Base Metals


BMO Capital Markets’ Global Metals & Mining Conference wrapped up last week, and certainly provided a broad snapshot of the industry.

The 25th annual BMO Capital Markets Global Metals & Mining Conference wrapped up last week, and with representatives from 215 metals, mining and fertilizer companies in attendance, the event certainly provided a broad snapshot of the industry.
There was a lot to take in over four days, but BMO was able to identify a few overarching themes in a post-conference report. Overall, sentiment was more positive than it has been as of late, and BMO states that it is “comfortable talking about a recovery” in commodities now; however, it also stresses that it still expects “a long hard climb” rather than a quick turnaround.

Cautiously looking at a commodities recovery

For starters, the firm states that it remains optimistic on the precious metals sector. While gold prices are now rising and platinum prices recently broke $1,000 per ounce for the first time since October, BMO notes that overall precious metals miners have been showing their mettle for much longer.
“Precious metal miners have quietly lowered costs, improved liquidity, and implemented rigorous execution strategies that have enabled them to provide real leverage in a rising metal price environment,” it states in its note.

Taking a look at base metals and bulk commodities, BMO sees “[m]uch less ‘doom and gloom’, and much more ‘here’s what we are going to do about it’ this year” compared to 2015. Still, despite the recent flurry of M&A in the mining space, the firm believes that strategic buyers will be discerning — they’re looking for “Tier 1” assets at reasonable prices. BMO notes that copper currently appears to be “the most popular target.”
However, the outlook for the potash and phosphate sectors is not so positive. BMO states that the management teams at PotashCorp (TSX:POT) and Mosaic (NYSE:MOS) are bullish on prices in the short term, but that its own view is that such predictions come “amid rampant pre-Chinese potash contract negotiation tactics.”
“We are concerned POT/MOS will see sizable volume/earnings cuts well below guidance/expectations to hold up what are actually poor prices, so these stocks may be setting investors up for disappointment in the coming months relative to managements’ wishful thinking,” the firm explains.

Investor views: Financing to be a continued challenge, higher commodity prices a key catalyst

Last week’s conference featured presentations from some of the world’s largest mining companies, as well as talks from a number of BMO’s own researchers. However, for the past three years, the firm has also been surveying conference attendees to provide a “snapshot” of investor views on the sector.
This year, most attendees said they are looking to precious metals as the sector with the most upside over the next two years, and in its report BMO expresses no surprise at this result. As mentioned above, precious metals have been performing well lately; at the same time, weaker economic data supports a case for investing in gold.

That said, survey respondents expressed concerned about financing challenges for the space. Debt investors are more concerned with commodities prices, while corporate investors, “[e]ver the optimists,” are worried about a lack of discoveries.
Interestingly, BMO notes that 71 percent of corporate investors believe that mining stocks are currently undervalued. However, looking at all investors surveyed, there’s more of an even split between those who see stocks as “about right” and those who see them as undervalued.

Emerging markets as the main driver for metals demand?

BMO’s survey shows that going forward, investors are still focused on the “China stimulus story” as a driver for metals demand; however, the firm has some concerns about that position.
“We continue to see risks with this view, as China’s recent manufacturing PMI data came in weaker than expected, which indicates to us that the economic drivers for the country are indeed shifting,” the firm explains in the report. “The questions remain: 1) will stimulus really be commodities-intensive?, and 2) does this not kick the can down the road, as there are structural reforms that must take place?”
Investors are also watching growth in emerging markets, and BMO itself is “beginning to focus on other emerging markets as the future driver for global demand growth.”
All in all, the findings from BMO’s survey seem to fall in line with the overarching sentiment that there are signs of life in the mining space. “At the very least, our poll indicates that there appears to be opportunities available within the mining sector,” BMO concludes.

The BMO Metals & Mining conference is over, but PDAC is in full swing! Be sure to check out our coverage of the event.
Securities Disclosure: I, Teresa Matich, hold no investment interest in any of the securities mentioned in this article.


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