Base metal producers find favour with investors Investment Commentary

Base metals are no longer the wallflowers of the mining industry, forced to cool their heels while their sexy gilded sisters get trotted around the dance floor. Investors have taken a shine to the industry workhorses now that there are signs of solid economic growth in North America, Europe and the Far East.

The improved outlook for copper, zinc and nickel has prompted the mining team at National Bank Financial to revise and update its forecasts for Canada’s major base metal producers.

In the firm’s latest research report, analyst Ian Howat maintains his “buy” recommendation for Aur Resources (AUR-T), while increasing his target price to $4 from $3.50. However, this recommendation pre-dated Aur’s proposed hostile takeover of Cambior Resources (CBJ-T), which, if successful, would make Aur a sizable gold producer. At present, the company operates the Louvicourt copper-zinc mine near Val d’Or, Que., and the Andacollo copper mine in Chile.

Turnaround-story Boliden (BOL-T) was upgraded to a “buy” from a speculative buy, while its target price was increased to $6.50 from $5 per share. “Boliden still has high debt levels but was able to secure the financing for the Ronnskar expansion [in Sweden], which is to be completed in 2000,” Howat notes. “The improved performance at Lomas Bayas, Myra Falls and Los Frailes and the high leverage to both copper and zinc will allow Boliden to show improved operating results with our higher forecasted copper and zinc prices.”

Boliden acquired the Lomas Bayas copper mine in Chile, together with the Myra Falls polymetallic mine on Vancouver Island, as part of its 1998 takeover of Westmin Resources. The company’s Los Frailes mine in Spain has resumed full production following the cleanup of a tailings spill in the spring of 1998.

Breakwater Resources (BWR-T), another comeback kid, was rated a “focus buy,” while its target price was increased to $6 from $5 per share. “Breakwater continues to deliver excellent operating results, with all four mines running well,” Howat notes.

Breakwater operates the Nanisivik zinc-silver mine in Canada’s High Arctic, El Mochito (zinc-lead-silver) in Honduras, El Toqui (zinc-gold) in Chile, and Bougrine (zinc-lead) in Tunisia.

National Bank has retained its “focus buy” recommendation for Vancouver-based Cominco (CLT-T), while boosting its target price to $45 from $35. “Cominco will benefit from the increase in the zinc price through its exposure at the Trail and Cajamaraquilla zinc plants, and the Red Dog, Sullivan and Polaris mines,” Howat writes. “It will benefit from the copper price through its exposure to its interest in the Highland Valley Copper mine and the Quebrada Blanca copper mine in Chile.”

Recent strength in nickel prices has been a godsend for both Inco (N-T) and rival Falconbridge (FL-T). Howat maintained his “buy recommendation” for both companies. Falco’s target price was increased to $36 from $32 per share; Inco’s, to US$32 from US$30. Fowat notes that the firm is remaining conservative with respect to its target for Inco until the status of the Voisey’s Bay nickel project in Labrador is clarified. “Inco’s Goro nickel project in New Caledonia may now be developed before Voisey’s Bay,” he says.

The past few years have not been easy ones for Inmet Mining (IMN-T), particularly since it drained some of its treasury to thwart a hostile takeover bid. Howat upgraded the company to a “buy” from a speculative buy and increased the target price to $5 from $4. “Inmet is highly leveraged to copper and has good exposure to gold through its 18% interest in the Ok Tedi copper-gold mine in Papua New Guinea and the Troilus gold mine in Quebec. We have not given Inmet full value in our target price because of the environmental issues at Ok Tedi, where a decision on continued operations will be made late in 2000. We believe the mine will continue to operate, but with higher costs.”

Howat maintains his “buy” recommendation for Noranda (NOR-T) while boosting its target price to $30 from $25. “Noranda will benefit from its 50% ownership of Falconbridge and the latter’s exposure to copper, nickel and zinc. Noranda, on its own, has good exposure to zinc and aluminum but will be hurt this year by the continuing low smelter and refining charges for copper.” Howat notes that future growth will come from the company’s 33.75% interest in the Antamina copper project in Peru, which is expected to start production in 2002. Another source of growth is the 80%-owned Magnola magnesium project in Asbestos, Que., scheduled to begin production next year.

With its sole asset being a 45% interest in the Louvicourt mine, operated by Aur Resources, Novicourt‘s (NOV-T) target price was nudged up only 40 to $3.20. The mine has only five more years of production, barring new discoveries, which gives the company a limited shelf life, unless it takes on some new assets.

Howat maintains his “buy” recommendation for Rio Algom (ROM-T), while boosting its target price to $30 from $25 to reflect improved prospects for the copper producer. “Rio’s copper production will rise in 2000 with the expansion of Cerro Colorado and a full year’s production from its 34% interest in the Highland Valley mine in B.C.,” Howat notes. He adds that the Antamina project in Peru and the Spence copper deposit in Chile offer the company “good growth prospects” in the years ahead.

National Bank also released price estimates for zinc, copper and nickel. The firm sees potential for the zinc market to move sharply higher because of low inventories and strong demand. Mining analyst John Lydall notes that the firm’s estimate for the average London Metal Exchange cash price is now US60 per lb. for both 2000 and 2001.

“We have further raised our nickel price estimates,” he adds. “We now estimate an LME average cash price of US$4 per lb. this year, and US$3.75 per lb. in 2001.”

Lydall is less bullish about copper’s prospects. “Until there is more evidence of stronger underlying fundamentals, our copper price forecast remains quite modest at US85 per lb., as the average LME cash price this year, and US90 in 2001.”