Metals and Mining Update

Analyst Citigroup Investment Research (CIR) have released a Metals and Mining Update: Earnings upgrades have extended the plateau, and when combined with compelling relative PERs set a robust outlook for the sector. Demand growth in China appears to be improving as expected, but volatility could continue driven by uncertainty in the US housing/economy. Key picks from the analyst are BHP, ZFX, OXR, JBM, RSP and NCM.
There are more commodity price upgrades including significant upgrades from the market analyst to iron ore (from -20% to +7% in 2008), nickel (+15-20% for 2007-2009) and thermal coal. Aluminium, zinc and lead have also been marginally increased while copper has been downgraded in 2009 due to a looming surplus.

BHP Billiton remains the analyst's pick of the diversifieds driven by superior production growth and a 9 to 2 victory on our multi factor, head-to-head scorecard. However, the growth delivery is not without risk and iron ore price upgrades further underpinned the stability of Rio Tinto's earnings through 2008. Through expected continuation of near-term volatility they expect the diversifieds to trade +/-10% our NPVs of A$29 for BHP and A$79 for RIO.

The metal continues to strengthen with both JBM and MRE rated as Buy (JBM previously Hold). Both are generating huge cash flows to fund developments and/or generous dividend payouts.
An upgraded thermal coal price and share price volatility have driven upgrades to recommendations for Gloucester (Buy, previously Hold) and Macarthur (Hold, previously Sell). Best pick remains Resource Pacific for leverage and production growth.

The analyst remains positive on zinc and maintain their buy recommendations on Zinifex and Oxiana. Zinifex appeals on dividend yield and rerating upside from the smelter spin-off while Oxiana provides excellent growth prospects. ABY remains a Buy, but this recommendation may take a few more months to mature according to the market analyst.

The market analyst remains bullish on gold and their recent price upgrades remain unchanged at a peak of US$750/oz in 2008-09. Newcrest remains the preferred gold exposure and they have upgraded the recommendation to Buy, Previously Hold, based on recent share price weakness.