Monsters of Rock: ‘Few surprises’ this reporting season, analysts say — and yet we already have one
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We’ve already copped one major surprise this reporting season on day one, with the absolute shellacking copped by Leonora gold miner St Barbara (ASX:SBM) sending the stock plummeting over 20% this morning.
The rationale was sound for the thumping it took. The company suffered a cash drain of $34 million in the September quarter after announcing a more than 30% drop in production from its Gwalia gold mine.
Even at this early stage in the financial year the production will not be made up. If costs come in toward the upper end of its $2250-2500/oz range and gold prices stay as they are St Barbs will struggle to make much money at all this financial year.
Its market cap is now at a five year low of $430 million, with SBM’s shares at a more than 50% discount to RBC’s price target of $1.20.
Analyst Alex Barkley says he still sees good long term value, with labour rather than resource issues primarily blamed for St Barbs’ September woes.
“Regional corporate consolidation could help SBM increase its milling capacity; be this through existing milling capacity, increased cash flow or a greater access to capital markets that could come through scale,” he said in a note.
“SBM is likely to trade lower today. However, we find good long-term value in the stock, and any share price weakness could be somewhat supported by its corporate appeal.”
RBC’s Australian analysts, including Barkley, Kaan Peker and Paul Wiggers de Vries, had been expecting few surprises this reporting season, they said in a preview today, due to conservative guidance and seasonal maintenance.
It comes with the mining sector actually up slightly so far this financial year despite the Chinese and Russian headwinds that have plagued the sector this year.
“In FY23 so far, the Australian Metals and Mining space is up ~1% which is in line with the broader ASX,” they wrote.
“This is despite a further strengthening in the US dollar, and weakening of the renminbi (which raises the cost of importing metal in China) and increasing calls for a European/global recession.
“Admittedly, an increase in bank lending to local government financing vehicles has seemed to support infrastructure investment in China over the last month. However, wider appetite for new loans has been weak.
“Commodity prices appear to be caught in the middle of tight supply and deteriorating demand, which we expect to continue near-term.”
That sets the scene for what could be a ho-hum final reporting season of 2022.
But there are a few large cap stocks that look tasty according to the RBC number-crunchers.
IGO (ASX:IGO), which sadly saw the sudden passing of MD Peter Bradford over the weekend, has seen its price target lifted $2.25 to $17 a share on strong lithium and nickel prices, as well as production growth at Greenbushes and the new Kwinana lithium hydroxide plant.
RBC has lowered its price target on South32 (ASX:S32) by 50c to $4.40, but still reckons its cheap.
“S32 (A$4.40/sh PT, Outperform) continues to generate robust FCF, with the integration of Sierra Gorda, incremental acquisitions and brownfield expansion, copper equivalent production is set to increase 7% YoY,” they wrote. “Given portfolio changes, S32 warrants a higher multiple in our view.”
Rio and FMG had price targets lowered $2 respectively to $93 and $15 per share, while Mincor (ASX:MCR) ($2.80) remains favoured.
Goldman Sachs’ Australian team meanwhile, said last week it prefers bulk commodities over base metals over the next 3-6 months.
“We continue to think the next 2-3 Qs will be a tough period for base metals and steel as European and global demand continues to weaken and the USD continues to strengthen,” Paul Young, Hugo Nicolaci and Caleb Heiner wrote in a note.
“That said, there are commodities that have more supportive fundamentals over the next 6-12 months on tight supply and resilient demand and/or favourable substitution dynamics.
“These include high energy thermal coal, met coal (being diverted into thermal market), rare earths (NdPr), zircon and high grade TiO2 feedstock, copper to a degree with ongoing Chilean mine production issues.”
They expect strong quarters from Whitehaven Coal (ASX:WHC) and Coronado (ASX:CRN) because of strong prices and contract lags, MinRes on spodumene production and better low grade iron ore realisations and Iluka Resources (ASX:ILU) on aforementioned zircon and rutile pricing.
Deterra Royalties (ASX:DRR) has also been upgraded to a buy on the strong ramp up of BHP’s South Flank mine, a royalty over which is DRR’s only revenue source.