Macquarie Research (MRE) reviewed their commodity forecasts and highlighted their key picks in the resources sector. Thermal coal and coking coal upgrades led the way, followed by upgrades for steel and manganese due to ongoing supply/demand imbalances. MRE believe price strength will result in higher fundamental earnings. In the coal space, MRE’s picks are Centennial Coal (CEY), Felix Resources (FLX) and Straits Resources (SRL.) On the back of anticipated ongoing copper price strength, Oxiana remains MRE’s favoured exposure in the base metals space with Onesteel and Sims Group the preferred steel/manganese exposures.
Coal prices have been reviewed higher with ongoing structural shortages for a number of years due to Chinese/Indian demand along with delays in the completion of coal mine expansions. MRE have revised thermal coal prices for 2009 from $140/t to $180/t and 2010 from $125/t to $180/t; for coking coal, 2009 prices have been revised from $300/t to $350/t and 2010 from $280/t to $300/t.Coal is the pure play as higher coal prices will lead to substantial increases in underlying earnings for all producers. Picks are CEY, FLX and SRL. Coal stocks, Massey Energy and Consol Energy, gained over 4.5% in the US over the weekend.
MRE’s iron ore forecast is relatively unchanged. Mount Gibson offers high quality production and exploration upside in the iron ore space with earnings certainty. While MRE foresee a flat Australian benchmark price in 2009. MRE are forecasting a small fall in Brazilian benchmark prices to Asia (-4%) and a 15.6% fall in average spot prices.
Lead, zinc, nickel and aluminium have been downgraded whereas copper and tin remain in tight supply. Oxiana, aka Oz Minerals, remains a key pick as it offers size, liquidity and growth in copper – MRE’s preferred base metal.
MRE have upgraded steel prices in 2008 and assumed a small pullback in prices in 2009 with upside risk to prices due to an anticipated structural capacity shortage outside of China in the next five years. MRE reiterate their outperform recommendations for Onesteel and Sims Group.
Recent market jitters and global stagflation concerns warrant having some gold exposure with MRE’s preferred gold exposure, Lihir Gold.
MRE prefer size, diversity and quality – in particular, Xstrata and Vale in the global mining space. (MRE remain on research restrictions for BHP Billiton and Rio Tinto.) Forward earnings multiples remain attractive and justify the MRE desire to remain overexposed to the diversified, quality end of the sector. MRE have a preference for big over small, bulk metals over base metals, and quality over leverage - driven by the China/India growth phenomenon.
The economic outlook has deteriorated which means that caution must be exercised in relation to commodity-based investments. Supply constraints in coal, manganese, copper and steel have resulted in forecast upgrades.
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