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Fundamentals for base metals 'supportive' this year after poor 2018

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Fundamentals for base metals 'supportive' this year after poor 2018

Analysts at Haywood Securities remain cautious on the performance of base metals equities in 2019, due to global trade tensions and China's domestic slowdown.

Canadian base metals producers underperformed in 2018, as metal prices also recorded yearly declines. Copper prices averaged US$2.92/lb in 2018, a 4.2% increase over the average 2017 prices. Prices fell 20% from the start of the year, hitting 18-month lows recently.

Zinc averaged US$1.33/lb in 2018, up 1.1% year over year, but represented a steady decline since January, falling 24% on the year. Nickel, meanwhile, averaged US$5.95/lb in 2018, up 26% on a yearly basis, but dropping 13% since the start of the year.

Haywood is keeping a supportive outlook on base metals fundamentals going into 2019, particularly for copper, which may benefit from Chinese infrastructure investments in the near-term and anticipated electric vehicle growth in the long-term.

The International Copper Study Group said earlier in the month that copper mine production capacity is expected to hit about 26 million tonnes by 2021, reflecting a growth rate of 2.2% per annum. Copper smelter capacity is seen growing at an average annual rate of about 3.5% through 2021, with China to account for 68% of the expected growth in world smelting capacity between 2018 and 2021.

Stronger stainless steel demand and Chinese measures to tackle pollution has benefited nickel, which is also set to profit from an anticipated increase in global demand in batteries for electric vehicles.

An expected surge in zinc supply has not yet materialized, but is looming this year and in 2020. "In the meantime, the fall in zinc stocks has created tightness, and is positive for zinc on a short-term basis, but weakening demand combined with a pipeline of new, albeit delayed, projects are expected to ease the pressure in the metal market," according to the Jan. 7 note.

However, Haywood noted that there is a "downside risk" to their outlook for the base metals sector if U.S.-China trade tensions linger. SP Angel also noted in a Jan. 10 report that investors are eagerly watching the U.S.-China trade talks, and that the Trump administration pushing for a way for the Chinese government to deliver on its commitments if a deal is reached to defused a trade war.

The analysts assigned a "buy" rating to Lundin Mining Corp., Capstone Mining Corp., Copper Mountain Mining Corp., Hudbay Minerals Inc., Nevada Copper Corp., and Trevali Mining Corp.

They gave Lundin a target price of C$8 per share. With a "tender" recommendation, Nevsun Resources Ltd. was given a target price of C$6 per share. Copper Mountain was assigned a C$2 target price due to its long-term production profile at its namesake mine in British Columbia, and for its Australian growth potential, although the analysts believe that financing new projects at the current copper price may pose challenges.

Hudbay was assigned a target price of C$8 and Trevali was given a target price of C$1, while Capstone and Nevada Copper were given per share target prices of 85 cents and 90 cents, respectively.

The slower Chinese growth in 2018 was prompted by the ongoing trade war, weaker factory output and softer consumer demand. The country's growth is seen further declining in 2019, however, monetary policies are being eased to support economic activity.

A resolution of the trade conflict between China and the U.S. will be critical for the sector, which is seen benefiting from the recent resumption of trade talks with the U.S. and introduction of measures to lower average tariffs. However, Chinese reforms and efforts to control rising levels of environmental pollution could also impact metals production.

Elsewhere in the world, the national electoral committee in the Democratic Republic of the Congo, a top producer of base metals, announced Felix Tshisekedi as surprise winner of the country's presidential elections — a result that is being disputed by the opposition amid claims of fraud.

Benchmark Minerals said in a Jan. 11 note that civil unrest may lead to the closure of borders and a slight disruption to supply. However, this is expected to be short lived and will not impact prices, as the new government will also rely on mineral exports to prop up tax earnings. When the dust settles, the new government may look to renegotiate current mining contracts, which may lead to price increases.

"Ultimately, uncertainty is the norm in the DRC and while this election result is a surprise those buying cobalt from the DRC will continue to do so, likely uninterrupted," the firm said.