MARKETS SPECTATOR: Goldman's firm Fortescue conviction

Goldman Sachs has turned bullish on Fortescue Metals Group and OceanaGold, adding the miners to its list of buy recommendations.

Goldman Sachs turns ‘high conviction’ on the fourth force in iron ore, Fortescue Metals Group and OceanaGold.

In an update to its Australia/NZ conviction list, Goldman has made some changes following its recent performance.

Its resources team has refreshed its views on the sector, adding Fortescue Metals Group and OceanaGold as buy recommendations.

"We add Fortescue Metals Group to the Conviction Buy List following the change to our 12-month discount cash flow and P/E based target price to $7.24 ($5.83). Fortescue has very strong leverage – both operational and financial – to our positive iron ore market view over the next two years. The potential return for Fortescue is 75 per cent from the current share price. We note that even under the spot commodity price scenario, we still see c.72 per cent potential variance to the current share price,” Goldman said.

"In our view, on balance the strong earnings momentum outweigh the debt funding level risks. On our production and iron ore price estimates, we believe Fortescue has the potential to be debt free in fiscal 2018.”

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Source: Iress

On OceanaGold, Goldman said "OceanaGold is undergoing a fundamental transformation with the current commissioning of the Didipio Gold (Au)/Copper (Cu) project in the Philippines this quarter, which will add considerable earnings growth in fiscal 2013. This project will not only increase production, but lowers the group cash costs and materially improves cash flows and return on equity...

"We add OceanaGold to the Conviction Buy List following the change to our 12-month DCF and PE based target price as a result of our change in valuation methodology. Based on our analysis, OceanaGold has amongst the highest potential return in our coverage group at 72.5 per cent”.

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Source: Iress

On the downside, the broker has added nickel player Western Areas to its conviction list as a sell recommendation. "We add Western Areas to our Conviction Sell list as we see -35 per cent potential return from the current share price, the lowest potential return for the producers in our resources sector coverage, Goldman said.

"Whilst Western Areas operates a high grade nickel sulphide business that has now reached a stable low cost production base, the potential negative return is driven by our declining nickel price forecast which is clearly outside of management’s control and in the near term, with limited opportunities for volume growth to offset this."

In other additions, the broker included SAI Global to the conviction list as a buy recommendation. Countering these additions, Independence Group, which was rated a sell significantly outperformed during the previous month, and hence the broker is now removing it from its conviction list. Westfield Retail Trust, which was rated a buy was also removed following a strong outperformance during the month of October.