Tim Treadgold: Here’s your quarter time mining sector preview
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A recovery for Australia’s battered lithium sector could be on the way if leading investment banks’ previews of mining-company production for the September quarter are correct.
But naming lithium producers such as Galaxy (ASX:GXY) and Orocobre (ASX:ORO) as potential winners over the next 12-months is one of the few positives in a generally downbeat assortment of reports on what to expect from the miners in their latest quarterlies, which started flowing this week.
JP Morgan led what could be the start of a revival in lithium after a period of horrendous falls that has seen most lithium stocks plunge by close to 70 per cent since early 2018.
Galaxy, for example, has dropped from a high of $4.24 in January last year to latest sales at 93c, a 78 per cent dive. Orocobre is down 67 per cent from $7.24 in January last year to latest sales at $2.40.
Those share-price falls are directly linked to an over-supply of lithium, with the over-supply problem of the battery-making material compounded by slower-than-expected sales of electric cars.
“The lithium sector is having some growing pains and we see a difficult six-to-12 months ahead,” JP Morgan said.
“Mineral Resources, Galaxy and Orocobre will come out the other side, but we downgrade Pilbara Minerals (ASX:PLS) to underweight.”
The lithium-stock price tips from the big US bank include Orocobre rising to $2.90, and Galaxy effectively doubling to $1.80. Pilbara, however, is expected to fall from its current 32c to 25c.
The overall view of what to expect during September quarter reporting season is neutral, according to JP Morgan, and while finding value is hard, iron ore and gold are the preferred exposure.
“Our caution is based around macro-risks and decelerating growth,” the bank said.
“The global purchasing managers index is at a three-year low, global capital expenditure is not growing, and US-global recession risks have risen.”
UBS, in its September quarter preview, singled out graphite miner Syrah (ASX:SYR) for special mention, but not for a positive comment.
It warned clients that the stock remains under pressure despite its 76 per cent share-price fall since the start of this year and its 90 per cent fall over the past three years as it plummeted from a high of $6.27 in 2016 to latest sales at 46c.
“A key report to watch out for is Syrah Resources where an update on its operational review is due,” UBS said, before asking a question: “Could we see the Balama (graphite) operation placed on care and maintenance given the sudden decline in the market Syrah spoke of in September?”.
The Syrah quarterly is scheduled for release next Monday (October 21), according to UBS.
Other stocks on the UBS watch list, and what investors might see, include:
Macquarie Bank divided its September quarter preview into two reports, one covering base metals (such as copper, nickel and zinc) and the other covering bulk commodities (iron ore and coal).
Among the base metals, OZ is Macquarie’s favorite copper stock, and Independence (ASX:IGO) the preferred nickel stock because of the bonus of gold production.
But the surprise positive noted by Macquarie is the beneficial effect on all Australian base metal miners of the lower value of the local dollar.
“Due in part to the weak Australian dollar all of our base metal miners boast earnings upgrades at spot (current commodity price), with our nickel miners having the most significant upside,” Macquarie said.
On OZ, Macquarie expects slightly reduced copper output in the September quarter but more gold which should drive overall costs down and justify the bank’s buy tip on the stock and a price forecast of $12, up 24.5 per cent on OZ’s latest trades at $9.64.
Independence is expected to have a marginally weaker production over the last three months but remains a buy with the share price tipped to rise by 23 per cent to $7.
Macquarie’s bulk miners preview is topped by a forecast of continued strong results from the iron ore producers while South32 (ASX:S32) and Alumina (ASX:AWC) are likely to be weighed down by a weaker price for alumina, the aluminium feedstock.
“Quarter-on-quarter (iron ore) production for Rio Tinto, Mount Gibson and Mineral Resources is expected to increase, while volumes for BHP, Fortescue Metals and Champion Iron are expected to be marginally lower,” Macquarie said.
Among the bulk commodity producers, Fortescue and Iluka (ASX:ILU) are Macquarie’s top picks with pure-play iron ore stocks, Mount Gibson (ASX:MGX) and Champion (ASX:CIA) offering material upside at the current iron ore price.
A surprise inclusion in Macquarie’s bulk-miners preview is Kalium Lakes (ASX:KLL), one of the emerging potash producers which the bank believes should be in production by late next year.
But the over-arching comment from Macquarie on the bulk miners is that commodity price headwinds continue to underpin “our cautious view”.
RBC Capital Markets said the notable share-price gains in the September quarter came from gold, silver and nickel producers, whereas bulk commodity miners generally slipped lower.
That trend is likely to continue as the slow pace of global growth weighs on stocks exposed to material such as iron ore and coal while “bolstering the case for additional portfolio allocation towards the traditional safe-haven in gold”.