Citing what they describe as “base metal euphoria,” analysts at National Bank Financial are bullish on the prospects for Canada’s two major nickel producers,
In a recent report, they indicate that market fundamentals for nickel have improved dramatically over the past six months.
The renewed enthusiasm is justified for three reasons: the U.S. economy is growing steadily; economies in the Far East continue to rebound; and there is increasing growth in Europe.
Overall, the analysts say, the medium-term outlook for all metals is positive, with average prices expected to rise in 2000.
Nickel prices are expected to benefit from three factors: the strike at Inco’s Thompson division; worries about supply this autumn and next spring from Russia’s Noril’sk Kombinat; and production delays at Australia’s nickel laterite mines.
Meanwhile, London Metal Exchange nickel stocks have fallen to their lowest level since 1997.
“For medium/longer-term investors, we continue to recommend an overweight position in base metal shares,” the analysts state. “Because of the strong fundamentals of their respective markets, companies producing zinc or nickel remain our top picks.”
National Bank Financial’s base metal analyst, Ian Howat, issues a “buy” recommendation for Inco with a target price of US$30.
The major has lowered nickel cash costs at all its operations. Between the first half of 1998 and the first half of 1999, they fell 8%, from US$1.40 to US$1.29 per lb.
As well, an expansion at Inco’s Indonesian subsidiary is nearly complete, with full production to follow in 2000.
When the analysts’ report was released in mid-September, Inco shares were trading at US$23; by presstime, they had fallen 14% to US$19.81.
Howat also recommended Falconbridge as a “buy,” with a target price of $32, saying the company “is in a great position to benefit from the recent rise in base metal prices.”
The company has completed its capital spending programs. As well, the Collahuasi copper mine in Chile and the Raglan nickel mine in Quebec are running at, or near, full capacity. For these reasons, Howat says, “Falconbridge will generate substantial free cash flow that will allow it to pay down debt and prepare a good base for future developments.”
He warns, however, that Falco’s oil-dependent subsidiary in the Dominican Republic will see costs rise about US25 cents, to US$2 per lb. nickel, owing to high oil prices.
At the time of the buy recommendation, Falco shares were trading at $24.95; by presstime, they had fallen 19% to $20.25.
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