Stock markets are realizing that they have been underpricing base-metal equities, Salman Partners senior mining analyst Raymond Goldie says, and investors should “wait two months, then start taking advantage of this trend.”
Goldie — who has covered mining stocks for more than 20 years, and has a PhD in geology — maintains in a recent research note to clients that the best way to look at the relationship between base-metal equity prices on the Toronto Stock Exchange and base-metal prices themselves is to examine the performance of base-metal equities relative to that of the S&P/TSX Composite Index.
“The relative performance of base-metal equities, relative to that of the equity markets as a whole, is more strongly correlated with the price of the base metals than is the absolute performance of base metals,” he explains. “This implies that the prime driver of the prices of base-metal equities are not the prices of the base metals themselves — it is the price of the overall equity markets.” (The same can be said of gold, he adds, because gold equity prices are driven by the price of the overall equity markets, not by the gold price.)
In terms of base-metal equities in 2010, for example, Goldie notes that they outperformed the Composite by 32.2%, even though the prices of the actual base metals rose by 19.3%. In 2011, base-metal equities underperformed the Composite by 14.7%, while prices of base metals dropped by 21.7%. And in August of this year, base-metal equities outperformed the Composite by 7.7%, even though the average price of the base metals rose by just 2.5%, he says.
“We are encouraged that the equity market is showing signs that it has overlooked the strength and stability in the prices of base metals,” he writes. “Investors who want to join in the equity market’s new-found appreciation of the value inherent in base-metal equities should wait until around the end of October.”
In a separate note to clients, Goldie challenges conventional views that there will be a glut of copper next year that some analysts estimate could run as high as 408,000 tonnes.
Goldie argues that the oversupply thesis assumes copper miners will make good on the production forecasts they issue at the start of each year. This assumption is wrong, he says, based on compilations by Teck Resources (TSX: TCK.B; NYSE: TCK) showing that since 2003, copper producers produced less copper than they had planned at the beginning of the year. “The world produces something like 20 million tonnes of copper a year, so that annual gap [averaging 675,000 tonnes] is equivalent to about 4%,” he says in a telephone interview with The Northern Miner.
“It’s a funny world because before 2003, companies produced more than they said they would,” he adds. “It used to be around this time of year in the 1990s, 1980s, 1970s and 1960s that head office would look at your production figures, and if you had a strike or some other event that had affected your production, they’d say you were running behind budget and that they wanted you to mine the high grade. But today most of them will say there isn’t any high grade left that we aren’t mining already. My theory is that there is no high-grade stuff left anywhere.”
Goldie says the copper scrap market indicates supply and demand, and claims that scrap copper is in increasingly short supply. He cites figures published by the American Metal Market showing that in early 2011, the price of U.S. Refiner’s #2 copper scrap was trading at a US75¢ per lb. discount to the price of virgin copper on the London Metal Exchange. Today, by contrast, that spread has narrowed to US16¢ per lb. “That’s the single-best indicator that there is not a surplus of copper but a shortage of copper,” he says. “And if the price of copper goes up, it doesn’t necessarily reflect an increase in demand — it can be just someone playing financial games. But you can’t do that with the scrap metal exchange.”
He argues that China’s copper imports have been growing. According to figures from CIBC published on Sept. 10, China imported 388,000 tonnes of copper and related products in August, down 6% from the previous month, but which he says is “firmly above the average monthly import levels of 350,000 tonnes over the past two years.”
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