* Currency to provide an important tailwind
The strengthening of the US dollar in 2014 has clearly been a headwind tomining equities' performance. We think the flipside of this - weaker producer
currencies - will provide a tailwind to miners' cost control and free cash flows
in 2015. Adding this to increased cash flow post-cost saving and capex cutting
programmes, stabilising earnings from less volatile commodity prices, plus
strong balance sheets, we reiterate our view that the sector offers value, at
0.72x Price to NPV on average, In the longer-term, we think the mining stocks
can perform in a US dollar strengthening cycle, as they have done in previous
cycles, driven by cost and capex cutting success.
* Industrial metals displaying resilience – prefer base over bulks and precious
We think that the majority of base metals prices have displayed resilience in
the face of ongoing US dollar strength, with our thesis of lower price volatility
playing out. The bulks have been weaker, led by coal, then iron ore and now
oil. In 2015, we expect aluminium and zinc to be the outperformers of the
Industrial metals. For Bulk commodities, prices have fallen below the marginal
cost of production. However, producer cost containment has delayed the
necessary quantum of supply cuts needed for a price recovery. The
appearance of contango in the Brent forward curve is a clear example of the
rapid deterioration in physical fundamentals in the oil market. In terms of
precious metals, the gold outlook remains clouded by our assessment that US
real yields, the US dollar and the S&P500 will all post further advances heading
in 2015. However, we still view physical fundamentals in the PGM complex as
becoming healthier.
* Mixed earnings outcomes: increasing Al and Zn 2015 forecasts, cutting bulks
Our earnings estimates for the diversified miners come down 20-40% in both
2015 and 2016 as we factor in our lower bulk commodity price forecasts.
There is a small offset from assuming a weaker AUD and ZAR. Our forecasts
for Boliden, Norsk Hydro and Nyrstar benefit from increased base metals price
forecasts plus weaker SEK and NOK assumptions. Our estimates for a weaker
Russian Rouble benefits 2015-16 earnings for the Russian gold miners.
* We upgrade BOL and NHY from Hold to Buy; downgrade GLEN to Hold
As a result of the changes from our commodity price assumptions, we have
upgraded both Boliden and Norsk Hydro from Hold to Buy recommendations
and we have downgraded Glencore from Buy to Hold.