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13 Oct 2021 1 month(s) ago

There have been huge moves in commodity prices, especially energy and iron ore. What does that mean for Australia's big resources companies?

One thing that is definitely catching the eye of investors is the sharp rise in many commodity prices, especially energy. It is focusing the attention on Australia’s large resources companies, although there are conflicting trends. Iron ore has weakened while coal and gas have strengthened.

Gas producer Santos is returning to its six month high:

Woodside’s share price is also strengthening, although it has not got back to its peak of this year:

These performances are a little disappointing given the surge in LNG prices. The AFR recently reported that a cargo ship of LNG now costs $281million. It was just $10 million in 2020.

Macquarie looked at the large cap Australian miners and noted that the movements in commodity prices translated into varying share price performances. Fortescue Group’s share price has been the most volatile “given its 100% iron ore exposure” while BHP and RIO have fallen by over a tenth in the year to date, underperforming the ASX100 which is up by about 9% in the year to date. “S32’s share price rose 37% on the ASX and 31% on the LSE as its portfolio benefitted from hard coking coal, alumina and aluminium price upgrades. “

Macquarie says price weakness in iron ore since its May peak has impacted the share price performance for diversified miners with iron ore exposures. “However, surging prices in coking coal, thermal coal, aluminium, alumina, nickel and oil & gas moderated the impact and boosted S32’s earnings outlook.”

BHP and S32 are Macquarie’s preferred picks:

“We maintain our preference for BHP and S32 underpinned by their favourably positioned commodity exposure. The strong coking coal prices improves BHP’s earnings outlook, which is also supported by oil and gas prices given the global energy shortages. S32 enjoys commodity tailwinds from aluminium, alumina, and coking coal. We note both BHP and S32 are trading close to 20% free cash flow yields for FY22 using Macquarie forecasts.”

But Macquarie thinks there is still value in Rio Tinto and Fortescue (FMG): ?

“The recent softness in iron-ore prices is driving near-term downside risk to earnings for both RIO and FMG. However, we still see value in both names, with RIO and FMG trading on free cash flow yields of 16% and 10% for FY22 respectively (Macquarie forecasts). We have adjusted our September quarter iron ore production and shipment forecasts modestly to match our bespoke port data.

“Commodity prices have been very volatile in the first nine months of 2021 with diverging paths. Both coking coal and thermal coal saw strong upgrade momentum while iron ore prices weakened after registering an all-time high in May.

“When comparing average prices for the September quarter 2021 versus the June quarter 2021, Iron ore is the biggest laggard (down 15%) while other commodity prices are all higher quarter on quarter. The average iron ore price in the September 2021 quarter was US$164/t, which was down 18% on the US$200/t average over the June quarter. Coking coal was the best performer whose quarterly average price increased by 81% sequentially.”

 

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