Analysts weigh prospects of base metal producers

The first half of 2001 was no picnic for base metal producers, and most mining analysts expect prices to remain weak and vulnerable to downward pressure from funds and speculators for the rest of the summer — possibly even for the rest of the year.

Although Stephen Bonnyman and Keven Reid of CIBC World Markets have revised downward several of their price forecasts to reflect the weak demand profile of the 2001 first half, they foresee some relief once the traditionally slower summer season ends. “We are passing through the trough of the demand cycle and will see the re-emergence of global growth in the latter part of this year and into the next,” they note in a recent report. Looking ahead to 2003, the analysts see increased potential for continued recovery in global economic growth.

“Over the near term,” Bonnyman and Reid write, “our preferred metal exposure is to aluminum, owing to the increasing constraints on production as a result of global power disruptions.

“Over the longer-term horizon (of two or more years), we see opportunities arising in copper and lead, as the market balance continues to erode inventories in the face of limited new production developments.”

In keeping with their revised price forecasts, the analysts have amended the rankings of several company targets. Alcan (AL-T) was upgraded from “buy” to “strong buy,” whereas Falconbridge (FL-T) was reduced from “strong buy” to “buy.” Aur Resources (AUR-T) was rated a top pick for its “attractive longer-term returns” and given yet another nod as a “strong buy.” The list of “holds” includes the usual smaller producers, including Breakwater Resources (BWR-T) and Inmet Mining (IMN-T).

Like most major investment firms, CIBC World Markets is hard-nosed about the short-term challenges for base metal producers, given that most major economies are still in the throes of an economic downturn. In the U.S., a manufacturing recession is causing headaches for base metal suppliers, while Japan continues to struggle to support its export base. “Europe, originally expected to supplant North America as the growth-driver in metal demand, has been showing an unexpected amount of weakening in its reported data, and the reduced growth in North America is slowly being exported,” the analysts state. “This has been exacerbated by the continued resistance of the European Central Bank to match the U.S. rate cuts.”

Bonnyman and Reid expect weak prices for most major metals to continue this year, with the exception of aluminum, which they believe has the most bullish near-term outlook of all the metals.

“With a growth recovery in 2002 and beyond,” they add, “all metal prices are expected to improve from existing levels; however zinc, nickel and lead will likely be capped by the rising availability of supply.”