Scotia Capital analyst Orest Wowkodaw thinks the risk-reward proposition for mining equities remains “extremely attractive,” pointing to “compelling” valuations and strong free cash flow.
“Although macroeconomic risks remain elevated, we anticipate a strong stimulus-driven recovery in ex-China markets to more than compensate for decelerating Chinese growth, Delta concerns, and higher interest rates,” he said in a research note released Tuesday. “In the medium to long term, we anticipate the emergence of a new commodities super cycle driven by growing demand from global decarbonization efforts to address climate change amplified by the impact of severe underinvestment in new production capacity. Heightened LatAm geo-political risks are likely to compound the supply crisis.”
“Among the base metals, we continue to prefer copper exposure given very low inventories and our near-term forecast of a market largely in balance driven by ex-China demand recovery, before transitioning to a large medium-term structural deficit due to supply erosion. We also anticipate copper to be among the biggest beneficiaries of growing global decarbonization efforts. We forecast near-term over-supply risks in both zinc and nickel markets, albeit to a lesser extent than previously. Although we see material downside pricing risks for HCC from extremely elevated spot levels as supply inevitably recovers, but now only modest downside risks for iron given the acute recent correction, we continue to like the outlook for the premium segment of bulk commodities. U3O8 fundamentals are improving on supply constraints, aggressive inventory stockpiling, and the increasing role for nuclear in green energy.”
Though he maintained his copper price forecast through 2025, Mr. Wowkodaw made “modest” updates to the rest of his commodity price deck, including increases to his nickel, uranium and zinc projections and a decline to his iron estimates. That led to an increase in his 2021 EBITDA forecasts by an average of 1 per cent with his 2022 expectation rising 2 per cent.
“With different fundamentals, each commodity appears to be at a somewhat different stage of its own respective cycle stage (i.e., peak and trough),” said Mr. Wowkodaw. “Our analysis suggests that copper fundamentals are tightening while nickel and zinc appear to have moved into multi-year surplus positions. Of the three base metals, the recovery in copper appears the most advanced by far. We anticipate the recovery in both zinc and nickel to emerge by middecade. HCC is now the closest to its peak-cycle levels given the perfect storm of Chinese supply constraints and strong ex-China steel production. On the other hand, iron ore is now closer to mid-cycle levels given the severe recent pullback. After a ten-year bear market, the uranium market appears to be finally turning a corner driven by ongoing supplier discipline and nuclear power’s increasing role in green energy.”
“Despite surprisingly strong metal prices, we believe the massive underinvestment by the capital-constrained mining sector is likely to continue for some time, which is likely to produce another strong commodity cycle in the future as demand once again overtakes waning supply. In our view, mining companies remain under intense pressure from shareholders to remain disciplined in the current environment and not repeat the mistakes of the last cycle by chasing excessive growth.”
With his updated forecast, Mr. Wowkodaw made a series of target price changes to stocks in his coverage universe, including:
- Copper Mountain Mining Corp. ( “sector outperform”) to $4 from $4.75. Average: $5.10.
“We recommend 12 of 23 equities under our coverage. Our top picks are CS-T, FM-T, TECK.B-T, and VALE-N. We also recommend CCO-T, CIA-T, CMMC-T, FCX-N, HBM-T, IVN-T, LIF-T, and TRQ-T. The average implied return for our preferred equities is now a very robust 41 per cent (vs. 35 per cent last quarter),” said Mr. Wowkodaw.