BNS Despite facing significant geopolitical obstacles, the risk-reward proposition for the mining equities remains reasonably attractive, according to Scotia Capital analyst Orest Wowkodaw, believing commodity fundamentals “appear tight.”
“Russia’s war on Ukraine, escalating COVID related lockdowns in China, the global energy crisis, and rising interest rates due to rampant inflation, are all likely to negatively impact the global macroeconomic outlook in 2022,” he said. “However, the supply side also appears to be under considerable pressure given low visible inventories, growing risks to Russian output, ongoing fiscal uncertainty in LatAm, continuing supply-chain constraints, and rising inflation. As a result, despite significant uncertainty, we are not surprised to see most commodity prices trading near record highs. 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.”
For base metals, Mr. Wowkodaw prefers copper exposure, pointing to “very low” inventories and his forecast for a “relatively tight” near-term market.
“While both improved, we remain concerned with over-supply risks in zinc and nickel,” he added. “Given relatively weak Chinese steel mill margins, we see material downside pricing risks for hard coking coal from extremely elevated levels and moderate downside risks for Fe; however, we continue to like the outlook for the premium segment of bulk commodities. Uranium fundamentals are rapidly improving on aggressive inventory stockpiling and the dual Western World agendas of decarbonization, and now, energy independence.”
After making significant increases to his commodity price forecasts through 2026, Mr. Wowkodaw raised his EBITDA projects for companies in his coverage universe by an average of 14 per cent for 2022 and then 12 per cent for 2023 and 7 per cent from 2024.
He also made similar target changes to other stocks in his coverage universe, noting: We recommend 11 of 24 equities under our coverage.
“Our top picks are CS-T, FM-T, TECK.B-T, and VALE-N (TECK.B-T is our favourite),” he said. “We also highly recommend CCO-T, CIA-T, CMMC-T, ERO-T, FCX-N, HBM-T, and IVN-T. The average implied return for our preferred equities is now 27 per cent (unchanged vs. 27 per cent last quarter).
“With average 2022E-2024 EV/EBITDA multiples of 5.0 times, 4.7 times, and 4.5 times for the large/mid-cap base metal producers (or 4.4 times, 3.7 times, and 3.3 times at spot) vs. 3-year and 10-year average multiples of 5.5 times and 5.9 times, valuations remain reasonably attractive. The equities are currently trading at an implied average Cu price of $4.18/lb. Given the impressive FCF generation for most miners, we anticipate improved shareholder returns to continue, led by FCX-N, LIF-T, TECK.B-T, and VALE-N.”