Morningstar Investor users sign in here.

Stocks

Fair values cut across mining sector as boom comes to abrupt halt

Investors bet demand for fuel and metals will fall as central banks raise interest rates to battle surging inflation.

Mentioned: BHP Group Ltd (BHP), New Hope Corp Ltd (NHC), Rio Tinto Ltd (RIO), South32 Ltd (S32), Whitehaven Coal Ltd (WHC)


Wavering demand, rising interest rates and supply chain problems have sent once buoyant commodity markets tumbling, in some cases at historic pace. However, analysts remain cautious about buying opportunities and tip further price falls.

Demand for fuel and metals, especially economic bellwethers like copper and iron ore, is falling and expected to decline further as central banks raise interest rates to battle surging inflation. Copper prices notched their worst quarter since the financial crisis in June. Benchmark crude oil prices briefly dipped below the key US$100 a barrel level in early July, although prices have since rebounded slightly.

Morningstar lowered fair value estimates across the resources sector in response, says director of equity research Mathew Hodge. He warned about further volatility and said the sector is far from trading at a discount.

“Commodity prices are moving around at the moment [and are] highly volatile,” says Hodge. “Some have been moving in generally positive directions – such as thermal coal – but many such as copper and iron ore have not. If sustained, these lower prices are a headwind to valuations.

“Commodity prices overall are still relatively elevated so by no means is the sector on sale.”

Fair values at BHP (BHP) and Rio Tinto (RIO) were reduced by 3% and 6%, respectively because of falling iron ore and copper prices. Both are trading in a fairly valued range. Diversified miner South32 (S32) saw its fair value slashed 19% because of lower aluminium and manganese prices.

Hodge now assumes iron ore prices will average US$110 per tonne between 2022 to 2024, down from an earlier forecast of US$148 a tonne as falling steel production in China crimps prices.

Lower copper prices cut 12% off Oz Minerals (OZL) fair value. Gold miner Newcrest (NCM) is the most undervalued miner, with a fair value of $33 compared to its price around $19.

Hodge says the outlook is brighter for thermal coal as Russian sanctions remove supply from the market at the same time as Europe mulls restarting coal-fired plants to cope with an energy shortage.

Morningstar fair value estimates for Whitehaven (WHC) jumped 73% to $9 a share while New Hope (NHC) saw its fair value rise 58%.

Value still not found in big miners

Investment bank UBS says the Australian resource sector isn’t cheap enough to justify sector-wide buying.

Upcoming production and financial results in August are likely to show higher costs and possibly lower production, with reduced rates of investment spending, “all reasons to be cautious and selective on buying,” according to an early July report titled, “Australian Resources Cheaper… But Not Cheap”.

“We remain Neutral on BHP, Rio Tinto and Fortescue Metals Group. Strong earnings near term should support returns despite higher costs, but downside to spot iron ore, copper, met coal and nickel prices will likely weigh on equities,” the note said.

In terms of other commodities including copper and aluminium, UBS says that slowing demand growth into 2023 raises the risk of weaker prices. “And while stocks have already fallen from recent cycle peaks, lower commodity prices would likely pressure equities lower still,” the investment bank says.

Long term case still strong

Goldman Sachs resources analyst Paul Young expects a drop in global commodity demand over the next 12 month as global economic growth slows. At the same time, rising energy and labour costs in the energy sector will squeeze profits from the other direction.

However, over the medium to longer term, Young remains positive on the mining sector. An expected recovery in China will lift infrastructure and property construction while global decarbonisation and investment in renewable energy projects is expected to result in a shortage of base metals, which will buoy prices.



This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. 

© 2023 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This report has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or New Zealand wholesale clients of Morningstar Research Ltd, subsidiaries of Morningstar, Inc. Any general advice has been provided without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.

More from Morningstar

7 charts on the AI stock boom one year after ChatGPT’s launch
Stocks

7 charts on the AI stock boom one year after ChatGPT’s launch

These stocks and the key trends behind them are critical for understanding the AI investment landscape.
Why Berkshire Hathaway’s success will continue after Charlie Munger ... and Warren Buffett
Stocks

Why Berkshire Hathaway’s success will continue after Charlie Munger ... and Warren Buffett

Munger’s passing is a spiritual loss for the company.
Morningstar initiates coverage on 3 new shares
Stocks

Morningstar initiates coverage on 3 new shares

There are 2 undervalued names as part of our new coverage. 
3 shares for income investors
Stocks

3 shares for income investors

A dividend screen is a jumping off point for further research.
What we think of Morningstar subscribers' most traded share
Stocks

What we think of Morningstar subscribers' most traded share

This stock was the second largest ‘buy’ for 2023 and was also the second largest ‘sell’ for Morningstar subscribers.
How to build an income portfolio
Stocks

How to build an income portfolio

Investors love dividends but creating an income stream involves more than just picking the highest yielding shares.