Broker Stifel GMP reckons the current weakness in base metals is a short-term trend and thinks prices will bounce back longer term amid the 'green' revolution.
Previewing second quarter (to end June 2022) metals prices and miners' earnings, the broker noted that prices had consistently moved south since the highs of the first quarter due to macro-economic trends.
"With markets gripped by recessionary fears owing to global governments hiking interest rates in the face of stubbornly persistent inflation, base metals inline with global markets posted an average quarterly decline of 25%," said Stifel analysts.
But they added: "We reiterate that we view this weaknesses in base metals as short-term, while in the medium-long term we continue to foresee a bullish outlook as the green energy transition (renovate the planet) is expected to create significant demand growth for metals and drive prices higher."
Bellwether metal
On copper, a metal seen as a bellwether on the state of global economic activity, Stifel noted that its price fell 21% in Q2 due to China's economic slowdown, persistent inflation and central bankers "steadfast willingness" to clamp down on inflation, which in turn, prompted recession fears.
"Other base metals followed copper, however demonstrating a higher sensitivity towards the rising interest rate environment with lead, zinc and nickel losing 22%, 25% and 30%, respectively," said the analysts.
Given these recessionary headwinds and thus dampened investor sentiment, Stifel said it has lowered its valuation multiples for some companies leading to an average of a 17% decline in its target prices for the miners that it covers.
For example, Teck Resources, which it rates 'Buy', now has a target of C$62 compared to C$68 previously, while First Quantum Minerals. also a 'Buy', sees its target fall to C$39 compared to C$43 previously. On the junior producer front, Ero Copper's target goes to C$27 from C$35.
"We have updated our near-term base outlook given the current macroeconomic backdrop, but have left our LT assumptions unchanged," said Stifel.
For 2022, the broker forecasts an average copper price of $3.90 per pound, down previously from $4.40 per pound, a zinc price of $1.55 per pound (unchanged), and a nickel price of $11.78 per pound (from $15.48 per pound previously).
"Given the big drop in base metal prices towards the end of Q2, we are expecting substantial negative provisional pricing adjustments for several of the base metal miners," it added.
Contact the writer at giles@proactiveinvestors.com