Mining equities have room to run: BMO

Mining and metals stocks remain positioned for further gains in the mining equity cycle, despite a sharp selloff on Friday and new concerns about China’s copper demand, according to an analysis by BMO Capital Markets.

In a note marking roughly 10 years since mining equities bottomed amid concerns over metal surpluses, heavy debt loads and potential bankruptcies, BMO said several indicators suggest the sector has not yet reached a cyclical peak. While the firm expects volatility and periods of consolidation, it said the broader cycle remains intact.

“Nothing goes up in a straight line, but we still feel in the big picture cycle a considerable number of indicators point to further upside,” BMO analyst Matthew Murphy said in the note issued on Monday. “Miners will generate and return significant cash flow.”

The assessment follows a heavy selloff in mining equities on Jan. 30 after weeks of strong gains, alongside signs of slowing momentum in China’s manufacturing. But mining companies continue to show capital discipline and benefit from what BMO described as ongoing scarcity across key commodities. Low capital spending and governments with fiscal deficits focusing on domestic metal supply support the trend, the bank said.

Market gains

Since early 2016, the Morgan Stanley Capital International World Metals and Mining Index has gained more than 430%, compared with a 275% rise in the S&P 500 over the same period, with inflation up about 37%, BMO said. Returns across individual commodities have been even stronger, with copper equities posting median gains of roughly 1,410%, iron ore companies rising more than 1,470%, small gold producers up about 1,500% and large gold producers advancing nearly 1,100%.

The recovery was initially driven by stimulus, including an expansion in Chinese credit that boosted infrastructure and industrial activity, followed by easy monetary policy and fiscal support in Western economies, BMO said. That backdrop, combined with a prolonged period of low capital spending by miners, helped create tighter metal markets relative to the start of the cycle.

Several hallmarks of a market peak remain absent, analyst Murphy said. Materials account for about 20% of the TSX, below the more than 24% weighting seen at the last cycle peak, while the broader resource sector, including energy, represents roughly 36% of the index, compared with more than 50% previously. Capital raising activity and initial public offerings also remain limited.

Sector discipline

Equity markets are not rewarding growth with higher valuations, which has discouraged aggressive capital spending and helped reinforce discipline across the sector, BMO said. As a result, the current environment does not appear sufficiently optimistic to signal a peak.

That discipline was tested on Jan. 30, when mining stocks sold off sharply in a broad risk-off move that followed weeks of strong gains across metals markets. Mining equities fell heavily even as underlying commodity prices showed mixed performance, highlighting the sensitivity of the sector to short-term shifts in investor positioning.

Copper prices dropped sharply early in the session but recovered some ground by the close, outperforming most other metals during the selloff. The relative resilience underscored continued confidence in copper’s medium-term fundamentals, despite heightened volatility across commodity and equity markets.

China demand

Near-term risks remain, however. A recent surprise contraction in China’s manufacturing purchasing managers’ index has raised concerns about demand momentum for growth-sensitive metals, particularly copper, as weaker domestic activity could weigh on consumption in the months ahead.

While BMO expects some consolidation and de-risking in 2026, particularly following the Jan. 30 selloff, it said macro trends such as potential capital rotation towards emerging markets could extend mining equity strength. Mining stocks are also increasingly being viewed by some investors as a form of “safe asset,” reflecting physical scarcity and the strategic importance of domestic metal supply, the firm said.

Looking ahead, miners are positioned to generate significant cash flow that can be returned to shareholders or reinvested in high-quality projects. The main risks to the sector remain cost inflation, capital misallocation and expropriation, while gains depend on continued cost control and growing investor confidence in margin sustainability, BMO said.