HOLT: Materials Equities vs. Commodities

Transcription

1 : Materials Equities vs. Commodities Oil Producers flagging attractive. Are Gold Producers at a turning point? July 2014 Nik Wottge Europe Materials & Industrials Sector Specialists nik.wottge@credit-suisse.com Heather Kidde USA Energy & Materials Sector Specialist heather.kidde@credit-suisse.com credit-suisse.com/holtmethodology Analysis Custom Analysis

2 Jan-01 P/B (x) Global Oil is currently priced for a significantly lower oil price. OMV flagging attractive on restructuring efforts In this edition of the Equities vs Commodities report, we focus on oil and gold producers. Oil producers were recently highlighted by the CS Strategy Team ( Energy: back to benchmark ) and also flag attractive in. Gold, which has been under pressure since late 2012, is highlighted as the downward momentum has moderated and the sector is beginning to look attractive on some metrics. Oil prices have been moving up since 2009 and while historically this has tended to be reflected in higher P/B multiples for the sector, this correlation has broken down over the last 12 months to stand at 10-year lows now. Should the relationship revert to its long term historical median, the current oil price implies 30% upside potential for the sector. Post the global financial crisis, oil stocks have been priced structurally lower relative to the oil price P/B (x) Spot Equity Implied The correlation between sector Price to Book and Oil Price has broken down over the last year 1

3 Pressures on both margins (cost inflation) and asset turns (large CAPEX commitments outstripping growth) have weighed on sector CFROI in recent years. However the sector appears to be priced for these trends to deteriorate significantly, with market implied CFROI at 2% - close to the lows of the mid-nineties. Global Integrated Energy Companies: market implied CFROI at 2% is near the lows of the mid-nineties. A Scorecard approach ranking each company on its combination of Operational Quality, Momentum and Valuation shows that most of the opportunities are in the US. Of the top 40 global stocks in the Scorecard, OMV scores highest in Europe. 2

4 A closer look at OMV reveals significant differences in return profiles across the upstream and downstream activities (see below). Restructuring efforts underway aim to increase the company s footprint in upstream a positive from a group CFROI perspective. Yet the current valuation appears to give no credit with both the Price to Book and market implied CFROI close to all time lows. Furthermore, OMV s Price to Book is at its largest discount to peers Shell and Total since OMV AKTIENGESELLSCHAFT ROYAL DUTCH SHELL PLC - B SH TOTAL SA 3

5 Gold: The pace of negative CFROI revisions and ETF liquidations slows. Temporary lull or turning point? Holdings of physically backed gold exchange traded funds have been under pressure since early 2013, coinciding with a significant decline in the gold price. More recently, ETF withdrawals have slowed and gold prices have stabilised (see below). Withdrawals from physically backed Gold ETFs are slowing Source: Bloomberg For most of the last year, gold producers experienced the heaviest downward CFROI revisions in Materials. More recently however, iron ore and copper producers have claimed this distinction and gold producers revisions are only slightly negative (see below). Gold Producer s CFROI Revisions are no longer deeply negative (4 week cumulative revisions) 4

6 And gold stocks flag cheap on some metrics. On both a market-implied CFROI and Price to Book basis they are at or close to 25 year lows (see below). In other words, investors remain more pessimistic on gold than they have been in a long time. Gold Producers market implied CFROI is near all time lows Gold Producers aggregate Price to Book is also at multi-decade lows However, sell side expectations for gold (which lagged the buy side in adjusting CFROI downward) have now become even lower than the depressed expectations of the buy-side. In fact the spread between the market implied CFROI and the sell-side forecast CFROI is larger for gold producers than for any other industry globally (see overleaf). 5

7 Sell side CFROI forecasts (pink bar) for gold producers are now lower than for any other sector and below the CFROI implied by the market The question is whether these sell side forecasts have now overshot to the downside. History suggests that analyst forecasts often lag the market and tend to overshoot both ways (indeed they overshot on the upside for gold in 2011 and 2012). The reduction in negative CFROI revisions and the slowing of ETF liquidations could suggest that the industry is now near the trough and that the analyst community has already revised expectations down too far. A scenario modelling sector CFROI tending to mid-cycle levels over the medium term suggests 25% upside. At the individual stock level, Goldcorp, Randgold, Anglogold Ashanti and Newmont Mining screen top of the large caps (see sector scores below). Scores for global gold miners 6

