RBC 09:11 AM EDT, 10/05/2021 (MT Newswires) -- RBC Capital Markets said Tuesday that it expects continued strong free cash flow from copper producers with copper averaging $4.25/lb during the third quarter.
As a result, copper miners are expected to again focus on capital allocation including shareholder returns, accelerated growth projects, and potential M&A, RBC said.
But RBC said cost inflation and supply chain issues may impact results, and copper remains range-bound around $4.25/lb after reaching $4.86/lb in mid-May. RBC believes copper prices could continue easing into next year, estimating $3.75/lb for 2022 as demand slows in China amid increased supply.
RBC said low inventories and anticipation of medium-term deficits can keep prices supported. After falling about 30% since May, RBC believes valuations are attractive North America-based base metals equities (4.1x 2022 EBITDA at spot, 27% FCF yield on average) and continues to see opportunities in selected names.
RBC noted that Teck Resources Ltd. (TECK-A.TO, TECK-B.TO) benefits from record coal prices in the near term while growing estimated copper production by 60% by 2023.
First Quantum Ltd. (FM.TO) can generate strong FCF as Cobre Panama ramps up to become a top 10 copper mine, RBC said.
Ivanhoe Mines Ltd. (IVN.TO) is on the cusp of demonstrating the potential of the Kamoa-Kakula copper mine. For Capstone Mining Corp. (CS.TO), a Santo Domingo partnership could be a meaningful catalyst, according to RBC.
RBC added that Hudbay Minerals Inc. (HBM.TO) is at a FCF inflection point after completing investments in Manitoba and Peru, while Champion Iron Ltd. (CIA.TO) has strong growth potential as its phase-two project starts contributing in mid-2022.
RBC expects strong commodities to drive improved earnings, offset by cost inflation. Base metals were mixed quarter over quarter, with copper down 3%, zinc up 2% and nickel up 10%.
Gold was steady down 1% and silver weaker down 9%.
The bulks were most volatile, RBC said. Iron ore was down 18% on avg. q/q while met coal was up 89%. Cost escalation could continue with WTI up 6% q/q and global steel prices climbing from already elevated levels (US HRC +23% q/q & US plate +25% q/q).