JP Morgan still bullish on platinum and gold

Brendan Ryan | Mon, 14 Dec 2009 12:40
[] — JP Morgan analysts Steve Shepherd and Allan Cooke have turned even more bullish on platinum and gold, as well as South African platinum and gold equities.
That’s despite the numerous challenges faced by the SA miners. These include rand strength, the concerning outlook for electricity and water supply and the impact of various types of government involvement in the mining arena.
On gold, they said: “We see upside in the rand gold price and in our SA gold share picks, despite the challenging near-term operating environment in South Africa. We expect our gold share picks to outperform the gold price over the next six months.”
JP Morgan’s SA gold share picks are AngloGold Ashanti and Gold Fields. The analysts have also just upgraded DRDGOLD, changing their recommendation from “underweight” to “overweight” for investors’ portfolios.
They pointed out the most vulnerable stocks are Harmony and DRDGOLD, which had a high gearing to the rand/dollar exchange rate and cost inflation.
On platinum, Shepherd and Cooke summed up the situation as one of “solid demand and constrained supply outlook. Game on.”
They said: “We believe the ingredients may well be in place for the platinum group metals (PGM) basket to overshoot mid-cycle prices in the next couple of years and, if history repeats itself, equity prices should perform strongly in response to this.
“JP Morgan’s SA equities strategy to be overweight on platinum in 2010 reflects our expectations for this.”
Turning to the platinum shares, the analysts said: “Our top major pick remains Anglo Platinum, followed closely by Lonmin which we have upgraded from neutral to overweight.
“This said, we continue to expect the smaller names such as Northam (overweight) and Eastern Platinum (overweight) to be the top performers in 2010 due to a compelling valuation and the prospect for quantum production growth over the next five to 10 years.
“We are cautions on Impala Platinum (neutral), where we see some concerning management issues at its huge Rustenburg mine. Despite a good management team, we remain underweight on Aquarius Platinum due to its less favourable relative resources position and our valuation work.”
The analysts expected platinum demand to show progressive recovery, driven by a gradual recovery trend in global growth with emerging markets leading the way.
On the supply side, they believed a number of factors would adversely affect South African PGM production levels.
These included sharply reduced levels of capital expenditure; loss of production because of enforced safety-related interruptions to mining operations; concerns over future electricity supply from Eskom; worries over future water supplies and “developments of a political/taxation/ BEE [black economic empowerment] nature.”
Shepherd and Cooke said: “There appears to be an increasing risk that state interventions/involvement will tend to slow the rate of new PGM capacity investment in South Africa, which over time could add to PGM market tension.”
They said: “Given that the issues we highlight above pan out, we can only foresee that investors in commodities will continue to be attracted to PGM, adding further tension to the market. In this scenario we see the potential for prices of the metals to spike.”
On the gold sector, the analysts said they increased their near-term gold price forecast by 36% to $1,288 per ounce for 2010 and $1,225/oz for 2011.
They also strengthened their rand/dollar exchange rate forecast by 11% to R7.73/$1 in 2010 and R8.2/$1 in 2011.
They said: “Our outlook for the sector’s key drivers is much improved, with the rand gold price forecast to average around R320,000/kg over the next two years.
“If we are on the money, this will be good news for SA gold producers’ top lines that have sagged in 2009 under the weight of a stronger rand and lower production due to safety stoppages.”
Shepherd and Cooke commented the South African gold share ratings remained subdued and “quite frankly, are disappointing give the recovery in the rand gold price as the gold price has breached the $1,000/oz level.
“Our base case numbers continue to reflect multiples at around a 40% discount to the major North American gold miners. Relative to their ratings history and North American peer spot multiples, the shares continue to look inexpensive to us.”

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