Q3 Preview: How Will North American Miners Fare Amid Cost Inflation?

In August, wholesale inflation in the U.S. skyrocketed by 8.3% hitting a 10-year high, while the same indicator was worse in China by mid-September with a 9.5% increase. Worker shortages and supply chain constraints have hit industries at large, and mining has also felt the bumps.

With fiscal results for the third quarter around the corner, a Goldman Sachs Group Inc GS research on American metals and mining reveals how some key companies will fare amid a tumultuous and decisive stage. 

A quarter that, the report asserts, saw “continued price strength across the base metals complex,” but will also prompt an urgent focus on cost inflation since raw materials and energy costs have soared.

“Deleveraging continues to be a focal point, and we expect the discussion to center

around operational execution and the subsequent pivot to delivering shareholder

returns,” the study assesses. 

So, how will stocks of some of the most important metal and mining companies in North America fare?

Alcoa Corp AA

The world’s eighth aluminum producer is set to announce financial results for the quarter this week, with Goldman Sachs giving its stock a buy rating with a 12-month price target of $63. 

The company still benefits from strong aluminum fundamentals, “and leverage to price upside - a 10% increase in aluminum prices corresponds to a ~20% increase to EBITDA.” 

Alcoa is bound to offer shareholders capital returns in the quarter since the company has improved cost curve positioning and shed pension liability worries. 

Goldman has updated its earnings per share estimates on Alcoa from $5.11/$6.90/$9.14 to

$5.61/$7.01/$8.88 between 2021E-2023E by factoring operating cost assumptions and including the restarted capacity at Alumar this year. 

Alcoa faces concerns on lower aluminum, cost inflation, operational execution

challenges, and slower-than-anticipated deleveraging.

Freeport-McMoRan Inc FCX

The Arizona-based mining firm has a buy rating with Goldman maintaining a 12-month price target of $46. Freeport’s near-term production in Grasberg, Indonesia, and Lone Star, Arizona, makes it the top copper-exposed choice among all similar companies operating globally.

Freeport assets are diversely located, which keeps it away from the ambiguous mining policies of regions like South America. Also, its balance sheet flexibility is set to

grant the firm strong capital returns next year “with the company having reached its stated

$3-4 billion net debt target in the previous quarter.”  

Earnings per share estimates are updated from $3.23/$5.61/$5.07 to $3.26/$5.53/$5.03 between 2021E-2023E, while key risks revolve around a downside to copper and gold prices, weaker operational execution at Grasberg, and geopolitical uncertainty.

First Quantum Minerals Limited FM

With a buy rating, First Quantum Minerals stock target price has been readjusted from C$40 to C$39. According to Sachs’ report, the company is an appealing copper pure-play producer whose solid free cash flow is allowing a quick debt reduction potential. The partial sale of

the Ravensthorpe asset for $240 million is playing a key role. 

“The company continues to employ a conservative approach to achieving its debt reduction goals while balancing growth, and we see a path to announcing capital returns plans at year-end.”

Factoring commodity prices and the firm’s production profile at Cobre Panama, Kansanshi, Sentinel, and Ravensthorpe, Sachs adjusts its earnings per share from $1.18/$3.56/$4.22 to $1.05/$3.48/$3.99 between 2021E-2023E. 

“Key risks include downside to commodity prices, weaker operational execution, and

geopolitical uncertainty in Zambia.”

Teck Resources Ltd Class B TECK

Goldman Sachs has a neutral rating on Vancouver-based Teck Resources, with the company lined up for benefits from diverging Australia free-on-board and China cost-and-freight prices. 

The research asserts: “given a focus to divert ~30% of 2021 shipments to China, we continue to look for construction progress updates at Quebrada Blanca 2 and commissioning updates at the Neptune Terminal.”

Sachs has adjusted the company’s earnings per share from C$5.17/C$6.01/C$6.08 to C$4.82/C$6.11/C$6.58 during the 2021E-2023E period, factoring commodity prices for the quarter and reviewing operating costs and production trajectory across all assets.

Commodity prices, operational execution according to expectations, and construction risk around Quebrada Blanca 2 are the key risks in the report.