With no ceasefire in sight, the bank sees copper prices falling to $4.20 a pound and warns that the 'buy the dip' trade is close to exhaustion.
A war with no end is forcing one of the City's biggest research teams to tear up its commodity outlook.
RBC Capital Markets downgraded four mining stocks, with the ongoing conflict between the US and Iran as the central factor. The bank sees copper as the most exposed commodity in its coverage, on both price and the valuations investors are paying. The companies in the crossfire are Antofagasta PLC (LSE:ANTO), Atalaya Mining Copper (LSE:ATYM, TSX:AYM), Boliden and Central Asia Metals PLC (AIM:CAML, OTC:CAMLF).
The copper problem
Copper is a gauge of global economic health. When factories produce more and construction accelerates, demand rises. When growth stalls, demand falls and so does the price.
RBC's analysts believe the market has held onto optimism for too long. Antofagasta, the Chilean miner listed in London, traded at 12 times earnings before the conflict began.
It now trades at 10.2 times. The analysts see further to fall. Their base case: copper drops to $4.20 a pound as supply and demand come back into balance, and companies that built up stockpiles begin drawing them down. COMEX warehouse stocks, a measure of physical copper held in the exchange's facilities, have started to decline, which the bank reads as a warning sign.
RBC cut its price target on Antofagasta from 3,600 pence to 2,800 pence and moved the stock to 'underperform', its most negative rating. At the current share price of 3,273 pence, that target implies a fall of around 14%.
The three other downgrades
Atalaya Mining, a smaller copper producer, was cut from 'outperform' to 'sector perform'. Its price target fell from 1,525 pence to 1,125 pence. RBC cited the company's exposure to copper prices and the risk of rising costs. A permit for a new project in Spain, called Touro, could act as a catalyst for the shares, but the bank no longer sees that as sufficient to hold a positive view.
Central Asia Metals, which mines copper and zinc in Kazakhstan and North Macedonia, was cut to 'underperform'. Its price target fell from 230 pence to 170 pence. The company has a record of reliable dividends and low operating costs, but RBC argues those qualities do not provide enough protection when commodity prices face this degree of pressure and no acquisition target is in view.
Boliden, the Swedish metals company, was cut to 'sector perform' from 'outperform'. Its price target fell from SEK 750 to SEK 600 per share. About 30% of Boliden's revenues come from copper, with zinc and silver making up most of the rest. The analysts credited the company's energy hedges, but concluded that the risks to top-line growth outweigh the positives.
One winner in the rout
Not every mining name suffered. RBC upgraded Norsk Hydro, the Norwegian aluminium producer, to 'outperform' and raised its price target from NOK 85 to NOK 95 per share. The logic sits opposite to the copper downgrades. The Middle East conflict is cutting energy supply, which pushes electricity prices higher. Aluminium smelting is an energy-intensive process, so high power prices hurt producers with expensive electricity.
Norsk Hydro runs on cheap Norwegian hydropower. Supply disruptions elsewhere could lift aluminium prices while the company's costs stay low.