Analyst Actions: Credit Suisse On U.S. Metals & Mining, Revising Estimates for BTU, SWC, NOR and CENX
Trough in the Rear View, Risks to the Upside; Revising Estimates for Peabody Energy Corporation ( BTU ), Stillwater Mining Company ( SWC ), Noranda Aluminum Holding Corporation ( NOR ) and Century Aluminum Co ( CENX ).
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 this quarter.
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.