Goldman Sachs: Australian mining sector ready for a positive 2022

The Australian mining sector is set up for a positive 2022, according to the latest analysis from Goldman Sachs.

On 12 January, Goldman Sachs released an in-depth report on Australia’s metals and mining sector. 

Thanks to several years of deleveraging and the growing focus on decarbonisation, Goldman Sachs “see this commodity up-cycle as different from the last two commodity booms.”

“We see capital allocation (production growth vs. decarbonisation spend vs. shareholder returns), M&A and portfolio optimisation as the key themes for the sector in 2022,” says the report.

According to Goldman Sachs, major miners are undervalued. Trading on average 4x higher than earnings (compared to historical multiples of 6-7x), these companies may have room to grow. 

Likewise, the current free cash flow yields of 11-12% compare favourably to the 15-year average of 7-8%. 

Here’s what Goldman Sachs had to say about iron ore, base metal, mineral sand, rare earth, and coal stocks. 

Iron Ore

Goldman Sachs sees “modest downside risk” to iron ore, thanks to weak Chinese steel production and construction demand. Still, they expect a rally in the second quarter of this year. 

In their report, GS forecast that iron ore will hit US$125/t in the October to December period. 

Iron ore spot prices have already exceeded this target. Iron ore is currently priced at US$127/t, after enjoying 17.05% growth in the last month. 

• Goldman Sachs is buy rated on Rio Tinto (ASX: RIO). 

• Price target: $125.6.

• This represents an upside of 14% to Rio’s current price of  $110.02. 

Aluminium/Copper/Zinc

Citing a multi-year bullish view on aluminium, Goldman Sachs is:

• Buy rated on SOUTH32 (ASX: S32). 

• Price target: $4.70.

• 16.33% upside to the current price of $4.04.

SOUTH32 also remains on Goldman Sachs’ conviction list.

Copper/Gold

While Goldman Sachs remains bullish towards copper’s prospects, the company acknowledges that Australian copper companies are trading close to their full values, unlike other diversified miners. 

• Oz Minerals (ASX: OZL) was downgraded from buy to neutral. 

• Price target: $28.4

“Even though we are positive on copper and Oz Minerals' strategy, we downgrade OZL to Neutral (from Buy) on valuation,” says Goldman Sachs.

Oz Mineral is trading at 6x higher than earnings. This is well above Oz Minerals global copper peers, which are trading at an average multiple of 4.5x. 

Mineral Sands and Rare Earths

Referencing “compelling Zircon and TiO2 price upside and Rare Earth growth potential,” Goldman Sachs is:

• Buy rated on Iluka Resources (ASX: ILU)

• Price target: $12.4

• 13.66% upside to current price of $10.91

According to Goldman Sachs, Iluka is trading at more than a 50% discount to the company’s rare earth peers, and more than a 10% discount compared to other mineral sands miners.

Coal

Goldman Sachs expects global power demand to recover in 2022. They also see met coal as being undersupplied. 

• Whitehaven Coal (ASX: WHC) was upgraded from neutral to buy.

• Price target: $3.60

• 23.49% upside to current price of $2.915

We previously covered Whitehaven in greater depth in this article.