Goldman lifts forecasts for miners

Goldman Sachs has boosted its price targets for Australian miners (reports The Australian)
15th January 2021
Resources Rising Stars

Goldman Sachs has boosted its price targets for Australian miners as the US investment bank stays bullish on commodities in 2021 on recovering global demand, low inventories and supply constraints, reflation and a weakening US dollar, and ongoing capital discipline from the mining sector (reports The Australian).

Among major miners, its price targets for BHP and Rio Tinto have risen 8pc to $48.70 and $117 respectively. Other price target increases include South32 up 7pc to $3.00, Alumina up 5pc to $2.10, Iluka up 22pc to $7.20, New Hope up 6pc to $1.70 and Deterra up 11pc to $4.00.

“Our preferred commodities in 2021 are metallurgical coal, iron ore, copper, aluminium and zircon, based on favourable supply/demand dynamics,” says GS analyst Paul Young.

“Five years of mining sector deleveraging and capital discipline from 2015-2020 and a lack of high-quality greenfield projects across most commodities sets this next cycle up as more of a supply-side driven rally as global demand recovers from the COVID-19 pandemic.

“We note though that demand for base metals in 2021 will only climb back to 2019 levels and the demand recovery will be volatile.”

He notes that most of Goldman’s commodity price forecasts are near the top end of market estimates and its earnings forecasts are mostly above consensus.

While the sector may appear “fairly valued based”, he notes that the 2003-2007 and 2009-2011 commodity bull markets saw most diversified miners and pure plays traded up to around 1.2 times their net asset value, “indicating the sector can move higher.”

On an enterprise value to earnings multiple basis, major miners “appear slightly undervalued relative to historical multiples, although 2021 will be close to historical peak earnings.”

“We also think multiples can expand in this cycle due to stronger balance sheets and free-cash-flow,” he adds.

“Lastly, we see consensus EPS upgrades for the sector over the 1H21 and expectations for strong capital returns in February to continue to support share prices in the near term, particularly for the iron ore and copper companies.”

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