Monsters of Rock: Big dogs to kick off reporting season for the March quarter

Rio kicks off big dog reporting season tomorrow with BHP to follow
Higher commodity prices to be reflected in results, but also inflation and logistics issues: RBC
Joe Biden’s bank lends support to graphite play Syrah Resources

Welcome to the big boys reporting season, as the majors crawl out of the woodworks to show you what they’ve been doing for the past three months.

First up is Rio Tinto (ASX:RIO) tomorrow morning, followed by BHP (ASX:BHP) on Thursday and OZ Minerals (ASX:OZL) on Friday.

Whatever happens, super high commodity prices in the March quarter are set to deliver windfall revenues for Australian miners, with RBC analysts Kaan Peker, Alex Barkley and Paul Wiggers de Vries telling clients in a note to expect strong free cash flow generation to continue.

“High commodity prices, combined with subdued capital spend and healthy balance sheets, are expected to translate to another quarter of strong FCF (and dividends) across our coverage,” the said.

However, they say there are big risks to 2022 guidance on cost and production metrics due to inflation and Covid logistics issues.

“Operationally (production, cost and capex), however, we see increased risk to 2022 guidance (and FY23 estimates),” RBC’s analyst say.

“Cost inflation was an industry-wide/global headwind in 2021, and for the second year in a row will continue to affect miners.”

“We include modest cost increases in 1Q, but risk is to the upside. Labour, fuel, energy and input costs remain elevated as supply struggles. Covid continues to impact productivity, while attracting/retaining skilled mine labour is difficult.”

“1Q could also see possible wet weather impact key Australian operations. The recent AUD appreciation provides help, so too strong by-product credits.”

Mark to market

RBC has upped its earnings expectations after a range of commodities moved higher in the March quarter, spurred on by supply shortages and sanctions against Russia following its invasion of Ukraine.

High nickel, coal, copper, iron ore and especially lithium prices have characterised the first quarter of the year, although IGO (ASX:IGO) is the only of the large caps under RBC’s coverage to be exposed to the latter.

Peker, Wiggers de Vries and Barkley have done a “mark to market” on their commodity price forecasts for the first quarter, which were lower than realised prices, “resulting in modest earnings upgrades across our coverage partially offset by higher AUD.”

“The largest M2M increases came from the lithum complex (spoduemene, hydroxide and carbonate), followed by base, bulks and energy,” they said.

Other companies have received support elsewhere on higher iron ore and lithium pricing.

Goldman Sachs last week upgraded Mineral Resources (ASX:MIN), which had a horror first half after a drop in the price realisation for its lower grade iron ore, to a buy and lifted its price target by 42% to $70.80 a share.

GS analysts Paul Young and Hugo Nicolaci increased their earnings per share estimates for MinRes by 27% for FY22, 81% for FY23 and 44% for FY24 on model and project changes as well as higher expected spodumene prices and low grade iron ore price realisations.

“We forecast a more than doubling of group EBITDA to over A$2bn in FY23 driven by higher lithium and low grade iron ore
prices, and a 5% increase to mining services volumes to ~300Mt,” Young and Nicolaci said.

“Over the next 5yrs we expect MIN’s mining services volumes to increase ~50% to over 400Mtpa, lithium volumes to triple, and iron ore equity volumes to nearly double.”

At spot lithium and iron ore prices GS say Chris Ellison’s firm’s EBITDA in FY23 would increase by over $3b.

Monstars share prices today:

Washington pumps funds into Syrah’s battery play

Syrah Resources (ASX:SYR) soared by 15% after the graphite anode hopeful received a ringing endorsement from Joe Biden’s Whitehouse.

The company has a conditional commitment with the US Department of Energy for a US$107 million loan for the expansion of its Vidalia plant in Lousiana, the famed home of the Bayou.

It will be the first plant of its kind to operate at commercial scale on US soil, fed by graphite from Syrah’s Balama mine in Mozambique.

The project already has plenty of funding committed to it and Elon Musk’s Tesla on board to purchase around 8000t of its initial 10,000tpa capacity.

The loan comes amid a push from governments across the Western world, including in the USA, Australia and Canada to support the development of so-called critical minerals, especially those used in electric vehicles and renewable energy like lithium, graphite, rare earths, nickel, copper and the rest.

Syrah says proceeds from a $250 million fully underwritten placement earlier this year would be enough to fully fund the US$165 million of capital costs remaining on the Vidalia expansion project.

But if the loan is drawn Syrah will use surplus equity to ramp up studies and detailed engineering for an even larger expansion of Vidalia and provide balance sheet flexibility given interest in its anode product.

The Department of Energy’s Loan Program Officer Jigar Shah says it is the first loan from the US$17.7 billion Advanced Technology Vehicles Manufacturing loan program to support a supply chain manufacturing project in the USA.

“This reiterates President Biden’s commitment to strengthening US critical mineral supply chains and growing the US workforce to support domestic battery manufacturing for EVs,” Shah said.

“Moreover, the Vidalia Initial Expansion project provides a socially and environmentally responsible US supply chain for graphite, which is critical to accelerating the deployment of batteries to power EVs.”

Syrah MD Shaun Verner said the non-binding term sheet and conditional commitment highlights “Vidalia’s strategic position in the USA and provides strong validation of Syrah, Vidalia and the Vidalia Initial Expansion.”