Positive outlook for copper, nickel miners

Kristie Batten
Friday, 20 March 2015

DESPITE a slump in prices, the weak Australian dollar has led to earnings upgrades for Australia’s copper and nickel producers.

Nickel is down 8.8% so far this week and hit a 14-month low this week, while copper has lost 7.7% ad dropped to a 5.5-year low in January.

Earlier this week, Macquarie cut its 2015 Australian dollar outlook by 4% to US80.7c and by 13% to 77.3c for 2016, prompting positive revisions to price targets and earnings forecasts for Australian miners.

Macquarie took the opportunity to mark-to-market metals for the current quarter, which in most cases offset the reduction in the Australian dollar.

In copper, it offset earnings upside for Sandfire Resources and US dollar producers PanAust, Tiger Resources and MMG this financial year, but doubled the forecast for OZ Minerals.

Earnings forecasts for copper producers OZ, Sandfire and Aditya Birla for FY16 were upgraded by 82%, 35% and 69% respectively, and in nickel, earnings estimates for Western Areas, Panoramic Resources and Mincor Resources were upgraded by 22%, 57% and 84% respectively.

OZ was upgraded to outperform from neutral and its price target was lifted by 23% to $A5.30, while Aditya’s was boosted by 45% to16c and Sandfire’s by 10% to $6.70.

“However, should the spot price persist, then there is material downside to all our valuations,” Macquarie said.

In nickel, Macquarie believes nickel stocks are already factoring in a price recovery, with Panoramic and Mincor factoring in a $US9 per pound price and Western Areas factoring in a price closer to $8/lb, against the current price of around $6.20/lb.

As a result, price targets for Western Areas, Panoramic, Mincor and Sirius Resources were upgraded by only 7-9%, though Mincor’s rating was lifted to outperform.

“We concede there is now a material divergence between our price targets and the implied valuations using spot prices,” Macquarie said.

Macquarie expects copper to rebound to more than $3.50/lb by the end of 2017 and nickel to rise to more than $10/lb next year.

Sandfire is Macquarie’s preferred copper pick due to cashflow, earnings and growth potential at the DeGrussa mine, while Western Areas is the favoured nickel pick due to its solid free cashflow, even at current prices.

“Sirius’ Nova nickel project is world class and both it and Western Areas remain potential takeover targets,” Macquarie said.

“Panoramic and Mincor have the potential to add material value through the drill bit however we note that both companies are loss-making at spot nickel prices.”

Meanwhile, GMP Securities also noted that Panoramic and Mincor would struggle to make a profit when it downgraded its base metal estimates this week.

Its copper forecast for 2015 was lowered by 18% to $2.71/lb and its nickel outlook dropped 13% to $7/lb.

GMP said current spot prices were not sustainable.

“Even with strong headwinds, we continue to believe the spot prices across the board in the base metal space are unsustainably low and must move higher in order to incentivise new production; that being said, the current prices are likely to persist for the first half of 2015,” GMP said.

GMP said Sirius’ Nova project looked to be timed perfectly to take advantage of the expected price rise.

Shares in Sandfire, OZ and Sirius were all slightly higher this morning, while Aditya, Mincor and Western Areas were lower and Panoramic unchanged.

On the London Metal Exchange overnight, copper jumped 3.3% to $5879.25 per tonne, while nickel rose 2% to $13,734.50/t.

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