CIBCEQUITY RESEARCH
February 1, 2022 Earnings Revision
Q4/21 Base Metals Earnings Preview
A Strong 2021 Closes With Momentum Into The Year Ahead
Our Conclusion
Looking back at the close of what was a strong year for commodities, Q4/21 price action across the relevant commodities was positive, with no declines quarter over quarter. While average copper prices only increased by ~2% Q/Q, the price of the red metal rose from $4.05/lb at the start of the quarter to end the year off at $4.46/lb. Zinc saw average prices increase Q/Q by 13%, FOB Australia Hard Coking Coal increased 40% and LT U3O8 increased 16% Q/Q, all carrying positive momentum into the year ahead.
For the coverage group, we expect average quarterly EBITDA growth of
19%. We forecast earnings beats for Copper Mountain and Lundin Mining,
while we are in line or slightly below consensus for our remaining coverage universe. Our top picks include First Quantum, Hudbay, and Cameco.
Key Points
Improving Commodity Prices Support Q4 EBITDA Growth. We expect
the combination of stronger base metal prices and positive provisional
pricing impacts to be supportive for earnings growth relative to Q3/21. We
believe offsetting factors can include inflation within unit costs, potential
sales lags due to global logistics constraints, as well as COVID costs and
disruptions. We expect the biggest gainers under coverage to be Hudbay
and Lundin, where we forecast 50% quarterly EBITDA growth (Q4/21E vs.
Q3/21A) for Lundin and 43% for Hudbay. We forecast Q4/21 EBITDA of
C$2.4B for Teck Resources, a notable increase from C$2.1B reported in
Q3/21A. We note the consensus estimate of C$2.7B is higher than our
estimate.
Beats And Misses. Reporting begins on February 9 with Cameco and
concludes with Largo reporting in March (TBD). Notable variances to
consensus include Copper Mountain and Lundin. Our Copper Mountain
EBITDA forecast of C$63M is 15% ahead of consensus, and our Lundin
estimate of $617M is 13% ahead of Street expectations. We are slightly
below consensus for Ero Copper, First Quantum, and Hudbay. We are 10% below Street expectations for Teck, but as noted above, Q4/21E results are well above Q3/21A, and we put less emphasis on an earnings miss given the expected strong financial results coming from higher realized coal prices. Recall, Teck pre-reported its average realized Q4/21 coal price of $351/t vs $237/t in Q3/21A.
Inflationary Impacts. Headlines have focused on inflationary factors
throughout the quarter. While inflation poses a greater risk to project
economics due to increased capital build costs, we expect margins to start to get compressed as operating costs also continue to creep upwards. We
forecast average inflation of ~4% in copper cash costs per pound, net of by- product credits, as gold and silver have remained generally stable Q/Q