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Miners being valued at 100-year low, says Bernstein Research


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Miners being valued at 100-year low, says Bernstein Research

Making a long-term bull case for miners, Bernstein Research analyst Paul Gait said the sector is being valued at a 100-year low.

"Our broad conclusion is that mining has never been cheaper than it is today, hence the current sector weakness represents an ideal entry point for any long-term investor," Gait said in a Sept. 3 note.

Analyzing the sector's cyclically adjusted price to earnings ratio, or CAPE, Gait found that the mining industry trades at 1.4 standard deviations under its long-term average value. This, Gait said, is the lowest recorded data point over the past century.

"The only comparable period in recent history was during the height of the dotcom bubble in the late 1990s, however even during the dotcom bubble the valuation disconnect was not as severe as it is now," Gait said. "Over the four years between 1997 and 2001, the relative valuation averaged about 0.46x relative CAPE, during the period 2015 to present the average has been 0.31x relative CAPE!"

Based on the analysis, Gait doubts the gap will persist, suggesting valuations will eventually revert to more normal historical levels.

Digging into more recent market movements, BMO Capital Markets analyst David Gagliano noted that U.S. metals and mining companies had a rough summer, with equities down about 15% since the end of July. Gagliano sees valuations as low overall, saying miners will likely need an improving economic outlook to recover.

"Against this murky near-term backdrop, in our view the best-positioned producers in the current environment are those where the underlying commodity price has already taken a hit, where the end-market exposure is somewhat more defensive, or where the producer has some surety of profits in the form of volume commitments under fixed price contracts," Gagliano said in a Sept. 5 note.

BMO Capital Markets raised its Arch Coal Inc. rating to "outperform" from "market perform" and lowered the target price on the stock to US$100 from US$105, while dropping Steel Dynamics Inc. to "market perform" from "outperform" with a revised price target of US$30 per share, down from US$40 per share.

In other analyst revisions to target share prices, BMO Capital Markets analyst Andrew Kaip lifted Pretium Resources Inc. to C$24 per share from C$20 per share, noting investors may be increasingly comfortable with the company's performance at the Brucejack gold mine in British Columbia. Also in the gold sector, Haywood Securities analyst Kerry Smith raised his target on Osisko Gold Royalties Ltd. from C$17.00 to C$19.50 per share, noting an expanded silver stream from the Mantos Blancos copper mine in Chile.

In the coal space, B. Riley FBR analyst Lucas Pipes lowered his price target on Peabody Energy Corp. from US$29 to US$27 per share. Pipes pointed to expectations for a weak third quarter as well as lower met coal prices. However, Pipes said the guidance did not have a material impact on the company's long-term outlook.

In the battery metals sector, Morgans modestly dropped its price target on lithium miner Orocobre Ltd. from A$5.05 to A$4.97 per share. Morgans analyst Chris Brown underscored the impact of lower lithium prices yet said the company would continue to profit.

"But don't expect the share price to respond until the lithium carbonate equivalent price trend firms up," Brown said.