RBC cautious on base metals, bulk commodity stock outlooks

JOHANNESBURG (miningweekly.com) - Equity researcher RBC Capital Markets on Tuesday recommended that investors in the mining sector “exercise caution in an extended economic recession”.

RBC was cautious on base metals and bulk commodity stock outlooks, in an environment where developed and emerging market economies were expected to contract in 2009.

However, the firm believed that the precious metals, uranium and fertiliser sectors offered investors more attractive returns.

Volatility in commodity and mining share prices was expected to continue. Seasonal demand and a bear market rally could provide near-term upside, however, RBC said that as the market realised that the global economy could remain stagnant into 2010, investors would continue to be net sellers of resource stocks and commodities.

“Investors may make reasonable returns with short-term trading strategies, however, buy-and-hold strategies are very risky,” the researcher said.

RBC said that there could be an upside for gold and silver in the first half of 2009, followed by de-stocking risks into the second half of the year.

“Given the amount of monetary and fiscal stimulus that is being pumped into the system by central banks and governments, we would expect gold and silver to perform well early in 2009, in line with previous periods of economic stimulus.

“However, an extended contraction of the global economy would put significant pressure on emerging market economies, which would likely result in significant de-stocking of precious metals, similar to the trend observed in 1997 and 1998 as the Asian currencies collapsed and economies contracted,” RBC stated.

The platinum-group metals pricing basket was expected to remain weak throughout 2009, owing to the lack of supply-side discipline and weak automotive market.

Similarly, added RBC, rough diamond prices were not expected to rebound until later in the economic cycle.

Uranium was expected to perform relatively well in 2009, as power utilities and investors have been showing renewed interest in uranium. This has resulted in record spot volumes in 2008, and the spot price rebounding off of its recent lows.

Significant uranium production cuts were announced in late 2008 and RBC felt that the supply side of the equation remained at risk, while demand appeared to remain in line with expectations.

RBC expected fertiliser stocks to perform well in early 2009, based on its view that potash prices would remain relatively high and fertilizer demand would pick up ahead of planting seasons. The group also expected that the settlement of the 2009 Chinese potash contract would be a key catalyst for valuation improvement within the sector. A sustained rally was dependent on overall crop prices, which remained supportive for fertiliser demand in 2009.

Seaborne iron-ore and coking coal were expected to underperform ahead of the Japanese steelmaker contract-renewal period.

“In an extended recession we expect to see significantly lower sales volumes in 2009 and there could be further price deterioration into the 2010 contract-renewal period this time next year,” RBC said.

With regard to base metals, RBC said that in the current economy, where base-metal markets were in surplus, stockpiles were rising and the various global economic indicators continued to decline, the group would not expect to see any sustained base-metals rally in 2009.

Earlier this month, ratings agency Fitch director Monica Bonar stated that growth in the base-metals sector would continue to slow for the next 12 months.

However, she did say that demand was likely to pick up in the second half of 2009, on the back of improved credit availability and the implementation of stimulus programmes.

Meanwhile, RBC said that mergers and acquisitions, as well as restructuring of failed enterprises were expected to continue in 2009, particularly given the significant amounts of debt taken on by the base-metals mining companies, continued closures of steel mills and the need for “asset-rich, balance-sheet poor” companies to seek strategic partners.