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Base metal miners headed for strong Q3 financials, analysts say

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Essential Metals & Mining Insights - September 2020

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Base metal miners headed for strong Q3 financials, analysts say

Base metal miners are on track to report strong third-quarter results on the back of surging metal prices, notably copper, driven in part by recovering demand in China, according to analysts.

The copper price collapsed from over $6,000 per tonne at the outset of the year to under $5,000/t in March but then started to rebound. It has traded over $6,000/t since the end of June, with analysts crediting Chinese buying amid a shortage in copper scrap.

"In particular, a base metals pricing rally through [the second quarter of 2020] set the stage for higher than anticipated (sustained) pricing in [the third quarter of 2020]," Cormark Securities analyst Stefan Ioannou said in an Oct. 19 research report, noting that copper averaged $2.96/lb in the third quarter. "A pandemic-induced lack of scrap has also helped to bolster metal prices."

Ioannou noted that copper scrap availability was down about 50% in China, which in turn drove a surge in concentrate and cathode imports.

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Macquarie Securities analysts recently took a similar view, saying average base metal prices increased 18% quarter over quarter in the period ended Sept. 30, translating into the best price-performance since 2009 in the wake of the global financial crisis. "Buoyant copper and nickel prices continue to drive earnings upside momentum, with material FY21 earnings upside for producers," the analysts wrote in an Oct. 5 note.

Assessing some of the sector's larger base metal miners, Scotiabank analyst Orest Wowkodaw projected EBITDA will jump 43% over the previous quarter and 44% year over year.

"We anticipate [third-quarter 2020] financial results to significantly improve ... for the majority of the companies in our coverage, driven by markedly stronger commodity prices and a better operating performance following several COVID-19 related disruptions in [the second quarter]," Wowkodaw said in an Oct. 20 note.

Wowkodaw took a bullish view of the copper market, as did certain other analysts, listing it as a favorite for exposure along with premium bulks and uranium. As a base case, he said he expects government stimulus outside China to underpin a 2021-2022 market recovery.

"In the medium term, we anticipate the next commodity bull cycle to be primarily driven by the supply side following severe underinvestment in new capacity," Wowkodaw said in an Oct. 13 note.

Meanwhile, Macquarie analysts sounded a note of caution on "China-stretched base metals," saying they expect base metals to overshoot in the second half of 2020 before fading. "Most of the rally simply reflected the recovery in downstream broad-based demand," the analysts said in a Sept. 21 note.

The Macquarie analysts also suggested higher base metal prices could encourage more supply to come on stream, softening their outlook over the next few years.

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For 2020, HSBC analysts forecast overall copper mine supply shrinking by 2.2%, mostly stemming from COVID-19 related disruptions earlier in the year.

"Beyond 2020, mine supply is expected to grow by 3-4% during 2021-24 due to recently committed projects and ramp-up of production," the HSBC analysts wrote in an Oct. 13 note. "These new projects should continue to drive supply growth over the next three-four years, though there could be some delays."

In a recent analysis of copper supply and demand, S&P Global Market Intelligence said to expect a 5,000-tonne surplus in the refined copper market in 2020, and a 100,000-tonne surplus in 2021. Market Intelligence has also estimated that copper exploration budgets fell by 24%, or $561 million, year over year in 2020, driven by pandemic lockdowns and other health and safety measures.