8 APPENDIX Equities versus Commodities Analysis for other commodities follows 7

9 Jan-01 Jan-01 P/B (x) Crude Oil : Today s oil price suggests 30% global oil sector upside Spot Crude Oil USCRWTIC (USD/barrel): 106 (30 Jun 2014) Equity Implied : 91 (13% Discount to Spot) P/B (x) Spot Equity Implied % Spread 40% 20% 0% -20% -40% -60% Median = % Equity Implied - Spot Equity Implied - Forward Curve The Equity Implied is based on a regression model of spot commodity price versus Price / Book valuation multiple. 8

10 Jan-01 Jan-01 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 P/B (x) Base Metals Miners: base metals and their miners are trading in line Spot Commodity Index Industrial Metals (SPGCIN) : 359 (30 Jun 2014) Equity Implied : 350 (2% Discount) P/B (x) Spot Equity Implied P/B (x) 0 Equity Implied -Spot (Spread) 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% Median Spread = -9% Spread > 0, com m odity relatively attractive Spread < 0, equity relatively attractive Historical Correlation between P/B Multiple & Spot (5-yr rolling) Median = 1 The Equity Implied is based on a rolling regression model of spot commodity price versus Price / Book valuation multiple. 9

11 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Commodity Price P/B (x) Iron Ore: From about 2010, iron ore producers seemed to anticipate a drop in the iron ore price but they did not signal the recent decline Spot Iron Ore Steel China Iron Ore Fines cfr (US$/ton): 94 (30 Jun 2014) Forward Iron Ore ($/tonne):97 (Dec 2016) Equity Implied : 116 (24% Premium to Spot and 20% Premium to Forward) P/B (x) Spot Equity Implied Forward Curve P/B (x) % Spread 50% 0% -50% Median Spread = -15% -100% -150% Equity Implied - Spot Equity Implied - Forward Curve Historical Correlation between P/B Multiple & Spot (3 yr rolling) Median =.77 The Equity Implied is based on a regression model of spot commodity price versus Price / Book valuation multiple. 10

12 Jan-01 Jan-01 Jul-14 Jan-15 Jul-15 Jan-16 Jan-01 Jul-14 Jan-15 Jul-15 Jan-16 Commodity Price P/B (x) Aluminium: The recent rally in Aluminium producers stocks suggests equities see further gains in the aluminium price Spot Aluminium LME ($/tonne): 1,857 (30 Jun 2014) Forward Aluminium ($/tonne): 2,015 (Jan 2016) Equity Implied : 2,011 ( 8% Premium to Spot and 0% Premium to Forward) P/B (x) Spot Equity Implied Forward Curve 4, ,500 3,000 2,500 2,000 1, P/B (x) 1, % 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Median Spread = -4% Spread Equity Implied - Spot Equity Implied - Forward Curve Historical Correlation between P/B Multiple & Spot (5-yr rolling) Median = 0.55 The Equity Implied is based on a regression model of spot commodity price versus Price / Book valuation multiple. 11

13 Jul-14 Jan-15 Jul-15 Jan-16 Jul-14 Jan-15 Jul-15 Jan-16 Price P/B (x) Steel: Steel and steel producers appear priced in line with each other Steel Index TSIPUSHR Index: 664 (30 Jun 2014) Forward Steel Price ($/tonne): 630 (Apr 2016) Equity Implied : 641 ( 3% Discount to Spot and 2% Premium to Forward) P/B (x) Spot Equity Implied Forward Curve 1,200 1, P/B (x) Spread Equity Implied - Spot Equity Implied - Forward Curve 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Median Spread = -1% Historical Correlation between P/B Multiple & Spot (3-yr rolling) Median = The Equity Implied is based on a regression model of spot commodity price versus Price / Book valuation multiple. 12

14 Jan-01 Jan-01 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-01 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 P/B (x) Copper: Despite copper s recent strength, the equities imply more downside to come in the metal Spot Copper LME ($/tonne): 7,041 (30 Jun 2014) Forward Copper ($/tonne):7,157 (Dec 2016) Equity Implied : 6,844 (3% Discount to Spot and 4% Discount to Forward) P/B (x) Spot Equity Implied Forward Curve 12, ,000 8,000 6,000 4, P/B (x) 2, % Spread 20% 0% -20% -40% -60% Median Spread = -12% Quarterly forward curve data points in later years due to low liquidity -80% Equity Implied - Spot Equity Implied - Forward Curve Median = 2 Historical Correlation between P/B Multiple & Spot (5-yr rolling) The Equity Implied is based on a regression model of spot commodity price versus Price / Book valuation multiple. 13

