Indonesia is a major exporter of thermal coal and nickel. There have been some private mine closures as a result of the coronavirus outbreak but there is, as yet, no mandate from the government on halting operations.
UBS points out thermal coal mining predominantly takes place in South Sumatra & Kalimantan while nickel mining is in South Sulawesi – far from the epicentre in Jakarta but still in populous areas.
In the case of nickel, the broker suggests the decision to move forward the ban on ore exports means any disruption from the pandemic is likely to be evident in ferro-nickel and nickel pig iron exports, while potentially threatening local smelter expansion plans.
While not its base case, UBS suggests a wide shutdown of Indonesian exports would be supportive of prices, noting thermal coal has already lifted to US$70/t as a result of the South African lock-down.
UBS prefers Whitehaven Coal ((WHC)) for exposure to thermal coal, IGO Group ((IGO)) for nickel and Glencore for both commodities. Bell Potter points out Nickel Mines ((NIC)), with operations in Sulawesi, is approaching the disruptions from a position of strength.
The Indonesian Morowali Industrial Park is a secure, self-contained facility with its own power, port and accommodation capacity. Management has benefited from the Chinese experience of epidemic controls and was one of the first sites to react to the pandemic.
Nickel Mines has no development projects but is planning to lift ownership of Hengjaya and Ranger to 80% and fund at least a portion with debt. In this circumstance, with a lightly geared balance sheet, a low-yield environment could provide cheap finance for the company. Bell Potter has a Buy rating and $1.14 target for the stock.
Global demand is expected to be materially lower for commodities and along with a growing number of mine closures there is potential to quickly change the supply/demand balance, in JPMorgan’s view. The broker retains a preference for quality names with low gearing and leverage to potential Chinese stimulus and considers diversified miners well-placed. There is minimal impact on assets so far.
Bell Potter also favours producers in the resources sector in the current market, particularly those with Australian assets. Unlike other sectors, such as travel & tourism, mining companies still have a market for their product.
While some commodity prices, particularly base metals, have fallen the slump in the Australian dollar has offset this considerably. When combined with an oil price that has fallen more than -50% many Australian mining operations are actually ending up in a favourable market position.
Bell Potter prefers gold and iron ore exposures for the short term, although value is harder to find in these sectors. Very few Australian assets have been subject to reductions to guidance or suspensions.
The main risk appears to be the availability of labour as border closures and quarantine requirements need to be worked through. The broker expects the Australian government will prioritise continuity of operations in the resources sector as this is one of the few sectors that is able to maintain employment, high margins and contribute to the economy.
BHP Group ((BHP)) is the top sector pick for JPMorgan, given a 5% dividend yield and a 6% free cash flow yield with the stock trading -20% below valuation. Rio Tinto ((RIO)) is also a top pick and the broker rates South32 ((S32)) and Fortescue Metals ((FMG)) Overweight based on attractive valuations.
Along with the bulks, JPMorgan prefers gold stocks and considers Saracen Mineral Holdings ((SAR)) and St Barbara ((SBM)) the best. The broker retains a US$1500/oz long-term gold price forecast ($2000/oz at AUD/USD of $0.74), noting the Australian price has improved recently to $2700/oz. Low risk operations and jurisdictions are preferred.
Bell Potter prefers Fortescue Metals for its resilience and strong balance sheet as well as direct exposure to Chinese stimulus. Regis Resources ((RRL)) is considered one of the better propositions in the gold sector as operations are well situated to ride out restrictions related to the pandemic.
Bell Potter also likes OZ Minerals ((OZL)) because of the quality of the portfolio, although acknowledges the copper price recovery appears long dated.
However, OZ Minerals and Sandfire Resources ((SFR)) do not offer compelling value on the back of the -11-14% downgrade to copper prices, in JPMorgan’s view, despite the recent sell-off. The broker finds some value in nickel miners such as IGO Group and Western Areas ((WSA)), as well as Iluka Resources ((ILU)) and Mineral Resources ((MIN)).
With a growing number of production assets being shut down as governments curtail activity, Macquarie observes zinc has experienced some of the largest reductions. This is also the result of a soft market for concentrates and a descending price, not just the pandemic.
The broker calculates around one third of the cost curve is now out of the money which compares with around 15% for copper. While demand declines are even more extreme, the reductions to production will still need to temper an oversupply.
Zinc mines announced over 200,000t of curtailments in recent weeks yet Macquarie suggests, with the peak in epidemic infection still ahead of many countries, there is likely to be even more downside for zinc prices in the next few weeks.
Once the threat has passed, the broker suspects zinc could be amongst the least over-supplied of the metals and become interesting on a relative value basis.