RBC: Don’t expect any sustainable rebound in mining stocks (RTGAM)
TIM SHUFELT
The global commodity thrashing that has dominated markets of late should reach its nadir next year, but no vigorous recovery is likely to take place, according to RBC Dominion Securities.
Production cuts should help to rebalance commodity markets, while rising global economic growth should improve conditions on the demand side, RBC said in a new report.
The two effects should bring about a bottom in non-precious metal commodity prices in 2016. But the best investors can hope for out of mining stocks is for flat performance next year, the report said.
“Our supply-demand analyses suggest the commodity markets remain significantly oversupplied and we believe much tighter markets are required to support sustained outperformance of either the commodities or the share prices,” RBC said. “However, we believe trading opportunities may present themselves in 2016.”
Excess supply has fuelled the worst commodity rout in more than a decade, with prices on coal, copper and iron dragging mining stocks down to near-record lows. The Bloomberg Commodity Index, which measures returns on 22 raw materials, is trading at a 16-year low.
On Tuesday, London-based Anglo American PLC announced it would suspend its dividend and sell off more than half of its assets. The company’s stock, already trading at a 70-per-cent discount to its 52-week high, dropped by an additional 12 per cent in Tuesday’s trading.
The current phase of the global commodity environment, which has seen a sharp correction in the second half of the current year, should give way to a calmer, sideways market through 2016, according to RBC’s mining and materials equity team.
“We expect an improvement in global economic growth, combined with ongoing production curtailments, to lead to a bottom in non-precious metal commodity prices in 2016 and a gradual improvement in prices beginning in 2017.”
Meanwhile, mining shares are trading at a 19-per-cent discount to net asset value at forward curve prices, RBC said. And attractive valuations going into a seasonally strong period for commodities could spur a rally. But tax-loss selling could pull keep any rally in check, the report said.
“While a seasonal rally may be possible, sustained outperformance is unlikely.”
RBC recommends that generalist investors maintain an underweight position in non-precious metals and mining stocks, and “take a cautious approach focusing on companies with strong balance sheets and solid funding positions.”
In the North American mining space, RBC’s current top picks are Teck Resources Ltd., Lundin Mining Corp., Ivanhoe Mines Ltd., Cameco Corp., Uranium Participation Corp., and Labrador Iron Ore Royalty Corp.