FYI Stifel analyst Cole McGill thinks “there is an underappreciated copper demand story that the market has been overlooking.”
“This is informed by near-term PMI, mid-term emerging market infrastructure cycle and a long-term outlook by our proprietary, in-house copper demand model,” he said. “Near term, we have seen a rebound in global PMI now indicating expansion, which alongside sticky inflation provides the optimal outlook for copper demand and more broadly cyclical value stocks as indicated by our Chief Equity strategist Barry Bannister.
“Midterm, we opine that emerging markets globally have both historic precedents to increase infrastructure spending and the balance sheet room to do so. Not only does potential dollar weakness provide relative pricing relief for these markets to spend but the more moderate balance sheet growth of emerging markets through the pandemic provides the firepower to do so. G7 governments are sitting on balance sheets 117-per-cent the size of GDP, versus the more paltry 53 per cent exemplified by 30 per cent of the world’s population in emerging markets.”
In a research report released Tuesday, Mr. McGill resumed coverage of the copper sector, believing on the mid-tier sub-sector is “strategically best positioned to capture demand growth for the red metal, alongside a view that the group offers the best risk/return in the current market.”
“Recent metal strength has shown senior miners the most love, now trading up to 1.4 times P/NAV on average, a reward we think is solely due to capital discipline accompanied by a disincentive to provide growth (greenfield project IRRs mirror sector cost of capital),” he added. “With the mid-tier sub-sector trading at 0.89 times, and the majority of names below both replacement cost/build cost, we feel this increases the strategic value of the group and provides a rerate opportunity as investors/seniors take note of deleveraging balance sheets and growth profiles.”