With base metal prices remaining “well-supported based on tightly balanced markets and low global inventory levels,” National Bank Financial analyst Shane Nagle sees equity valuations remaining discounted despite strong performance thus far in 2022.
“Our base metal coverage universe is currently implying a copper price of US$3.19 per pound (producers: US$3.44 per pound, developers: US$2.67 per pound) compared to US$3.39 per pound at the start of the year, while copper prices have increased from US$4.40 per pound to over US$4.70 per pound over the same period,” he said. “In terms of relative valuation, base metal producers are trading at an implied price that represents 73% of spot, at the lower end of the recent range, despite year-to-date performance of producers within our universe of up 20 per cent.”
In a research report released Friday, Mr. Nagle raised his near-term price assumptions to fall in line with spot prices for the remainder of 2022 and 2023. His biggest increases were for copper prices for 2022 and 2023 to US$4.70 per pound (from US$4.30), nickel prices for 2022 and 2023 to US$14.00 per pound (from US$9.50) and 2022 hard coked coal prices to US$375 per ton (from US$350).
“There also remains significant uncertainty on continued impacts of COVID-19 variants, Russia/Ukraine conflict, supply chain issues and rising inflationary pressures on the global economic recovery,” he said. “Given this backdrop, we continue to anticipate some price volatility in the near term while longer-term fundamentals remain well-supported by demand for global energy transition, lack of supply growth and rising incentive prices.”
With those commodity deck changes, Mr. Nagle made a series of target price changes for stocks in his coverage universe, including two of his three top picks in the sector. They are:
* Hudbay Minerals Inc. (
, “outperform”) to $13 from $12.50. The average on the Street is $13.37.
“2022 represents an operational inflection point with Pampacancha grades and New Britannia production ramping up throughout the year,” he said. “A technical report on Copper Wold in Q3/22 is expected to provide more clarity on the private land-only development alternative in Arizona which currently represents a free-option within the portfolio. An update in early-2023 on processing 777 tailings will also provide an opportunity to extend the operations life and reduce long-term reclamation expenditures.”
* Teck Resources Ltd. (
, “outperform”) to $60 from $55. Average: $54.95.
“Despite logistical challenges from heavy rainfall in B.C. to start the year, strong FCF [free cash flow] from the coal division and completion of QB2 in 2022 will drive near-term FCF growth, leading to increased shareholder returns,” he said. “Elevated oil prices will drive significant CF generation from the company’s interest in Fort Hills and several advancements of non-core copper projects like San Nicolas, Masaba and Zafranel may lead to a number of noncore assets being monetized beginning in H2/22.”