8 billion development that could stir the copper price

While it is largely about iron ore now for these miners, it won’t always be.

As iron ore prices fall back to the top of the cost curve and EV/renewables demand really takes off, a major deficit is expected to emerge in copper.

That has firms like BHP and Rio Tinto looking to ramp up the share of earnings they generate from their world-class copper divisions.

Goldman Sachs in a note this week ran the numbers on a potential “compelling” expansion to keep Escondida in Chile, the world’s largest copper mine majority owned by BHP (57.5%) and minority owned by Rio Tinto (30%) operating at peak potential.

From 1.1Mtpa the massive operations known as “the hidden one” is going to hit 1.2-1.3Mt by 2025-26 before falling back to 1Mtpa on Goldman Sachs analysts Paul Young and Caleb Heiner’s estimates by 2027.

Worth US$46b on a 100% basis and Goldman’s (admittedly higher than spot) US$4.30/lb long run copper price, it says the mine adds up to 15% of BHP and 8% of Rio’s NAV.

That makes expansion potentially critical for the megaminers.

GS think it will cost US$8b based on benchmarking from other Chilean copper projects including US$5-6b on a new concentrator, US$1-1.5b on a sulphide heap leach and US$1-1.5b to construct tailings and bring in an electric truck fleet, boosting production by 350,000tpa and 2.5Mt in total by 2035.

It could increase copper production 20% to 1.2Mtpa at Escondida by 2029-30.

“The expansion of Escondida would likely be one of BHP & RIO’s largest growth projects,” Young and Heiner said.

“In 2021 we outlined that BHP’s major challenge is addressing a 40% or c. 600kt decline (BHP’s share) in copper production from 2023-2035 due to reserve depletion and grade decline in Chile.

“An expansion of Escondida and growth in South Australia should boost BHP’s copper production by >10% to over 2Mtpa by the end of the decade.”

Goldman expects copper to rise from 23% of BHP’s EBITDA in 2023 to 45% by 2030, with Rio to see a tripling in its reliance on copper from 10-30%.

The incentive price implied for an expansion at Escondida could underpin GS’ long term bullishness on the copper price, where old operations are set to deplete as demand accelerates in the energy transition.

“We are Buy rated on both BHP and RIO (on CL) but prefer RIO on valuation and better medium-term Cu Eq production growth and FCF,” Young and Heiner said.

“GS remains positive on copper, and we believe that if a brownfields expansion of the world’s largest copper mine requires an incentive price of US$3.6/lb, this underpins
our above consensus long run price of US$4.3/lb.”


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