Morningstar hikes fair values for slew of miners

Morningstar analysts made double-digit upgrades to fair value across the resources sector, forecasting that booming commodity prices will linger for years to come.

Diversified miners Glencore, Rio Tinto, BHP and South32 saw upgrades between 11% and 23% on the back of higher price forecasts for copper, coal, aluminium and iron ore. Coal miners New Hope and Whitehaven Coal had the biggest upgrades at 33% each, with thermal coal prices set to remain at more than triple their 2020 levels over the next 18 months.

Big upgrades for almost all the miners under coverage were first mooted last month and reflect the growing view that commodities prices will remain elevated until 2024 and, in some cases, beyond, says Mathew Hodge, Morningstar director of equity research.

“Commodity prices have surged on robust economic growth and supply worries, exacerbated by the Ukraine war and Russian sanctions,” he says. “After updating our commodity price assumptions, the fair values for most miners on our coverage list will also rise.”

Morningstar is the latest in a line of analysts to boost valuations for the mining industry as hopes fade of a speedy resolution to the shortages and disruptions driving up prices for everything from coal to nickel.

The upgrades pushed several miners back into fairly valued territory despite the broader resources sector trading at an average 21% premium to Morningstar’s fair value.

Whitehaven Coal (ASX: WHC), South32 (ASX: S32) and Glencore (GLEN) are again trading at or near fair value. Iron ore miners Rio Tinto (ASX: RIO), BHP (ASX: BHP) and Fortescue Metals (ASX: FMG) remain pricy despite double-digit upgrades.

Gold and copper miner Newcrest (ASX: NCM) is the only miner under coverage still trading at a discount to fair value. Shares closed on Tuesday at $28.84, a 13% discount to fair value.

Commodity prices are rallying as strong economic growth stokes demand that mines impacted by Covid-19 and years of underinvestment are struggling to deliver. Russia’s invasion of Ukraine and the retaliatory sanctions have added to price pressure as traders fret supplies of coal, nickel or iron ore produced by both countries could be removed from tight markets.

Bulk commodities iron ore and coal are up 42% versus a year ago, according to Reserve Bank data. Base metals like copper and nickel have risen by 51%.

Coal, copper and iron ore move higher

After hitting a nadir around US$90 last November, iron ore prices have surged to above US$150 amid renewed optimism about the steel-hungry Chinese economy and concerns over supply disruptions at producers in Ukraine and Russia, says Hodge.

Acknowledging higher prices are likely to stick around, he raised the average iron ore price forecast for 2022 through 2024 by 34%. Fair values for iron ore heavyweights Rio Tinto, BHP and Fortescue Metal increased by 11%, 13% and 20%, respectively.

Fortescue Metals trades at a 55% premium to fair value after the upgrade. Hodge attributes its performance to today’s iron ore prices and enthusiasm over the firm’s push into green hydrogen.

“We think it’s too early to get excited about green energy,” he cautions. “Entry into the space is likely to be capital intensive and we have no reason to assume Fortescue is likely to generate returns better than its cost of capital from green energy over the long term.”

A slew of miners also benefited from major increases to Morningstar’s copper and coal price forecasts.

Hodge raised his long-term forecasts for copper by 18% in response to its growing use in electric vehicles and renewable energy, rising production costs and continued demand from Chinese infrastructure and real estate.

Copper and gold miner Oz Minerals (ASX: OZL) saw its fair value raised 19% as it gears up to approve a new nickel-copper project in Western Australia by year-end. Hodge cautioned that high commodity prices and new projects are “more than priced in” to the stock.

Shares closed on Tuesday at $27.73, a 29% premium to fair value.

Coal markets are hovering near record highs scarcely five months after world leaders agreed at the UN’s COP26 climate conference to phase down use.

Rebounding demand for energy, tight supply and little prospect of new mines saw Hodge raise his 2022-2024 price forecasts for thermal coal 53% to US$202. Prices averaged US$60 in 2020.

While he expects thermal coal prices and demand to steadily decline this decade, Asian power plant customers will keep coal miners Whitehaven and New Hope (ASX: NHC) in business “for decades”.

Glencore, the world’s largest exporter of thermal coal, had its fair value raised 18%. The London-based miner is also exposed to copper and nickel.