With the U.S. economy offically in recession, Canaccord Capital base metals analyst Roger Chaplin is already looking to a turnaround that should propel base metal prices and stocks higher in the year ahead.
The American-based National Bureau of Economic Research has concluded that the recession in the U.S. began in March 2001, with real gross domestic product falling by 1.1% in the third quarter of 2001, following a rise of just 0.2% in the second quarter.
Chaplin looks to the past as a guide for how long the U.S. recession will last. Since the Second World War, there have been nine business cycles in the U.S., the average cycle length being 61 months and the down phase just 11 months.
“Since we have already been in recession for eight months, we expect the start of a recovery soon, likely in the late first quarter or the early second quarter of 2002,” writes Chaplin.
He sees several bright spots in the current environment: lower interest rates are reducing consumers’ mortgages; tax cuts have increased real incomes; and the U.S. government is putting in place a massive recovery package following Sept. 11.
Chaplin predicts we will see negative growth in the fourth quarter of 2001 as a hangover from Sept. 11, but by the second quarter of 2002, he expects the U.S. GDP to be growing by 4% on an annualized basis.
The prospective strong growth this year in the U.S. GDP bodes well for base metals, as the U.S. economy is a major driving force in metals demand. In particular, Chaplin points out that the National Association of Purchasing Managers’ Index, which is a leading indicator for base metals, bottomed in January 2001 (just before the recession started) and rose strongly in November.
For 2002, Canaccord is forecasting the following prices for base metals: US68 per lb. for aluminum; US76 per lb. for copper; US22 per lb. for lead; US$2.90 per lb. for nickel; and US45 per lb. for zinc.
Chaplin writes that the recent rally in the share prices of the European mining and metals stocks has removed much of the upside potential since his previous report.
Canaccord’s top picks on Dec. 4 were: London-based
Rio Tinto’s underlying earnings, before exceptional items, are expected to be about the same in 2001 as in 2000, at around US$1.10 per share. However, the company has announced it is closing the North Concentrator at the Bingham Canyon mine in the U.S. and is reviewing its book value, which stood at US$3.1 billion at the end of 2000.
Canaccord has assumed a US$500-million writedown, which would reduce net earnings by about US25 per share. The brokerage house expects earnings to rise to US$1.36 per share in 2002, with increased earnings in all divisions, particularly in copper and energy. This would generate a price-to-earnings ratio of just 13.7 times, well below the stock’s long-term average of 17 times.
Rio Tinto has several development projects under way, including the Comalco alumina refinery in Australia and the Diavik diamond mine in Canada. The Sept-les iron-pellet plant expansion in Quebec has been delayed as a result of weaknesses in the steel sector.
Canaccord’s calculated “fair value” for Rio is US$23.48 per share.
Umicore is involved in a broad range of activities, including the mining and refining of advanced materials, precious metals, copper and zinc.
As a result of lower base metal prices, the company issued a profit warning in November that earnings would be about 15% lower in 2000, instead of holding steady as previously believed.
Canaccord says the reduced 2001 earnings forecast still give a prospective price-to-earnings ratio of 9.1 times in 2001 and 9.3 times in 2002, below Umicore’s long-term average of 10.
Canaccord’s “fair value” for Umicore is 54.47 euros per share.
Swiss-listed Xstrata’s reported earnings for the first half of 2001 of US$4.38 per share were down 33% from a year earlier, chiefly as a result of weakening chrome and vanadium markets.
Chaplin says the one bright spot in Xstrata’s first half was its Spanish zinc-smelting operations, Asturiana de Zinc, which reported earnings of US$14 million. He notes that while Xstrata’s shares have been sold down in sympathy with declining zinc prices, zinc-smelting operations such as Asturiana are generally faring better than the zinc miners.
“So long as Asturiana de Zinc can obtain supplies of concentrates (which we expect, as these are mainly sourced through Xstrata’s major shareholder Glencore), the operations will continue to report positive earnings,” writes Chaplin.
Looking ahead to 2002, he foresees a recovery of Xstrata’s net earnings to US$12.27 per share as Asturiana contributes for the full year and the chrome and vanadium divisions begin to recover.
Canaccord’s “fair value” for Xstrata is calculated at US$166 per share. The brokers rate the stock a “strong buy,” with the proviso that this depends on a turnaround in the chrome and vanadium markets.
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