15 Jan-01 Jan-01 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-01 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 P/B (x) Gold: The recent strength in gold, combined with weakness in miners, sees the two priced back in line Spot Gold US$/oz: 1,327 (30 Jun 2014) Forward Gold ($/oz): 1,349 (Dec 2016) Equity Implied : 1,449 (9% Premium to Spot and 7% Premium to Forward) P/B (x) Spot Equity Implied Forward Curve 2,000 1,800 1,600 1,400 1,200 1, P/B (x) 0 Spread 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Equity Implied - Spot Median Spread = -19% Equity Implied - Forward Curve Quarterly/semi-annual forward curve data points in later years due to low liquidity -60% Historical Correlation between P/B Multiple & Spot (5-yr rolling) Median = 0.71 The Equity Implied is based on a regression model of spot commodity price versus Price / Book valuation multiple. 14

16 Jan-01 Jan-01 May-01 Sep-01 May-02 Sep-02 May-03 Sep-03 May-04 Sep-04 May-05 Sep-05 May-06 Sep-06 May-07 Sep-07 May-08 Sep-08 May-09 Sep-09 May-10 Sep-10 May-11 Sep-11 May-12 Sep-12 May-13 Sep-13 May-14 Sep-14 Jan-15 May-15 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 P/B (x) Platinum: Miners and the metal appear priced in line but the correlation remains weak and erratic Spot Platinum Plat Cmdty (US$/oz): 1,486 (30 Jun 2014) Forward Platinum ($/oz): 1,512 (Jul 2015) Equity Implied : 1,497 (1% Premium to Spot and 1% Discount to Forward) P/B (x) Spot Equity Implied Forward Curve 2, ,000 1,500 1, P/B (x) 0 Spread Equity Implied - Spot Equity Implied - Forward Curve 20% 10% 0% -10% -20% -30% -40% -50% Median Spread = -19% -60% Historical Correlation between P/B Multiple & Spot (5 yr rolling) Median = The Equity Implied is based on a regression model of spot commodity price versus Price / Book valuation multiple. 15

17 Appendix: Constituents and Methodology Methodology: This analysis looks at the 5-year rolling correlations between spot commodity prices and underlying equity valuations (using the Price-Book Multiple) to calculate Equity Implied s. An equity implied commodity price below spot commodity price implies that equities are more attractive than commodities and vice-versa. Base Metal s Mi ners (Top 20 by m arket cap) SEDOL Nam e Country ALCOA INC USA B1YW0L9 ANGLO AMERICAN PLC ZAF ANTOFAGASTA PLC GBR BHP BILLITON PLC ZAF B29BCK1 EURASIAN NATURAL RESOURCES CORPORATION PLC GBR FREEPORT-MCMORAN COP&GOLD USA B4T3BW6 GLENCORE INTERNATIONAL PLC GBR GRUPO MEXICO S.A.B DE C.V. MEX HINDUSTAN ZINC LIMITED IND INNER MONGOLIA BAUTOU STEEL RARE-EARTH HI-TECH CHN IVANHOE MINES LTD CAN MMC NORILSK NICKEL OJSC RUS NMDC LIMITED IND B11HK39 NORSK HYDRO ASA NOR RIO TINTO LIMITED AUS SOCIEDAD MINERA CERRO VERDE SAA PER SOUTHERN COPPER CORP USA TECK RESOURCES LTD -CL B CAN B5BCW81 UNITED COMPANY RUSAL LIMITED HKG XSTRATA PLC GBR Copper SEDOL Nam e Country B12TY10 ADITYA BIRLA MINERALS LTD AUS ANTOFAGASTA PLC GBR FIRST QUANTUM MINERALS LTD CAN FREEPORT-MCMORAN COP&GOLD USA GRUPO MEXICO S.A.B DE C.V. MEX IVANHOE MINES LTD CAN JIANGXI COPPER COMPANY LTD HKG B0HZPV3 KAZAKHMYS PLC GBR KGHM POLSKA MIEDZ S.A. POL SOUTHERN COPPER CORP USA TONGLING NONFERROUS METALS GROUP HOLDINGCHN YUNNAN COPPER COMPANY LIMITED CHN Alum inium SEDOL Nam e Country ALCOA INC USA ALUAR ALUMINIO ARGENTINO SA ARG ALUMINA LIMITED AUS CHALCO - ALUMINUM CORP OF CHINA LTD HKG B0GWF48 HINDALCO INDUSTRIES LIMITED IND NATIONAL ALUMINIUM COMPANY LIMITED IND B11HK39 NORSK HYDRO ASA NOR SHANDONG NANSHAN ALUMINUM CO., LTD. CHN YUNNAN ALUMINIUM CO., LTD. CHN 16

