UNDERVALUED: Goldman runs the ruler over Australia’s mining bigwigs as reporting season looms
Goldman Sachs analysts say Australia’s big miners are outperforming their international peers and remain undervalued heading into a big September Quarter reporting season.
Aussie equities analysts Paul Young and Caleb Heiner have run the ruler over Australia’s largest mining stocks with reporting slated to kick off in earnest next week.
They say local stocks have been outperforming their international peers over the past 2-3 months despite continuing negative news around operating and capex costs as well as lower than hoped for divvies in August.
“Although margins and FCF (free cash flow) are coming under pressure, we highlight the ongoing difficulty of executing on high quality mining projects, which plays into the underinvestment/undersupply thesis for commodities over the medium to long run,” Young and Heiner say, pointing to its own estimate of the price needed to incentivise an expansion of BHP (ASX:BHP) and Rio Tinto’s (ASX:RIO) Escondida copper mine in Chile as an example of that.
They say Australian mining stocks are priced at a discount to long term commodity price expectations.
“We see the Australian bulk mining and steel sectors as fairly valued trading at ~1xNAV and ~5.5x NTM EV/EBITDA, though with ~70% of our stocks trading below NAV and discounting commodity prices below our long run forecasts,” Young and Heiner say.
Despite bear moves around China, interest rates and more, Goldman says most of the 20 commodities it tracks are performing better than expected and trading at or above marginal cost.
Supply issues mean the “micro” is “winning over the macro”.
“Takeaways from our China M&M team’s recent China trip showed near-term demand and activity remain very weak, with downside risk in property construction activities leading to ongoing weakness in long product steel, but pockets of strength across manufacturing and energy transition that is positive for flat steel, copper and aluminium demand,” Young and Heiner say.
“This ties well into the GS commodity team’s broader view into 2024 where they prefer copper and aluminium over battery materials & thermal coal based on SD fundamentals.
“We also continue to like metallurgical coal, mineral sands and high grade iron ore over the medium term, mostly due to supply side tightness.”
Young and Heiner think iron ore could be hit by the end of mill restocking after the Golden Week Holiday in China, but think a balanced market and recovery in non-Chinese steel demand will be positive for the bulks in 2024.
Meanwhile a stable second half production quota of 120,000t of rare earths for the second half, up 14% YoY, was as anticipated.
“We continue to think that China Northern Rare Earths (CNRE), as the largest producer and therefore the primary liquidity provider into the Chinese NdPr price index and price setter, will continue to moderate production to even out margins through the RE value chain from mines to magnets,” Young and Heiner say.
Goldman has buys on the bulk of the Aussie bulk mining and steel sector, with BHP, Rio, Iluka Resources (ASX:ILU), Champion Iron (ASX:CIA), Coronado (ASX:CRN), BlueScope Steel (ASX:BSL), Sims Metal Management (ASX:SGM) and, now, Lynas all on its buy list.
All, it says are trading below or around NAV with strong free cash flow and/or high production and earnings growth.
Fortescue (ASX:FMG), Mineral Resources (ASX:MIN) and New Hope Group (ASX:NHC) are sell rated because GS sees them as trading at above 1.3x NAV, while copper miner Sandfire (ASX:SFR) is seen the same way for low free cash and concerns about production challenges at its MATSA copper mine in Spain.
GS has upgraded Alumina (ASX:AWC) to neutral, on price upside with approval for a new mine plan for its operating partner Alcoa expected to be delayed until mid-2024.
GS continues to see value in Champion Iron and Coronado, despite the latter’s recent production delays, with its upgrade of Lynas coming off the back of more concrete moves to fund and construct its US rare earth plants.
“We also like CIA for high grade iron ore and production growth, CRN for met coal and capital returns (div yield of 10% in 2024), and ILU for zircon and TiO2 supply tightness over the medium term and rare earth exposure with the company trading at 0.65xNAV,” Young and Heiner said.
