Strong resources sector set to deliver higher returns

Miners have entered 2021 in good shape as the strength of China’s COVID-19 recovery continues to surprise and governments around the world dig deep with stimulus packages (reports The Australian Financial Review).
15th January 2021
Resources Rising Stars

Miners have entered 2021 in good shape as the strength of China’s COVID-19 recovery continues to surprise and governments around the world dig deep with stimulus packages (reports The Australian Financial Review).

UBS is forecasting global economic growth of 6.1 per cent and growth of 8.2 per cent in China, the epicentre of resources and commodity demand.

On the global front, that kind of growth hasn’t been seen since the 1970s and miners are in a strong position after emerging from 2020 with balance sheets boosted, capital spending in check and free cash flow at record levels in some cases.

All that has set the scene for even higher returns in 2021.

There is even a bright side for Australian coal miners on the outer with China and renewed interest in battery metals, including recovering lithium producers, as governments put a green tint on economic stimulus.

Canaccord Genuity head of mining research Reg Spencer is bullish about battery and base metals in 2021. "The pandemic accelerated the push toward electrification and that is going to flow through into demand for those battery metal commodities," he adds.

"I expect that throughout 2021, interest in lithium and rare earths in the battery metals space is going to remain high."

In rare earths, Spencer expects some of the attention focused on Lynas to start to tickle down to emerging players like Arafura Resources and Hastings Technology Metals.

He expects renewed interest in lithium producers Orocobre Limited and Pilbara Minerals, and in IGO Limited after its acquisition of a stake in the Greenbushes mine in Western Australia.

UBS analyst Glyn Lawcock says COVID-19 lockdowns before widespread vaccination remain the biggest cloud hanging over 2021 for the resources sector because of the impact it could have on demand.

Lawcock says UBS is working on the theory that the commodity-hungry developed world will roll out vaccines before parts of the developing world dominated by mining. This tips the market balance in favour of demand versus supply.

Of the iron ore heavyweights, UBS prefers BHP over Rio Tinto as Rio continues to deal with the fallout from the destruction of ancient rock shelters in Western Australia.

UBS lifted its target price for Andrew Forrest’s Fortescue Metals Group from $22 to $24 just before Christmas with shareholders in line for a whopping interim dividend on the back of soaring iron ore prices.

It also sees an upside for investors in coal stocks that traded at deep discounts based on China's unofficial ban on Australian imports.

"If you believe the rhetoric and commentary, clearly China has decided to go forth and buy coal," Lawcock says. "And while they are not directly buying Australian coal, their presence in the market is positive for demand. We think coal prices can strengthen."

Spencer says gold stocks fell out of the spotlight towards the end of 2020 but predicts their stellar run is far from over with the price of the precious metal still at historically high levels.

"We are starting to see an increasing investor view that we might be in the early stage of a commodity super cycle and that is unequivocally inflationary," he adds. "Our view is gold is likely to benefit."

It has already made the new Archduke oxide discovery, covering 2km of strike just south of Admiral-Clark-Butterfly.

It had originally looked toward toll treatment options, but with the A$13.5 million consolidation of 15km of strike between Ulysses and Orient Well, it became clear the project would likely support a new mill, just south of St Barbara's Gwalia mine.

It is now targeting first production in 2022.

Genesis started the year with around $20 million in cash, and counts Alkane Resources as its major shareholder with 19.9%.

The junior's stock was up 1.4% in afternoon trade to 7.5c, off its 12-month peak of 9.2c that was set in October. Genesis' capitalisation was $146 million.

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