The Ugly Duckling: What analysts see in unloved resources stocks

ASX miners fell 15% in 2024, trailing a strong ASX 300 which lifted 12%
Goldman Sachs and RBC both see value in resources ahead of reporting season and the second half of FY25
Gold miners could be the best place to look, with equities to benefit from a strong commodity price

Analysts are about to stick their noses to the grindstone as the ASX’s biggest miners roll out their production numbers for the second quarter of the financial year.

It comes at a tenuous time for the sector in general, with believers hopeful money will flow from the pumped tyres of the tech and financial sectors into an oversold materials sector.

Incredibly, despite the penetration of miners in the ASX 300 – the index of Australia’s largest 300 liquid companies, close to 20% of whom are in metals and mining – the sector has decoupled from the broader market.

Miners fell 15% across 2024, while the ASX 300 lifted 12%.

“The main drivers of the underperformance were the weak global demand backdrop for commodities, especially from China, but also elevated industry costs, compressed margins and declining FCF (free cash flow),” Goldman Sachs’ Paul Young and Hugo Nicolaci said in a note. They say demand needs to pick up to see fundamentals for resources stocks turn the corner.

“The supply side did all the heavy lifting for commodity prices in 2024. For 2025, we need to see a sustained pick up in Chinese and Developed Market (DM) industrial production, construction and consumer activity to see a fundamental re-rating in metal prices to re-rate the Australian mining sector in our view.”

Yet, major investment banks Goldman and RBC have buy ratings across much of the mining space. And it all comes down to valuations.

Opportunities for mining investors

RBC’s Kaan Peker said, ahead of December quarter reporting, that the bank expects to see production lift 2-3% QoQ across its bulk and battery metals coverage.

But as costs inflation steadies and share prices remain weighed down by sentiment, Peker thinks there is value to be found among mining’s blue-chippers.

“Operational performance has generally been patchy, and while we see some risk to guidance this quarter (outlined below), the bulk miners have done a good job of delivering volumes to the market, albeit at the expense of quality,” he said.

“Meanwhile, lithium miners have recently announced production cuts, re-basing expectations. On costs, we are past the point of cost inflation and are now seeing margin support via a lower AUD, freight rates and treatment/refining charges, which are supportive of FCF.

“Given the recent share price weakness, we believe valuation appeal has re-appeared across the sector, given that on average our base/bulk coverage is trading below a 6x 12-month forward multiple with 6-7% FCF yield.”

RBC’s outperform ratings (equivalent to a ‘buy’ at most brokers) include copper companies Sandfire Resources (ASX:SFR) and FireFly Metals (ASX:FFM), heavily sold lithium quad Mineral Resources (ASX:MIN), Arcadium Lithium (ASX:LTM), IGO (ASX:IGO) and Pilbara Minerals (ASX:PLS), Fortescue (ASX:FMG) and South32 (ASX:S32), while it has a sector perform (hold) on BHP (ASX:BHP), Rio Tinto (ASX:RIO) and 29Metals (ASX:29M).

However, it has trimmed price targets on copper exposed stocks BHP, RIO, SFR and 29M after the bank’s global team cut its forecast 2025 copper price from US$4.50 to $4/lb due to expectations for weaker Chinese demand. Its PT on embattled lithium and iron ore producer MinRes has been clipped from $59 to $52, despite its iron ore projection lifting from US$80/t to US$85/t.

Goldman has sells on FMG and coal miner New Hope Corp (ASX:NHC), with a neutral rating on Sandfire, Lynas (ASX:LYC), MinRes and Sims Metal Management (ASX:SGM) and buys on Coronado Global Resources (ASX:CRN), Whitehaven Coal (ASX:WHC), Bluescope Steel (ASX:BSL), Iluka Resources (ASX:ILU), Deterra Royalties (ASX:DRR), Champion Iron (ASX:CIA), BHP, Rio and South32.

Young and Nicolaci have raised price targets on a number of miners despite lowered iron ore forecasts to US$95/t in 2025 and US$90/t in 2026, with a weaker Australian dollar against the US dollar an advantage for local producers, boosting most earnings per share forecasts across GS’ coverage. That’s translated to some price target updates.

South32’s PT has been lifted from $3.90 to $4 on higher alumina prices, though lower copper, zinc and lead prices have seen Sandfire’s price target cut from $10.40 to $10.20, while MinRes’ has been reduced from $41 to $34 with lithium expansions delayed due to weak pricing.

The strongest PT upgrade has been delivered by GS for Whitehaven, from $87.90 to $9.10, 45% upside on its current price.

Boosts for gold miners

While the outlook for bulk and base metal purveyors remains uncertain, analysts are more resoundingly positive on Aussie gold miners.

Few surprises are likely in the next fortnight with most of the sector outside big three Northern Star Resources (ASX:NST), Newmont Corporation (ASX:NEM) and Evolution Mining (ASX:EVN) delivering preliminary production figures.

In 2024, Goldman’s Nicolaci, Young and Isaac Brooke said the ASX gold equities under their watch underperformed the gold price by 10%.

They’ve initiated Newmont as a buy and upgraded NST to a buy, saying record gold prices will drive improved free cash flow generation. Northern Star, notably, has loaded production to the second half of FY25.

Goldman says Aussie gold stocks are pricing in an average of US$2240/oz, well below spot levels of US$2670/oz and Goldman’s long term price estimate of US$2300/oz. It’s only sell, Regis Resources (ASX:RRL), is pricing in US$2500/oz, with Goldman negative on its long-term prospects despite strong near-term cash generation, while Northern Star on the other end is currently priced as low as US$2100/oz.

“With our global team remaining constructive into 2025/26 on structurally higher central bank demand, we expect our Australian gold coverage is set up for a growing cash harvest over the next 12 months as price increases outweigh cost escalations (driven by processing cost increases on our database), supporting further balance sheet strength, growing capital returns and prospective M&A,” Nicolaci et. al. said.

“We revise our estimates up on the updated gold/FX forward curves (partly offset by cost escalations), and lift our LT gold price to US$2,300/oz from 2029 (real $2025), where we see prices more likely to be sustained at elevated levels.”

GS has lifted its Northern Star price target from $16.60 to $20 and EVN (neutral rated) from $4.50 to $5.15. Even Regis, despite the sell label, has seen its PT lifted from $2.05 to $2.70. Only Bellevue Gold (ASX:BGL), which disappointed with production numbers in December, has had its PY chopped from $1.80 to $1.55.

RBC’s Alex Barkley rates the underperformance of gold stocks to the price of bullion in 2024 as being even wider than GS’ assessment at -25%.

“We still maintain our view that industry conditions are improved vs prior years,” he said.

“This should give greater confidence to production forecasts vs the Covid years. Despite better earnings confidence gold producers are showing good value; our FY26e EV/EBITDA are ~20% below 3-year averages. Since DecQ started, gold equities have matched gold (+17% coverage, AUD gold +19%), but this follows CY24 underperformance of ~25% equity vs gold.

“Given our view of a well-supported gold price in CY25 we expect levered equities to outperform the commodity.”

RBC has outperforms on Bellevue, Westgold Resources (ASX:WGX) and Regis.

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