Trough in the Rear View, Risks to the Upside; Revising Estimates
for Peabody Energy Corporation (
), Stillwater Mining Company (
), Noranda Aluminum Holding Corporation (
) and Century Aluminum Co (
Trough in the Rear View Mirror: As our global team highlights in
this quarter's commodity quarterly titled "Back to the Future", we
expect commodities to recover on the back of a Global recovery in
2013. We believe that after a long period of disappointment,
expectations have overshot to the downside, and believe that the
acute phase of the crisis may be coming to an end. However, we have
made only minor revisions to earnings estimates for a number of
companies, as our commodity forecasts have only marginal changes
Copper, Palladium and Steel are Preferred: In our view, the
metals with the tightest supply dynamics stand to gain the most,
which drives our relative preference for copper and palladium.
Disciplined U.S. domestic steel supply, low inventories and demand
improvement should also support steel prices.
Thermal Coal and Aluminum have structural issues: We remain less
positive about commodities which have significant oversupply
(Thermal Coal, Aluminum). While the global thermal seaborne surplus
should decline in 2013, it is unlikely to tighten enough to
pressure prices. In the U.S., we expect coal inventories at the
utilities to remain well above levels for producer pricing power.
Similarly, we expect Aluminum prices to remain capped by market
surpluses and excess inventories.
U.S. Stock Calls
Top Steel Pick - Reliance Steel (RS, OUTPERFORM): RS remains our
preferred way to play a 2013 U.S. demand recovery, given its
diversified end market and product mix, margin sustainability and
stellar track record of acquisitive growth.
Top Coal Pick - Peabody Energy (BTU, OUTPERFORM): BTU remains
our top pick in coal, given its 1) global diversification and
organic Australian growth, 2) significant, growing leverage to
metallurgical coal markets (potential 40-55% increase in met
coal/PCI sales by 2015) and 3) Compelling Valuation, trading at a
17% discount to historical multiples.
Top Small Cap Pick - Stillwater Mining (SWC, OUTPERFORM): We
believe SWC remains the most attractive way to play a bullish
outlook for palladium, due to 1) SWC's high correlation to PGM
prices (Correlation of SWC to Pd: 0.8), 2) zero political risk at
its operating mines and 3) cash flow and operating stability
relative to its South African peers.