Base Metals

With copper prices still sitting around $2.61 per pound, sentiment in the space isn’t great at the moment. However, firms are still putting out positive outlooks on the copper price, and Cormark Securities is one of them.

With copper prices still sitting around $2.61 per pound, sentiment in the space isn’t great at the moment. What’s more, despite lower prices and the end of Lunar New Year celebrations in China last month, consumption of the red metal hasn’t picked up as much as much as some market watchers were expecting.

Case in point: the Financial Times reported that two weeks after the end of the holiday signs of a “real pick-up in consumption” have still not come forth, while imports fell to their lowest level since 2011 in February.

That’s no doubt got some investors worried. However, firms are still putting out positive outlooks on the copper price, and Cormark Securities is one of them. In a note from Cliff Hale-Sanders, the firm points out that copper prices recovered slightly with the end of the Lunar New Year, and while it states that ” [i]nvestors remain concerned by slowing Chinese growth, a tepid emerging market outlook and ever stronger US dollar,” it argues that prices need to move higher.

“While we agree copper is modestly oversupplied in the near term, we remain bullish over the medium term as higher prices are needed to sustain the industry,” the note reads.

To be sure, it isn’t all sunshine and roses — as far as the near term goes, Cormark notes that while copper prices have ticked up somewhat from five-year lows, prices still remain depressed. “Until the demand outlook firms, it is unlikely the sector will see any positive momentum,” it notes. In terms of economic indicators, the firm concludes that while the US economy is improving, the outlook for the global economy is staying weak and “increasingly uncertain,” which typically isn’t great for Dr. Copper.

However, it points to a few other considerations that could be good for the red metal:

  • Shrunken supply expectations — The Chinese government’s growth target is set at 7 percent for 2015, down from 7.5 percent last year, providing uncertainty over the country’s level of metal consumption. That said, Cormark notes that expectations for new supply entering the market have decreased. It suggests that if demand holds, the market could quickly turn back to a deficit.
  • Olympic Dam troubles — On that note, Cormark reminds readers in its note that BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) has cut its production forecast by 60,000 to 70,000 tonnes due to problems with the largest mill at its Olympic Dam project in Australia. Depending on different forecasts, that difference stands to take a decent chunk out of the projected copper surplus.
  • Prices up in February — Copper prices are still below $3, but Cormarck points out that prices actually rose 7 percent in February, with inventories on the LME increasing by 19 percent month-over-month. “We note this was the Chinese holiday month and data was expected to look weaker,” the firm states. Since the start of the month, prices have remained fairly steady, dipping down about 1.2 percent.
  • Short positions decreasing — “Based upon the COMEX data it appears the net short position has declined somewhat in the space,” Cormark notes, suggesting that the change may have been partially responsible for the recent modest price recovery.

Overall, Cormark still sees a surplus in the market over the next two years, with more supply coming online. However, it anticipates the situation changing a little further down the line. “We note the recent pullback in new supply and development delays suggest that deficits are likely to re-emerge in 2017-18 onward barring a collapse in Chinese demand,” it states. Certainly investors will be keeping a close watch to see what happens next.

Companies

While the main event was a base metals market update, the end of Cormark’s note includes a brief list of the base metals companies that it’s covering at the moment, along with its latest ratings and target prices. Here’s at a look at some of the copper developers and mid-tier producers on the list:

  • Nevada Copper (TSX:NCU) — rated a “speculative buy” with a target price of $3; closed Thursday at $1.62 per share.
  • Ivanhoe Mines (TSX:IVN) — rated a “buy” with a $2.40 price target; closed Thursday at $0.81 per share.
  • PolyMet Mining (TSX:POM, NYSE MKT:PLM) — rated a “speculative buy” with a price target of $2.20; closed Thursday at $1.58 per share.
  • Western Copper and Gold (TSX:WRN,NYSEMKT:WRN) — rated a “speculative buy” with a $2.50 price target; closed Thursday at $0.69 per share.
  • Capstone Mining (TSX:CS) — rated a “buy” with a price target of $3.10; trading at $1.19 at Thursday’s close.
  • Copper Mountain Mining (TSX:CUM) — rated a “buy” with a price target of $2; closed Thursday at $1.14 per share.

Analyst certification as stated in Cormark’s note: “We, Cliff Hale-Sanders and Alec Meikle, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject company(ies) and its (their) securities. We also certify that we have not been, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report.”

 

Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article. 

Related reading:

Analysts See Copper Price Moving Higher

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