Q2/23 Preview and Price Deck Revision
Slowing Chinese Growth Weighs on Metal Prices Increasing Expectations for Chinese Stimulus Boosts Miners
TD Investment Conclusion
We have adjusted our price deck to reflect lower copper prices in Q2/23 than what we were forecasting. We have decreased our 2023 copper price forecast to US$3.95/lb (from US$4.02/lb); our 2024 US$4.10/lb copper price forecast is unchanged. We have lowered our 2023 zinc price forecast to US$1.19/lb (from US $1.43/lb), reflecting recent price weakness, but we expect prices to rebound in 2024 on tighter supply; we have lowered our 2024 zinc price forecast slightly to US$1.40/ lb from US$1.45/lb.
We remain positive on the outlook for base metals as the rate-hiking cycle comes to an end. TD's Global Macro team is forecasting a 25 bps hike in July, followed by a period of stability before 300 bps of rate cuts between March 2024 and December 2024. We expect growth and inflation to slow in the next several months, supporting easing rate expectations. We expect the end of the hiking cycle to be supportive to the price for base metals, with the expectation of U.S. dollar weakness into 2024.
We expect relatively weak Q2/23 results from most of the base-metal producers, with many expecting stronger production in H2/23 due to a combination of project ramp-ups (First Quantum's Cobre Panama 100Mtpa project ramp-up and Hudbay's Pampacancha project) and better grade profiles. We also expect that negative provisional price adjustments will weigh on some companies that do not hedge the impact — we are projecting that Lundin Mining will report a negative provisional price adjustment of ~$80 million. Given the slow start to the year at Sentinel and the now-resolved stability agreement dispute in Panama, we believe that there could be downward revisions to First Quantum's 2023 copper production guidance.
We are maintaining our OVERWEIGHT sector recommendation, particularly given the high availability of copper exposure across the Canadian mining sector. However, we recognize that base-metal prices could remain challenged over the short term, with potential macro headwinds in China, a strong U.S. dollar, and minimal mine disruptions.
Our ACTION LIST BUY recommendation is Cameco. Uranium is one of the top-performing commodities year-to-date, with nuclear power continuing to gain government backing in many regions. In the base-metals complex, First Quantum is our top pick among the large-cap names, and Champion is our top pick among the mid-cap names.
We note that the current returns to target for Cameco and First Quantum are slim, given our recommendations, and we expect to review our target prices and/or recommendations as the companies report their respective mid-year results in the coming weeks.