“We also upgrade LYC from Neutral to Buy on valuation (0.8xNAV) after incorporating the company’s US Heavy Rare Earth (HRE) refinery into our base case which has added ~A$550mn to our NAV.”
As for the results themselves, there could be some turbulence for Aussie miners as diesel costs, labour inflation and maintenance has featured.
“From a production, revenue or margin perspective, we see potential negative surprises for AWC (margins), MIN (Li volumes), LYC (NdPr sales on stockpiling), ILU (Min sands volumes on weak China zircon imports), CRN (Curragh & Buchanan coal production), CIA (sales volumes), FMG (Fe sales volumes on maintenance) and BHP (Fe, Cu & coal volumes mostly on maintenance) vs. Visible Alpha Consensus Data.”
Rio has already released its third quarter iron ore production of 83.9Mt and is now tracking ~5% ahead of where it was in 2022, but shipment data reviewed by Young and Heiner shows FMG and BHP iron ore shipments and BHP met coal volumes could disappoint.
“Qld coal port data implies BHP’s met coal shipments of ~7Mt for the Sep Q (-15% QoQ) after long wall move at Goonyella and safety incidents at Peak Downs and Saraji impacted operations, though this will continue to support the coking coal price in our view,” they said.
In precious metals, Goldman’s Hugo Nicolaci, Paul Young and Elise Bailey see a $300/oz increase coming in margins to FY25 across its covered ASX gold names.
“Our updated analysis of >30 listed Australian gold assets suggests industry cost inflation eased further in June,” they said.
“Forward gold pricing expectations remain elevated, while a softening AUDUSD and hedging roll offs also support company realised pricing.”
With maintenance generally low across the quarter, they’re expecting production growth in the gold sector in the September quarter numbers, but see project spend over the longer term eating into free cash flow, while M&A activity is expected to continue.
Goldman’s favourite gold names are Gold Road Resources (ASX:GOR), Regis Resources (ASX:RRL) and De Grey Mining (ASX:DEG) in the mid-tier with Evolution (ASX:EVN) its large cap buy over the neutral Northern Star (ASX:NST) thanks to less execution risk in its growth pipeline and the fact over 20% of revenue on GS estimates is coming from the copper at its Ernest Henry mine in Queensland.
Capricorn Metals (ASX:CMM), which owns the Karlawinda gold mine in WA, is covered and rated neutral by GS.
De Grey’s upgrade to a buy came off the back of a landmark DFS last week, which put a $1.3 billion price tag on the development of its 530,000ozpa Hemi mine in the Pilbara, expected to be producing gold by the latter end of 2026 (though Goldman sees that being potentially delayed to the first half of 2027.)
Trading at $1.20 and a market cap of $2.15b currently, Nicolaci, Young and Bailey have placed a $1.40 price target on the company, up 4% from $1.35, after the DFS and accompanying $300 million equity raise it says support an “incremental derisking” of the major gold development.
While its gold peers trade at around 1.05x NAV and a long term price of US$1800/oz, they say De Grey was trading on Tuesday at just 0.85x NAV or pricing US$1580/oz.
Goldman sees De Grey hitting net cash by 2030 on a standalone basis, with the company flagging potentially $800 million of debt funding to support the development of the Hemi mine. But Nicolaci et. al. say the DFS also derisks De Grey and Hemi as an M&A target.
“Once ramped up to >500kozpa, Mallina will have a competitive scale. We risk adjust our NAV with a 15% discount to reflect the fact that DEG’s flagship Mallina Gold Project asset is pre-construction and funding (though incrementally de-risked post-DFS and interim equity raise),” they wrote.
“While historically, mining stocks tend to underperform through the execution and ramp-up phase of a project, we expect with Hemi positioned as a Tier 1 asset of global scale that post-DFS it remains an attractive potential strategic consolidation target.”
At Stockhead we tell it like it is. While De Grey Mining is a Stockhead advertiser at the time of writing, it did not sponsor this article.