Two analysts, two opinions - Found in The G&M Russia’s invasion of Ukraine has brought “significant gyrations in commodity markets that were already extremely tight,” according to Canaccord Genuity analyst Dalton Baretto.
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In a research report released Tuesday, Mr. Baretto predicted a “volatile” environment will persist through 2023 as major supply-demand issues continue to emerge and impact both commodity prices and equity valuations.
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“As such, we expect a decade of commodity price support, with the industrial commodity complex poised to benefit from: • Inflationary trends • A movement to lower reliance on the US$ • Building of strategic stockpiles • (Re)building onshore manufacturing capability.”
Mr. Baretto made “limited” changes to his near-term commodity price forecasts, seeing the current dynamics already priced in. However, he increased his medium-term projections for several “critical” metals, including copper and high-grade iron ore, seeing supply issues.
Based on price performance over the first quarter of the year, Mr. Baretto downgraded a pair of mining companies:
* First Quantum Minerals Ltd. (FM-T) to “hold” from “buy” with a target increasing to $44 from $41. The average on the Street is $41.48.
“Given FM’s operating leverage to the increase in our medium-term copper price forecasts, we are increasing our target price .... Our target remains based on an equal weighting of 5.5 times ntm [next 12-month] EBITDA and 1.35 times NAV, now measured as at April 1st, 2023 (previously January 1st, 2023). Despite the increase to our target price, given the limited implied return from the current share price, we are downgrading FM,” he said.
* Teck Resources Ltd. (TECK.B-T) to “hold” from “buy” with a target of $52 from $52. Average: $55.38.
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National Bank Financial analyst Shane Nagle...
said he expects first-quarter earnings season for base metal producers to be hampered by “soft” production results and the impact of rising inflation.
“Following discussions with management teams in our universe ahead of Q1/22 earnings, we expect higher costs in the quarter and anticipate several companies could increase cost guidance as a result of elevated diesel prices, ongoing shipping delays/logistical challenges and impact of Russia/Ukraine conflict on other key consumables within the industry,” he said. “We expect persistently high inflation to have an impact on the nearterm outlook as supply contracts are renegotiated, supply chain issues persist and consumable prices continue to rise.”
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“Overall, it’s hard to see any producers without significant by-product credits being able to avoid an 10 per cent increase in cost guidance from numbers released in late-December/early-January,” said Mr. Nagle. “Adding to the impact of these cost pressures are several additional factors we expect will weigh on Q1 production results (several operations across our universe are in lower grade mine sequences to start the year (some by pushing mines harder at end of 2021), weather related impacts (including heavy rain in Brazil and regions of Africa), logistical challenges (including shipping related delays and/or CP rail strike in Canada), scheduled maintenance programs and COVID-19 related absenteeism).”
The analyst said there are few places for investors to “hide from negative headlines.”
“Within our coverage, only Sherritt (
, $1.10 target, “sector perform”) is expected to benefit from strong fertilizer, cobalt by-products which may ultimately lead to a reduction in cost guidance for the year,” he said.
“Teck Resources (
, $65 TP (was $60), OP) has also pre-released Q1 coal sales which has been accurately reflected in Consensus estimates ahead of the quarter. Spot coking coal prices are also US$480 per ton (NBF 2022 estimate: US$375/t) providing additional tailwinds for the remainder of the year.”