2019 has been a year when the macro issue of trade tensions between the US and China have dominated (“trumped”, if you will), underlying market fundamentals. This has not been without justification: we have seen key demand metrics weaken over the course of 2019 as a result of poorer sentiment and the actual impact of trade restrictions.
We expect this to remain a factor into 2020. While market balances are anticipated to remain tight across our key commodity exposures (copper and nickel), there has been a reduction in the magnitude of forecast supply deficits. Supply constraints remain, with drivers including lower mined grades, industrial action across Latin American copper producers and the Indonesian nickel ore export ban coming into effect in January 2020. Partially offsetting these factors are lower expectations for demand growth, resulting from restrictions on global trade. The difficulty with this is it is a politically driven factor and hard to predict, particularly given the players involved. On balance, we have positive, albeit tempered, price expectations for 2020. We recommend retaining base metals exposure on supportive fundamentals and the upside risk of positive resolutions to ongoing trade disputes.
Throughout 2019 gold has re-established itself as a portfolio diversifier and benefitted from declining real interest rates. This has reignited investor interest and lifted the gold price. Despite the recent correction, the US$ gold
price is up ~14% ytd (as at early December 2019). Although we view sentiment as relatively neutral into year-end and there being potential for the current pullback to have a little more to run, we believe gold remains an attractive exposure into 2020. Real interest rates remain in decline, gold remains cheap relative to equities and the USD is rangebound, all framing a favourable gold price environment.
NICKEL MINES (NIC)
During 2019 NIC achieved several key milestones, laying down an excellent track record of delivery and driving a strong re-rating over the course of the year. This saw the completion of the ramp-up phase at the Hengjaya and Ranger Nickel Projects at the Indonesia Morowali Industrial Park (IMIP) in Sulawesi. All four NPI production lines reached full production within 21 months of construction commencing. Heading into 2020, we expect the reporting of strong financial results to follow on from the strong operational performance and the delivery of further production growth to to drive NIC’s share price higher. We retain NIC as one of our top picks on the basis of it remaining cheap relative to peers and its pure nickel commodity exposure – one of our preferred base metals.
PNR has been a disappointment in 2019. Plans to grow gold production to ~80kozpa following mill upgrades and new mine developments at Nicolsons failed to be realised, leading to a poor share price performance over the year.
However, we must take a forward looking view on our recommendations and we view the current share price as oversold. The recent completion of an operational review and outline of a detailed two year, 50kozpa production plan, we believe is a conservative, high-confidence base-case designed to under-promise and over-deliver. Furthermore, PNR has secured a 50% interest in, and management control of, the Norseman Gold Project. This offers the opportunity to establish a second production asset over the course of 2020. It’s been our observation that the market is attributing a significant premium to multi-mine producers and PNR, if successful, could benefit materially from this over the course of 2020. PNR’s balance sheet is debt free and will be unhedged from April 2019.
OZ MINERALS (OZL)
OZL is an established, low-cost Australian copper producer with a strong track record of production and cost performance. We recently picked it as our preferred copper exposure. For 2020 we see the potential for a positive re-rating on the commencement of production from Carrapateena, which will ramp-up to ~65ktpa copper and 80kozpa gold. It will become OZL’s second major copper mine, along with the Prominent Hill mine which currently produces ~100ktpa copper and 120kozpa gold. We forecast strong earnings growth and positive free cash flows in 2020 with OZL’s CAPEX peak now having passed. It offers exposure to both copper and gold, both of which we favour in 2020 and has a debt free balance sheet.