Despite cost pressures, commodity prices to push higher: Goldman Sachs

While the Russia/Ukraine war, low stockpiles, global shipping challenges, and ongoing underinvestment by mining companies have driven commodity prices higher, Goldman Sachs expects recovery in Chinese construction activity in the June quarter to continue to drive commodity prices even higher, especially iron ore.

The broker is bullish on base metals and iron ore over the next 3-6 months and believes cost inflation across the mining sector - running at 5-10% year-on-year across most upstream and downstream assets - provides further upward pressure to commodity prices in the near term.

But despite higher costs, courtesy of acute cost inflation – from labour, diesel & chemical prices, and higher capex budgets – Goldman’s Australian mining sector 2022 earnings per share (EPS) estimates are upgraded by 10%-plus at spot commodity prices.

The broker is forecasting an attractive average sector dividend yield of 10% and 8% in FY22 and FY23 respectively.

Iron ore stocks

While the iron ore price has rebounded to above US$150/t on supply side tightness, Goldman’s now sees upside risk to its US$145/t forecast for second quarter.

The broker maintains Buy ratings on Rio Tinto (ASX: RIO) – price target $136.40, and Champion Iron (ASX: CIA) – price target $8.30, and recently upgraded Mineral Resources (ASX: MIN) to Buy after making six major changes to its volume/growth assumptions in iron ore, lithium and mining services, which lifted the broker’s NAV estimates by 45% to $58.10, and price target to $70.80.

Goldman’s maintains a Sell recommendation on Fortescue Metal’s (ASX: FMG) - price target $15.20 - based on both relative valuation (1.6x NAV) - trading at a significant premium to BHP (ASX: BHP) and Rio on a EV/EBITDA – and capex and execution risks on the Iron Bridge & Fortescue Future Industries (FFI) set of renewable projects.

However, the broker notes improvement in Fortescue’s low grade price realisations from 65-68% to 70-75% - due to Chinese steel mills preferring cheaper low-grade Fe based on low steel mill gross profit margins – as one near term tailwind.

Base metal stocks

Goldman’s commodities team forecasts a primary aluminium deficit of 2.2Mt in 2022 and 1.8Mt in 2023 and with price forecasts of US$1.55/lb and US$1.75/lb respectively.

However, the broker is less bullish on alumina based on swing supply and refinery restarts in China and new refining capacity in Indonesia.

The broker is Buy rated on South32 (ASX: S32) – price target $5.80 - with strong exposure base metals, but despite upgrading earnings on higher alumina prices remains Neutral on Alumina (ASX: AWC) – price target $2.10.

Copper/gold

Goldman’s recently reiterated its bullish view on copper and raised their forecast market deficit for 2022 to 374kt - double their previous estimate.

Mine supply disruptions in Russia and Chile and recovering Chinese demand and imports and strong demand from green capex underscores the broker’s US$5.3/lb copper price forecast for 2022 (versus spot at US$4.7/lb).

Based on valuation and growth outlook, the broker has upgraded copper miner Oz Minerals (ASX: OZL) to Buy from Neutral (price target $28.70).

While Sandfire (ASX: SFR) has been upgraded to Neutral from Sell on valuation, the broker remains cautious on the company’s recent MATSA copper/zinc mine acquisition - based on operating risks and Botswana/Motheo copper mine execution risks - and thinks the stock has de-rated (price target $5.70).

Mineral sands/rare earths

Due to an attractive valuation and compelling Zircon and TiO2 price upside, plus Rare Earth (RE) growth potential, Goldman’s is Buy rated on mineral sands/rare earth producer Iluka (ASX: ILU).

The broker notes the stock is trading at a 50%-plus discount to RE peers and 10%-plus discount to min sands/pigment peers on an EV/EBITDA basis (price target $14.00).

Coal stocks

Goldman’s believes current tight global coal markets could potentially be further impacted by the Russia-Ukraine war putting Russian coal exports at risk due to possible sanctions and “self-sanctioning” by European & Asian utilities and steel mills.

For thermal coal, the broker forecasts US$207/t for 2022 and benchmark met coal to average US$372/t in 2022.

The broker sees Whitehaven Coal (ASX: WHC) as a compelling de-gearing and capital returns story and maintains a Buy rating (price target $5.30).

While met coal pure-play Coronado (ASX: CRN) is also rated Buy on compelling valuation and an ongoing tight met coal market (price target $3.00), Goldman’s has downgraded New Hope (ASX: NHC) to Sell (price target $3.00).

While New Hope has no production growth at the low-cost high margin Bengalla thermal coal mine in NSW, the broker notes its New Acland Stage 3 (NAC3) project is still waiting for government approvals.