Monsters of Rock: RBC says the future is bright for major miners

RBC is bullish on miners ahead of the fourth quarter reporting season
Costs remain a concern, but the investment bank’s analysts are strong on base metals and lithium producers
MinRes and Pilbara Minerals are its top lithium picks, while RBC is team BHP over Rio

RBC says the biggest mining names on the ASX are likely to deliver solid numbers for the final quarter ahead of a brighter outlook for 2024.

While they say FY24 guidance is likely to be conservative, RBC’s Australian analysts Kaan Peker, Paul Wiggers de Vries and Alex Barkley along with European number cruncher Tyler Broda think a variety of factors will put a floor under commodity prices despite expectations of an economic slowdown over the coming months and ‘soft landing’ in the US.

“That said, China’s recent rate cuts, coupled with additional infrastructure spending and historically-low exchange stocks should provide a floor under commodity prices over the next 3-6 months,” they said in a client note.

“Moving into 2024, the outlook is brighter, and we expect the market will increasingly look through the near-term head-winds/fading tailwinds.

“We expect commodity prices to lift as the US rate-cutting cycle gets into full-swing, global economic growth normalises, the USD depreciates and risk-appetite improves.”

RBC thinks base metals and lithium are in a good place heading into the second half.

“We expect base metal prices will relatively benefit the most. We also continue to like lithium, as we expect prices to be supported 2HCY23 owing to greater seasonal demand,” they said.

The investment bank’s outperforms include diversified miner South32 (ASX:S32), copper miner Sandfire Resources (ASX:SFR), and all four of the big lithium players, especially top picks MinRes (ASX:MIN) and Pilbara Minerals (ASX:PLS).

For the big iron ore players, BHP (ASX:BHP) is the preferred pick over Rio Tinto (ASX:RIO), but like its Pilbara cousin remains a sector perform, and Fortescue (ASX:FMG) rated an underperform.

RBC bulk and lithium coverage share prices today:

Where does inflation go?

The biggest focus in production reports in recent times has been on cost and associated output underperformance.

In particular the scarcity and high cost of labour has placed extreme pressure on miners.

“While inflationary pressures are not new, flat YoY costs will be a good outcome, but we think the days of double-digit unit-cost inflation are behind us,” Peker and Co. believe.

“On production growth, we forecast YoY production growth from most of our coverage, with notable increases from SFR, MIN, PLS, AKE, and IGO.”

RBC’s list is up 7% since its last update in April, driven by three of the four major lithium producers and held back by underperformance from S32 and MIN.

But miners remain cheap on their books, with price targets across the coverage implying an 11% gain over the next 12 months.

The cohort is trading, on RBC’s figures, at 5x its 12 month forward EBITDA estimates, below a historical average of 5.5x and at an average free cash flow yield of 6% in FY24.

At current spot prices that would lift to 7-8%.

“We continue to forecast strong dividends, with average sector yield of ~3-4% in FY23e (5-6% for the large-cap diversified/bulks miners),” they said.

What to look out for

The brains trust at the Royal Bank have a few key insights to watch out for this month.

Watching export figures out of Port Hedland, they reckon there is a risk Pilbara Minerals could miss guidance, but cash will still be extraordinarily strong at $2.5b post divvie and FY24 production is expected to lift from ~600,000tpa in FY23 to 700,000tpa in FY24 at AISC of $1050/t.

MinRes has already delivered a primer for bad news before the end of the June quarter by reducing its Mt Marion guidance and guiding to the lower end at Wodgina. With a major upgrade at Mt Marion just about done, RBC sees its output lifting from 300,000t on a 6% Li2O basis to 440,000t in FY24.

IGO, which tanked today after revealing a shock near $1 billion impairment on its $1.3b Western Areas acquisition, and Allkem are both expected to see production grow, with IGO’s Greenbushes seen producing at the top end of guidance to underpin a ~$480m dividend from its share of the TLEA business.

BHP and RIO are seen being relatively flat, though the former’s acquisition of OZ Minerals will beef up its copper output in FY24 by around 15%, while South32 could see copper equivalent lifting 12% quarter on quarter with a risk on the aluminium front.

FMG is expected to post a solid quarter, but all eyes will be on Iron Bridge’s ramp up forecasts, while Sandfire is expected by RBC to see higher output and lower unit cots at its MATSA complex in Spain.

A burning question for Sandfire, Peker et. al. say, will be first production from the Motheo mine in Botswana and any potential delays to its proposed throughput expansion from 3.2Mtpa to 5.2Mtpa.

Peker has lifted price targets for Allkem and Rio by 7% and 3% to $15 and $110 respectively, while reducing its PTs for Sandfire, South32 and MinRes by 4%, 7% and 1% to $4.20, $6.50 and $85.

The largest PT adjustment has been reserved for Pilbara, up 10% from $5 to $5.50, an implied return on its Friday share price of 12%.

And on the markets today?

After a stellar run last week the mining dominated materials sector has opened with a whimper, closing down 0.78%.

Energy stocks were also stragglers, with only coal miners Yancoal (ASX:YAL) and Whitehaven (ASX:WHC) really standing out among the large caps.

The battery metals sector was hit hardest, headlined by IGO’s WSA debacle, but it was Canada spodumene producer Sayona Mining (ASX:SYA) which was hit hardest.

It fell over 7% after an apparent protest vote at an EGM against the issue of shares to MD Brett Lynch and CFO Paul Crawford, both of which passed barely. The company said it “has engaged with investors” and will incorporate feedback into its remuneration structures.

A proposal to change SYA’s constitution to allow virtual only meetings was also withdrawn.

“As disclosed in Sayona’s 5 July 2023 ASX release … the Board has appointed an independent remuneration consultant to advice (sic) on performance‐based remuneration for executives with outcomes that are aligned with shareholders,” the company said.

“Given the level of concern raised by investors relating to proposed changes to the constitution relating to the Board’s ability to hold virtual‐only shareholder meetings, the Board agreed to withdraw that resolution
prior to the meeting.”

The only primary spodumene producer in Canada, Sayona’s shares are up 337% over the past five years but down 30% over the past six months.

It produced first concentrate from its NAL operation in Quebec in March but has raised upwards of $250 million from investors this year to fund drilling and studies.