18 Appendix: Constituents Steel (Top 20 by m arket cap) SEDOL NamName e Country B03XPL1 ARCELORMITTAL ARCELORMITTAL NLD NLD POSCO POSCO KOR KOR NIPPON FORTESCUE STEEL CORPORATION(C) METALS GROUP LIMITED AUS JPN BAOSHAN IRON & STEEL COMPANY LIMITED NIPPON STEEL CORPORATION(C) CHN JPN CHINA STEEL CORPORATION GERDAU S.A. TWN BRA FORTESCUE METALS GROUP LIMITED AUS B019KX8 CSN - COMPANHIA SIDERURGICA NACIONAL BRA B0RTNX3 NOVOLIPETSK STEEL OJSC RUS B5B9C59 SEVERSTAL RUS THYSSENKRUPP AG DEU B019KX8 CHINA STEEL CORPORATION CSN - COMPANHIA SIDERURGICA NACIONAL TWN BRA B0561N2 NUCOR CORP SEVERSTAL USA RUS BAOSHAN IRON & STEEL COMPANY LIMITED JFE HOLDINGS, INC.(C) CHN JPN GERDAU THYSSENKRUPP S.A. AG DEU BRA B0RTNX3 NUCOR NOVOLIPETSK CORP STEEL OJSC RUS USA SUMITOMO JFE HOLDINGS, METAL INDUSTRIES, INC.(C) LTD.(C) JPN JPN JINDAL JINDAL STEEL STEEL & POWER & POWER LIMITED LIMITED IND IND STEEL CLIFFS AUTHORITY NATURAL OF RESOURCES INDIA LIMITED INC USA IND B08V9B8 TATA EVRAZ STEEL PLC LIMITED RUS IND CLIFFS SUMITOMO NATURAL METAL RESOURCES INDUSTRIES, INC LTD.(C) JPN USA PANGANG TATA STEEL GROUP LIMITED STEEL VANADIUM & TITANIUM COMPANCHN IND B08V9B EVRAZ STEEL GROUP AUTHORITY S.A. OF INDIA LIMITED IND RUS HYUNDAI STEEL COMPANY KOR Pl ati num SEDOL Nam e Country ANGLO AMERICAN PLATINUM LTD ZAF AQUARIUS PLATINUM LIMITED AUS B1FFT76 IMPALA PLATINUM HOLDINGS LIMITED ZAF LONMIN PLC ZAF NORTHAM PLATINUM LTD ZAF B59KXT5 ROYAL BAFOKENG PLATINUM LTD ZAF STILLWATER MINING CO USA ZIMPLATS HOLDINGS LIMITED AUS Gol d (Top 20 by m arket cap) SEDOL Nam e Country AGNICO EAGLE MINES LTD CAN ANGLOGOLD ASHANTI LIMITED ZAF BARRICK GOLD CORP CAN COMPANIA DE MINAS BUENAVENTURA SA PER ELDORADO GOLD CORP CAN GOLD FIELDS LIMITED ZAF GOLDCORP INC CAN HARMONY GOLD MINING COMPANY LIMITED ZAF IAMGOLD CORP CAN B03Z841 KINROSS GOLD CORP CAN NEWCREST MINING LIMITED AUS B04TZ85 NEWMONT MINING CANADA CAN OSISKO MINING CORP CAN B14XJY8 POLYUS GOLD OJSC RUS B01C3S3 RANDGOLD RESOURCES LIMITED GBR B3C8VY3 SAUDI ARABIAN MINING COMPANY SAU SHANDONG GOLD-MINING COMPANY LTD CHN YAMANA GOLD INC CAN ZHONGJIN GOLD COMPANY LTD CHN ZIJIN MINING GROUP COMPANY LTD HKG Iron Ore SEDOL Nam Name e Country Country AFRICAN RAINBOW MINERALS LIMITED LIMITED ZAF ZAF B04NW20 ATLAS IRON IRON LIMITED AUS AUS CLIFFS BHP BILLITON NATURAL LIMITED RESOURCES INC AUS USA B1G KUMBA CLIFFS IRON NATURAL ORE LTD RESOURCES INC USA ZAF MOUNT FORTESCUE GIBSON METALS IRON LIMITED GROUP LIMITED AUS AUS B1G4262 RIO KUMBA TINTO IRON LIMITED ORE LTD ZAF AUS VALE MOUNT SA GIBSON IRON LIMITED AUS BRA RIO TINTO LIMITED AUS VALE SA BRA 17

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